If youaEURtmre like many investors these days, youaEURtmre warily eyeing your portfolio, wondering where the next dividend cut will come from.
Fear of dividend cuts is reasonable, even if you hold the Dividend AristocratsaEUR"the 63 S&P 500 firms that have raised their payouts for 25 years (or more). This club includes well-known names like McDonaldaEURtms (MCD), LoweaEURtms (LOW), Kimberly-Clark (KMB) and Procter & Gamble (PG), as well as less familiar firms, like Sysco (SYY), VF Corporation (VFC) and Linde (LIN).
For many folks, the Aristocrats are sacred cows. But the crisis will inevitably force some of these companies to cut payouts in the weeks and months ahead. And since many dividend investors depend on these firmsaEURtm dividends, a serious selloff could follow.
That, in turn, could trigger a big move into corners of the market investors have often downplayed, like reliable closed-end funds (CEFs) paying out 8%+ dividends. ItaEURtms a rotation I expect to start soon, meaning now is our chance to get in early (more on this below).
Human Managers Have the Edge
The popularity of the Dividend Aristocrats makes sense in good times. Even in these trying times, many of these firms, like Kimberly-Clark and Procter & Gamble, are positioned to weather, and even benefit from, the crisis. Others, such as McDonaldaEURtms, Sysco (which depends on restaurants) and Realty Income (O)aEUR"a REIT with many retailers as tenantsaEUR"may not do so well. Obviously, the stock picker who can sift through the winners and losers among these stocks will prosper.
And, to a certain extent, the risk of dividend cuts among this group is already priced in. If we look at the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which tracks these stocks, we see that itaEURtms trailing the S&P 500 by a wide margin this year.
Aristocrats Lag the Market
We can also see that this selloff is, generally speaking, rational: comparing Procter & Gamble to Realty Income, we see that the retail-dependent REIT is well behind the consumer-staples conglomerate.
Crisis Risks Look Priced In aEUR