NOBL: Dividend Aristocrat ETF That Underperforms Alternative Funds

Overview

Dividend aristocrats are companies that have increased their dividend payouts for a minimum of 25 years in a row. Achieving such a milestone creates a heightened sense of confidence for investors. Increasing dividends every single year for a long period of time means you get a higher yield on cost eventually, but it also means that the companies have been able to consistently grow their cash flows. This is an indication that a business is strong and can maneuver through different market cycles efficiently.

ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) makes this process of finding dividend aristocrats easy by compiling the best of the best. While NOBL doesn’t specifically promise to deliver a growing dividend income stream the way Schwab U.S. Dividend Equity ETF (SCHD) does, it offers the ultimate level of stability and quality. NOBL aims to replicate and deliver similar results to the S&P 500 Dividend Aristocrat Index.

The stability, reliability, and quality that NOBL offers are some reasons why someone would choose this fund, not necessarily total return. While that doesn’t necessarily resonate with someone like myself, the idea that this ETF contains the most cash-responsible companies in the world can be a truly “sleep well at night” strategy. However, the shortfall of NOBL is that the performance doesn’t align with some alternatives like SCHD or Vanguard Dividend Appreciation Index Fund ETF Shares (VIG).

The starting dividend yield is quite low at 2% as well. While I wouldn’t expect this ETF to create a large enough income stream to fund my lifestyle, I can at least depend on it to deliver a reliable source of income that has very little risk of being cut. The trade-off for this little amount of risk means that I also would not experience much growth in the dividend as a result. Therefore, I personally rate this ETF as a hold for those with a very delicate risk tolerance, but I would likely choose another avenue to build a stream of dividend income.

Holdings & Strategy

To be included into the ETF, a company has to have a successful track record of not only paying a dividend for 25 consecutive years, but also increasing them. Therefore, these are some of the best companies in the world with strong fundamentals, earnings growth, and rising free cash flows. The ETF currently has 68 total holdings spread across 10 different industries.

NOBL’s sector breakdown includes a majority weight in Consumer Staples, making up 24.6% of the ETF. This is followed by industrials at 23.3% and materials at 12.37%. The portfolio’s top holdings often change in weight and sector depending on market conditions. The annual turnover rate for 2023 was 19%. The top ten holdings are as follows:

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This updated holding list reflects the most recent portfolio constitution. The index here is rebalanced every January, April, July, and October. In addition, an annual reconstitution takes place every single January. As of the latest reconstitution, we saw the elimination of some poorly performing dividend stocks like Walgreens Boots Alliance, Inc. (WBA) who recently slashed their dividend by 50% following financial disappointments and slowing revenue growth. I like how the necessary changes are automatically implemented here.

Something else that stands out to me about their holdings is the inclusion of Real Estate. NOBL has a position within Realty Income Corporation (O) that is explicitly known for its reputation as the “monthly dividend-paying company”. Realty Income has managed to increase its dividend for 26 consecutive years, and I am a big fan of the real estate sector at the moment. Real estate has been crushed since the pandemic and price levels of the sector stayed suppressed due to the high interest rate environment that restricts the refinancing and borrowing costs of these REITs. Once anticipated rate cuts take place, I believe the sector will have a turnaround which can contribute to higher share appreciation for NOBL.

I believe the top 5 holdings build a strong case for the success of NOBL’s total return and dividend potential. These companies have been crushing it, so I think that it’s fair to mention some of the following highlights and milestones.

• Caterpillar Inc. (CAT): The price is up 167% over the last 5-year period and the dividend has grown at a CAGR of 8.2% over the last decade.
• Target Corporation (TGT): Officially labeled as a Dividend King with 55 years of consecutive dividend raises. Despite the large dividend raise streak, it manages to still grow the dividend at a double-digit CAGR average. In addition, the payout ratio remains healthy at 49%.
• Exxon Mobil Corporation (XOM): Adds a splash of diversity here and has a starting yield of 3%. The price has increased by over 45% over the last 5 years.

