Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Dividend Aristocrats Outperform During Volatility
Transcript
- Lucas: So the VIX is at 17.89 — down eight percent in the last five days. The VVIX, which tracks the volatility of the VIX, has dropped nearly eleven percent to 88.63. That's a market that is basically saying: calm down, the drama is over. Luna: And yet the S&P 500 is only up 0.7 percent over that same stretch. The Dow's up a bit more. So the 'everything is fine' signal isn't translating into a big rally. Lucas: Right. That's the interesting part. We're in a low-volatility environment where the market is not panicking, but it's also not euphoric. So where do you put money when you don't trust the high-flyers but you also don't want to sit in cash? Luna: I think a lot of people are asking that exact question. And it's worth pointing out, if this kind of practical conversation is useful to you, the reason we can keep having it without ads is listener support. You can find us at buy me a coffee dot com slash fexingo. It really does keep the lights on. Lucas: Appreciate that, Luna. And it lets us stay focused on what actually works. Which brings me to an old playbook that I think fits this moment perfectly: Dividend Aristocrats. Luna: You're talking about the S&P 500 companies that have raised their dividends for at least 25 consecutive years. Lucas: Exactly. There are about 65 of them right now. And they've been quietly outperforming the broader market during this low-volatility, sideways grind. Think Coca-Cola, Procter & Gamble, Johnson & Johnson — names that are boring until you look at the total return. Luna: What's the data on that? I know there's a famous study. Lucas: The most cited one is from Ned Davis Research and Hartford Funds. Over the 50 years ending in 2023, Dividend Aristocrats delivered an average annual return of about 10.6 percent. That compares to 8.2 percent for the S&P 500 as a whole. And they did it with lower volatility. Luna: So higher return, lower risk. That's the holy grail. Lucas: It really is. And the mechanism is straightforward: these companies generate predictable cash flows. They don't depend on the next big product launch or a hot market cycle. When the economy slows, they still have pricing power and brand loyalty. Luna: Take Coca-Cola. They've raised their dividend for 62 consecutive years. That's not an accident. That's a business model built on recurring demand. Lucas: And right now, with the 10-year Treasury yield at 4.40 percent, some people might say 'why not just buy the bond?' But the spread between the dividend yield on aristocrats and the 10-year is actually quite narrow. The dividend yield on the aristocrats index is around 2.6 percent right now. So you're giving up current income for growth. Luna: But the total return story is about compounding. If you buy Procter & Gamble today at a 2.5 percent yield, and they raise the dividend by 5 percent every year, in ten years your yield on cost is over 4 percent. And you still own the stock. Lucas: That's exactly the point. The bond doesn't increase its payment. The aristocrat does. Over a decade, that difference is enormous. And in this low-volatility environment, where the VIX is telling us not to expect big swings, steady compounding is a very attractive strategy. Luna: But what about the yield curve? The 10-year minus 2-year spread is 31 basis points and steepening. That usually means the market expects stronger growth ahead. Wouldn't that favor cyclical stocks over defensives? Lucas: It could. But the steepening we're seeing is more about the front end coming down — the 2-year fell from 4.11 to 4.09 — than the long end surging. That suggests the market is pricing in rate cuts, not a boom. And in a rate-cutting environment, dividend stocks tend to perform well because their yields become more attractive relative to cash. Luna: So the play is: if you believe the Fed is done hiking and will start cutting, lock in these yields now. Lucas: Exactly. And history backs it up. In the 12 months after the last Fed rate hike in cycles since 1990, the S&P 500 Dividend Aristocrats index outperformed the broad market by an average of 3.4 percentage points. That's a significant edge. Luna: But it's not just about timing the Fed. The real power is in the compounding. Let me give a concrete example. If you invested $10,000 in Coca-Cola in 1990 and reinvested dividends, by 2020 you'd have over $200,000. The price appreciation alone would have been about $60,000. The rest is dividends doing the work. Lucas: That's a great illustration. And it's not unique to Coke. Procter & Gamble, PepsiCo, McDonald's — they all have similar stories. The key is that these companies have business models that generate free cash flow consistently, and they have a culture of returning it to shareholders. Luna: So if someone is listening and thinking about building a portfolio right now, how would they start? Do they buy the individual stocks or an ETF? Lucas: There are ETFs that track the Dividend Aristocrats index. The ProShares S&P 500 Dividend Aristocrats ETF, ticker n o b l, is the most well-known. It holds about 60 stocks and rebalances annually. The expense ratio is 0.35 percent. Alternatively, you could pick a handful of the core names yourself if you want to avoid the fee. Luna: But be careful — not all dividend stocks are aristocrats. Some companies have high yields but shaky payout ratios. A 6 percent yield that gets cut is worse than a 2.5 percent yield that grows. Lucas: Absolutely. The aristocrat designation filters for consistency. To be in the index, a company not only has to raise dividends for 25 years, but also meet certain liquidity and market cap requirements. So it's a quality screen. You're not getting the highest yielders, but you're getting the most reliable ones. Luna: And in a market where the VIX is at 17.89 and the VVIX is collapsing, it's easy to get lulled into thinking risk is gone. But these stocks offer a cushion if volatility returns. Lucas: Exactly. And that's the real value proposition. They won't make you rich overnight. But they'll make you less poor when the next downturn hits. And over time, that consistency compounds into something substantial. Luna: So what's the one takeaway for someone listening right now? Lucas: If you're looking for a core holding that can weather uncertainty and still deliver competitive returns, Dividend Aristocrats deserve a serious look. Check the yield, check the payout ratio, and think about your time horizon. For the long-term investor, they're as close to a sure thing as you'll find in the stock market. Luna: And for those who want to dive deeper, we'll have show notes with links to the ETFs and a list of the current aristocrats. Thanks for listening.