ProShares S&P 500 Aristocrats ETF Should Deliver Steady Returns

NEW YORK ( /TheStreet ) -- Conservative investors have good reason to consider ProShares S&P 500 Aristocrats ( NOBL), a new passive exchange-traded fund.

To win a place in the S&P fund, a company must have raised its dividend for 25 consecutive years. Businesses that have passed the test tend to have steadily growing earnings, strong balance sheets and a corporate culture that is committed to raising dividends.

Since it began operating in 2005, the S&P 500 Dividend Aristocrats benchmark has been closely followed by institutional money managers who are searching for reliable stocks.

Many of the 54 stocks in the index are so consistent that they maintained strong profit margins during the financial crisis. Familiar names on the list include 3M ( MMM), Coca-Cola ( KO) and Johnson & Johnson ( JNJ).

Once they earn a spot in the index, stocks tend to stay there for years. But turnover does occur when companies hit a rough patch and cut their dividends. After the turmoil of 2008, a number of banks fell off the list, including Bank of America ( BAC) and KeyCorp ( KEY).

Postage meter maker Pitney Bowes ( PBI), a longtime aristocrat, cut its dividend this year. The meter business has suffered as old-fashioned mail has been replaced by electronic communications. Companies that recently recorded 25 years of growth and joined the list include AT&T ( T), Colgate-Palmolive ( CL), and mutual fund provider T. Rowe Price ( TROW).

The dividend aristocrats tend to do particularly well during downturns when investors seek safety. But in strong rallies, the blue-chips often lag a bit as confident shareholders race to buy riskier choices. In the turmoil of 2008, the aristocrat index lost 27%, compared to a decline of 37% for the S&P 500. When markets rebounded in 2009, the aristocrats gained 26%, trailing the S&P 500 by a percentage point. During the past five years, the aristocrats returned 21% annually, compared to 18% for the S&P 500.

Will the aristocrats continue outperforming in the future? That is hard to know. But the reason to buy the ProShares ETF is not to obtain outperformance. Instead, investors should consider the aristocrats as a way to own high-quality dividend payers that are likely to protect principal in downturns.

To obtain some extra yield, consider SPDR S&P Dividend ETF ( SDY), which tracks the 86 stocks in the S&P High Yield Dividend Aristocrats. The high-yield benchmark holds stocks in the S&P 1500 composite that have raised dividends for 20 consecutive years. The portfolio includes some of the names that are in the ProShares Aristocrats fund. In addition, the SPDR fund also owns some smaller stocks that fall outside the S&P 500.

The SPDR fund currently yields 2.6%, a nice payout at a time when the S&P 500 yields 2.0%. Top holdings in the high-yield fund include Chevron ( CVX) and Consolidated Edison ( ED). During the past five years, the SPDR fund returned 16.7% annually, trailing the S&P 500 slightly, according to Morningstar.

Launched in 2006, the SPDR high-yield fund has proved popular with dividend-seeking investors. Although many equity funds have lost assets lately, the high-yield fund has recorded inflows of $1.1 billion this year and now reports total assets of $13 billion.

Another choice for income-oriented investors is Vanguard Dividend Appreciation ( VIG), which tracks the Nasdaq US Dividend Achievers Select Index. The fund holds 147 stocks that have increased dividends for the past 10 consecutive years and seem solid enough to continue raising dividends. The Vanguard fund yields 2.1% and has returned 16.9% annually during the past five years. The ETF has $18 billion in assets.

Many dividend funds have big stakes in utilities and consumer staples, traditional sources of income. But the Vanguard fund tends to be more broadly diversified because it focuses on growing companies. The fund has 19% of assets in industrials and less than 1% in utilities. Holdings include International Business Machines ( IBM) and PepsiCo ( PEP).

At the time of publication, Luxenberg had no positions in stocks or ETFs mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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