Dividend Aristocrats In A Bear Market

One of the most popular income investing strategies is to buy the “Dividend Aristocrats,” those few companies that have increased their dividends every year for 25 years or more.

You’d think this strategy would work especially well in a recessionary bear market, when such an impressive track record would make these companies particularly attractive.

Indeed, the most aristocratic of them all, The Procter & Gamble Co. (PG), has increased its dividend every year since 1954. It has bumped the payout 278% just since the turn of the century, a period in which prices have only risen 40%.

Yet recessions carry a huge hidden danger for the Aristocrats.

Avoid the Pitfalls

The problem is that Dividend Aristocrats are a walking example of survivorship bias.

In economic upswings, almost all of the Aristocrats increase their dividends as advertised. But in downturns, some of them falter – and the returns on those that falter are generally very poor, dragging down the returns of Dividend Aristocrats as a whole.

Like all investing formulae, the Dividend Aristocrat method has a distressing tendency of “reverting to the mean” – there are no free lunches, after all.

To see how this occurs, just look at Pitney Bowes Inc. (PBI), the postage meter company. Going into the 2008 recession, PBI was a fine Dividend Aristocrat boasting more than 30 years of dividend increases.

During the recession, the dividend sometimes exceeded the company’s earnings, which can’t continue for long. Nevertheless, the company continued increasing the dividend while hoping that things would pick up. They didn’t, and in 2013 the company was compelled to halve the quarterly dividend.

Pitney Bowes is still profitable, and the $0.1875 quarterly dividend is still being paid, giving the company a yield of 4% (and a price-to-earnings ratio of only 9.7 times, at current earnings, which still haven’t fallen out of bed).