Yet it’s precisely their boring nature that makes dividends attractive. Because companies are loathe to cut their dividends, their yields will increase during bear markets. A steady stream of dividends goes a long ways toward giving us the discipline and fortitude to hold on to stocks through a downturn.

Perhaps the best recent example of this comes from Exxon Mobil,
XOM,
+0.82%
whose earnings took a big hit during the first months of the pandemic. From earnings per share of $4.88 in 2018, the company’s EPS dropped to minus $5.25 in 2020. Yet Exxon’s cash dividend in 2020 was 6.1% higher than in 2018. And it’s 1.2% higher today than it was in 2020.

ExxonMobil’s case may be extreme, but nevertheless more the rule than the exception. When focusing on all rolling 12-month periods since 1940, the S&P 500’s
SPX,
-0.02%
earnings per share have been 10 times more volatile than dividends per share (DPS), as this chart shows. So if you’re looking for something to invest in that helps you sleep through the night, a strategy centered on dividends makes sense.

Another attractive feature of dividends is that they usually grow faster than inflation. Based on an average of all rolling 12-month periods since 1940, DPS growth has outpaced inflation by 2.4 percentage points per year.

Don’t think that these impressive inflation-adjusted returns trace to earlier decades when share buybacks were less of a factor. Since 1990, when share repurchases have been a major substitute for dividends among companies wanting to return cash to shareholders, DPS 12-month growth rates have been 3.2 percentage points higher than inflation.

An alternative to the 10-year Treasury

It’s dividends’ historical tendency to outperform inflation that makes dividend-paying stocks an attractive alternative to 10-year Treasurys. This advantage may not be evident to the short-term trader, given that the 10-year yield
TMUBMUSD10Y,
2.910%
has jumped to nearly 3%. But you lock in that yield when buying a Treasury, unlike the situation with dividend-paying stocks.

Consider the cost-benefit calculation for buying a 10-year Treasury versus the S&P 500 Dividend Aristocrats ETF
NOBL,
-0.43%.
This ETF contains stocks of those companies within the S&P 500 that have increased dividends every year for the last 25 consecutive years. Its current yield is 2.24%, 60 basis points below the current 10-year Treasury yield.

Assuming that the growth of S&P 500 Aristocrats’ DPS outpaces inflation over the next decade by the same margin as historically, and assuming that the CPI increases over the next decade at what the inflation-expectations model from the Cleveland Federal Reserve is currently projecting, then this ETF’s total dividend payments over the next 10 years will almost precisely match the 10-year Treasury’s total interest payments.

But that’s only half the picture. With the Dividend Aristocrats you also own shares of established blue-chip companies. Insofar as their price-only return over the next decade is even modestly positive, you will be significantly ahead of the U.S. Treasury.

With this thought in mind, I turned to my firm’s database of top-performing investment newsletters. The list below contains those S&P 500 Dividend Aristocrats that currently are also recommended for purchase by at least two of these top performers.

Stock	Ticker	Number of newsletters recommending it
Cardinal Health	CAH	4
International Business Machines	IBM	4
3M	MMM	3
Abbott Laboratories	ABT	2
Air Products & Chemicals	APD	2
General Dynamics	GD	2
Johnson & Johnson	JNJ	2
Medtronic	MDT	2
Procter & Gamble	PG	2
T Rowe Price	TROW	2
Target	TGT	2
Walgreens Boots Alliance	WBA	2

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].

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