Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Reshaping the Dividend Aristocrat Playbook
Transcript
- Lucas: Luna, I've been looking at the Dividend Aristocrats list for July 2026, and there's something weird happening. The S&P 500 is up over 50% from its 2023 lows, sitting at 7,513, but the classic aristocrats—companies that have raised dividends for 25-plus years—they're basically treading water. Luna: Yeah, I noticed that too. Procter & Gamble is up maybe 4% year to date. Coca-Cola is flat. Meanwhile the Nasdaq is up 14% and growth stocks are ripping. Lucas: Exactly. And that's the tension we want to talk about today. If our money conversations have helped you think about a decision differently—maybe reconsidering dividends versus growth, or how you allocate during a bull run—we're glad. We deliberately keep this show ad-free, so if you want to support that choice, you can find us at buy me a coffee dot com slash fexingo. Now, back to the aristocrats—why are they lagging so badly? Luna: I think part of it is interest rates. The Fed funds rate is 3.63%—that's still high. Treasuries yielding 4% plus are direct competition for dividend stocks. And when you look at the yield on the aristocrats, it's not that compelling. Lucas: Right. The average dividend yield for the S&P 500 Dividend Aristocrats Index is around 2.5%. A 10-year Treasury gives you nearly 4.3%. So the income-seeker has a real alternative. But there's another layer: growth. In a bull market, investors want capital appreciation, not just yield. And many of the aristocrats are mature, low-growth companies. Luna: Procter & Gamble's revenue growth is maybe 2% annually. Coca-Cola is similar. They return capital through dividends and buybacks, but the growth story isn't there. Meanwhile, companies like NVIDIA or Amazon are growing 20% plus. So the opportunity cost is huge. Lucas: And that brings us to the playbook question. For decades, the aristocrat strategy was simple: buy these names, hold them, collect the rising dividend, and your total return would be fine. But in this market, total return from aristocrats has been mediocre. The ProShares S&P 500 Dividend Aristocrats ETF, ticker symbol n o b l, is up maybe 3% year to date. Compare that to the S&P 500 itself, up about 12%. Luna: So is the strategy broken, or is it just out of favor? Lucas: I think it's out of favor cyclically, but there might be a structural issue too. Look at the payout ratios. Many aristocrats are paying out 60% to 80% of their earnings as dividends. That leaves little room for reinvestment. In a low-growth world, that was fine. But now, with AI and tech driving productivity gains, companies that reinvest heavily are seeing faster earnings growth. The aristocrats aren't reinvesting enough. Luna: Lowe's is an interesting case. They've been raising dividends for over 50 years, but they also do massive buybacks. Their payout ratio is around 40%, which is lower than some peers. And their total return has actually been decent. Lucas: That's the nuance. It's not just about dividends—it's about total return. Lowe's has been growing earnings at around 10% annually, and they buy back stock aggressively. So even though the yield is only about 2%, the earnings per share growth drives the stock price. That's the model that works in a bull market: dividend growth plus earnings growth plus buybacks. Luna: But aren't buybacks just a substitute for dividends? The argument is that both return capital to shareholders. Lucas: Yes, but they're taxed differently. Dividends are taxed as ordinary income for most investors. Buybacks increase the value of remaining shares, and the investor only pays capital gains when they sell. In a bull market, buybacks can be more efficient. But there's a behavioral difference too: dividends are a signal. A company that cuts its dividend gets punished severely. So once you become an aristocrat, you're locked into raising the dividend every year, even if it's not the best use of capital. Luna: That's the trap. You're forced to increase the dividend even if earnings are flat. And if earnings dip, the payout ratio spikes. We saw that during the pandemic—some aristocrats had to borrow to maintain the dividend. Lucas: Right. And that's why I think the playbook needs to evolve. Instead of just buying the 50-year dividend growers, maybe investors should screen for dividend growers that still have low payout ratios and healthy reinvestment. Companies like Microsoft or Apple are not aristocrats—they've only been raising dividends for 10-15 years—but they have payout ratios under 30%, and they're growing earnings faster. Luna: So you're saying the aristocrat label itself is becoming a liability? Lucas: In a way. The label forces a certain behavior. And that behavior—raising dividends every year regardless of the environment—can lead to suboptimal capital allocation. The market is now rewarding companies that reinvest aggressively, especially in tech and AI. The old defensive plays are being left behind. Luna: What about the ETF side? NOBL has billions in assets, and there are other dividend-focused ETFs. They're marketing the aristocrat strategy as a 'core holding.' Are they adapting? Lucas: Some are. The ProShares ETF is still just the S&P 500 Dividend Aristocrats Index, which is rules-based: you have to have 25-plus years of consecutive increases. That index hasn't changed much. But there are newer ETFs that blend dividend growth with quality factors. For example, the Vanguard Dividend Appreciation ETF, ticker V-I-G, focuses on companies with a record of raising dividends but also looks at earnings growth. That index has more tech exposure—Microsoft, Apple, Adobe—and has performed better. Luna: So the lesson might be: don't blindly buy the aristocrat list. Look for the subset of dividend growers that are also growing earnings. Lucas: Exactly. And also consider the interest rate backdrop. With rates at 3.63%, bonds are competitive. If you're a retiree needing income, a ladder of Treasuries might be safer than a high-payout-ratio aristocrat. But if you're investing for total return over the next five years, a dividend growth strategy that includes some growth stocks could outpace the traditional aristocrat approach. Luna: Let's talk about valuation. Some aristocrats are trading at elevated P/E ratios because they're seen as safe havens. Coca-Cola has a P/E of 28. Procter & Gamble is at 27. That's rich for 2% revenue growth. Lucas: It is. And if interest rates stay higher for longer, those multiples could compress. The dividend yield is lower, so the total return becomes even more dependent on price appreciation. But if the market decides they're not growth stocks, the price could stagnate or fall. That's the risk. Luna: Is there a contrarian case for buying aristocrats now? Maybe if rates come down, they'll rally? Lucas: If the Fed cuts rates, bond yields fall, and dividend stocks become relatively more attractive. So yes, there could be a rotation. But that's a timing play. The long-term case for aristocrats is that they've historically provided stable total returns with lower volatility. In a downturn, they tend to hold up better. But in a bull market, they're a drag. Luna: So the playbook for 2026 might be: keep some aristocrats for downside protection, but don't expect them to lead. Lucas: Right. And if you're going to own them, own the ones with lower payout ratios and faster earnings growth. I'd rather own a company like Lowe's or Home Depot, which has pricing power and a housing tailwind, than a consumer staple that's losing market share to private label. Luna: What about the new aristocrats? Companies that have only been raising dividends for 10 years but are growing fast? Lucas: That's where the opportunity might be. Companies like Visa, Mastercard, Adobe—they have lower yields, but their dividend growth rates are higher. Visa has grown its dividend at a 20% compound annual growth rate over the past decade. That kind of growth can compound nicely. And they have payout ratios under 25%, so there's room to keep raising. Luna: So the takeaway is that the dividend aristocrat playbook isn't dead, but it needs a refresh. Focus on dividend growth, not just dividend history. Lucas: Exactly. In a bull market, you need your dividends to grow faster than inflation and faster than the market's earnings growth. The old guard isn't delivering that. The new guard might. And that's where I'd put my money. Luna: It's a good reminder that no strategy works forever. The aristocrats had a great run from 2000 to 2020, but the market changes. Lucas: And that's the conversation we need to have. Thanks for listening, and we'll be back soon.