A part of the fund’s strategy is that it will always contain a minimum of 40 individual stocks at all times. In addition, no single sector is allowed to ever make up more than a 30% weight of the whole index. The ETF’s goal is to seek results that align with the S&P 500 Dividend Aristocrats index, and it achieves just that. The fund also has a reasonable expense ratio of 0.35% which also makes it affordable.

Dividend

As of the latest declared quarterly dividend of $0.3863 per share, NOBL’s current dividend yield is 2%. Although the starting yield is quite low, the dividend growth has been acceptable. In the short term, however, the dividend growth has understandably slowed since the pandemic era. First, the pandemic caused a ton of uncertainty, so company performance across all sectors was dialed back. Next, we were hit with one of the fastest interest rate increase streaks in recent history, and this created additional volatility and uncertainty.

However, zooming out to a longer time horizon of ten years shows us that the dividend increased at a CAGR (compound annual growth rate) of 20.48%. Over a five-year horizon, the dividend grew at a CAGR of 7.15%. Since its inception, the dividend has grown over 187%. It’s worth noting that the dividend has always varied quarter to quarter, but at least when we zoom out to look at it over time, the payouts are trending in a slight growth trajectory. So if you are looking for a consistent level of income every quarter, this may not be the ETF for you.

If you are an investor who is looking for income to support you, NOBL requires a large position size to distribute anything meaningful. Even with $1M invested into this ETF, you’d be looking at a modest dividend income of only $20,000 annually. If you were to choose SCHD instead, which has a 3.3% yield, you’d have a total dividend income of $33,000. While providing a growing stream of income here isn’t a stated task, it is usually aligned with the concept of dividend aristocrats. After all, the holdings within the ETF have increased their dividend payouts consistently for decades at a time, so why shouldn’t NOBL?

The Downsides

Although NOBL offers a low volatility and low stress ETF to get exposure to dividend aristocrats, it isn’t exactly the most efficient for growing wealth over time when compared against some peers. As I just mentioned, NOBL doesn’t exactly make a great income-oriented investment, with the lower starting yield and the average dividend growth over time. In fact, you’d like to be better off if you just bought a regular S&P 500-based fund like the SPY or a total stock market fund like Vanguard Total Stock Market Index Fund ETF Shares (VTI).

While NOBL aims to stay parallel to the dividend aristocrat index, it severely underperforms the S&P500. The aim to stay parallel means that NOBL lacks any decent tech exposure. The tech sector is where lots of growthier companies exist, and the exclusion of this sector means that lots of upsides are being missed during those explosive bull markets as we experienced over the last 4 months. The trade-off is that this means NOBL has a great sense of stability and lack of volatility. While this may deliver peace of mind and less stress, it takes away from the speed at which your wealth can accumulate here.

Lastly, the dividend growth is so lackluster that I wouldn’t be able to solely rely on this ETF to provide me with the growth needed to fund my lifestyle during retirement. Even with a large position size of $2M dedicated to NOBL, the starting dividend income I would receive is around $40,000. While I would essentially have zero worries about my income being reduced, this would not be a sufficient level of income to fund a retirement in any medium to high cost of living city in the US. Ultimately, the ETF does exactly what it was designed to do: track and deliver similar results to the S&P 500 Dividend Aristocrat Index. Therefore, I rate it as a Hold with the caveat that there are better options out there for either dividend growth (SCHD) or capital appreciation (VIG).

Takeaway

ProShares S&P 500 Dividend Aristocrats ETF is a noble fund that delivers subpar results. Although the fund achieves exactly what it was designed to do, the dividend yield, total return potential, and dividend growth do not fit my current needs. In addition, the price sits near all-time highs, so this would not be an ideal entry point for me since the dividend yield is so low. The price last touched the $99 per share range back in 2021 and has stayed below this since. Maybe if the dividend yield was a bit larger, I would feel that the flat share price was okay since I was being paid a hefty dividend income while I waited for the market out.

In addition, the fund’s lack of exposure to tech means that we are likely to always underperform the greater indexes such as the S&P. The dividend yield is too low to provide a livable income, even with a large position size. Therefore, I would assume you’d only consider this low-yielding ETF if you were interested in a safe way to get a high total return. If this is the case, you are better off sticking with a basic index fund like SPY or VTI.