As 2023 draws to a close, investors are turning their attention to potential opportunities in 2024. Amidst discussions about the Magnificent Seven and the S&P 500, there’s a growing interest in a group known as “dividend aristocrats.” Dave Mazza, Chief Strategy Officer at Roundhill Investments, sheds light on why these dividend aristocrats should be on investors’ radar for the upcoming year.
A dividend aristocrat is a company that has consistently increased its dividend every year for 20 or 25 years. An even more exclusive category is the dividend kings or dividend monarchs, requiring 50 years of consecutive dividend increases. Mazza emphasizes the significance of this consistency, stating that such companies tend to be incredibly resilient. The ability to sustain dividend growth for an extended period reflects robust free cash flow, providing investors with reliable dividend payments.
In contrast to the popular Magnificent Seven, which may continue to drive the market in 2024, dividend aristocrats stand out for their resilience. Mazza notes that these companies have been out of favor, with the S&P high yield dividend aristocrats index experiencing its worst-ever relative performance compared to the S&P 500. This underperformance is attributed to the absence of exposure to the Magnificent Seven, resulting in an overweight position in sectors like staples and utilities that historically perform well during rate cuts.
Mazza expresses concern about the prevailing notion of rotating out of mega-caps into small caps. While the idea seems logical, the challenges lie in the profitability of many small-cap companies, especially those concentrated in regional banks and biotechs. To navigate a potential rotation, Mazza suggests staying with high-quality names found among the elite dividend growers in the aristocrats and dividend monarch space.
Investors are encouraged to consider dividend aristocrats as a strategic option for 2024, leveraging their track record of dividend consistency and resilience in varying market conditions.
