Today I am going to reveal what could be the easiest way for us to get rich from income.
In fact, this stock-market approach offers many incredible benefits for the likes of you and me.
You see, the key features on offer include:
- No hard work for us
- Very cheap product
- Sensible stock-picking process
- Lower-risk underlying investments
- Proven results
- Market-beating returns
What more could we want?
It all looks fantastic — and on the face of it may actually be the Holy Grail of dividend-based investing!
And so far at least, pioneering investors that have already taken the plunge have done very well.
Grow your wealth through dividends with no effort
So let me introduce you to the SPDR S&P UK Dividend Aristocrats ETF (LSE: UKDV), an exchange-traded fund that — in theory — allows you to sit back and grow your wealth through dividend stocks…
…without all the aggro of picking your own shares or gambling on costly fund managers.
Here’s more on those benefits:
- No hard work for us: This Aristocrats fund holds a selection of 30 shares and does all the buying and selling on our behalf. We just own the fund.
- Very cheap product: The ETF’s stated Total Expense Ratio is just 0.3% a year
- Sensible stock-picking process: The fund focuses on dependable dividend-paying shares and buys the ones offering the most attractive — and sustainable — yields.
(Shares owned by the fund must have a 10-year record of lifting or maintaining their dividends, as well as dividend cover greater than 1.)
- Lower-risk underlying investments: This fund ignores companies with yields of more than 10% (to avoid “dividend traps“), ignores companies not listed on the London exchange and ignores companies with small market caps.
- Proven results: The index this ETF tracks has delivered annualised total returns of 20% during the last five years.
- Market-beating returns: The fund was launched during early 2012 and has so far trounced the FTSE 100 index.
The red line in the chart shows the fund’s performance (up almost 29%) against the FTSE 100’s performance in blue (up nearly 16%).
A good mix of steady large-caps alongside mid-caps with greater yields
The following table shows the ten largest holdings of this SPDR S&P UK Dividend Aristocrats ETF:
| Security Name | Weight |
|---|---|
| AstraZeneca | 5.74% |
| Carillion | 5.05% |
| Amlin | 4.81% |
| Close Brothers Group | 4.74% |
| ICAP | 4.67% |
| SSE | 4.43% |
| Imperial Tobacco Group | 4.12% |
| BAE Systems | 4.11% |
| Balfour Beatty | 3.99% |
Data as of 13th May 2014
True, there are some FTSE 250 members in the top 10 which may not be familiar to everybody.
But places 11 to 20 contain household names such as BHP Billiton, Centrica, GlaxoSmithKline, Pearson and Tesco, while places 21 to 30 include Capita, Daily Mail, Reckitt Benckiser, Vodafone and WPP.
So it looks like we get a good mix of steady large caps alongside mid-caps with greater yields and/or faster growth potential.
Plus, the possible yield isn’t bad.
The Aristocrats fund has paid total dividends of 54p per share during the last twelve months, which supports a 4.1% income with the shares at £13.
Overall, then, everything looks great.
I mean, the fund’s proven selection rules do all the hard research work with lower-risk income shares, and we just watch the share price rise and beat the wider market…
The Holy Grail of dividend-based investing to make us all rich…?
Actually, I’m not so sure.
As always, nothing is ever that straightforward with the stock market
The downside with this Aristocrats fund is simple: the way the fund invests could suddenly fall apart.
After all, this ETF uses a mechanical strategy that looks good on paper and has started well…
…but may not stand up to a wide variety of company performances or market conditions.
In particular, the Aristocrats ETF undergoes a complete reshuffle just once a year — which is a long time to hold on to a company with problems.
What’s more, the fund looks backwards at earnings and dividends. So there’s plenty of scope to keep holding a company where its prospects have suddenly deteriorated.
And most importantly, there seems to be no double-checking of the sustainability of earnings.
After all, it is profits that are used to pay dividends.
And if those profits are not backed by actual cash flow, or are being propped up by dumb acquisitions, or are growing only on the back of sizeable debts…
…then the dividend and the share price could well be in danger.
The Aristrocrats became Paupers during the credit crash
Here’s an instructive table to consider:
| Year | UK Dividend Aristocrats ETF | FTSE 100 |
|---|---|---|
| 2007 | -19.6 | +3.8 |
| 2008 | -38.4 | -31.3 |
| 2009 | +36.1 | +22.1 |
| 2010 | +25.3 | +9.0 |
| 2011 | -2.8 | -5.6 |
| 2012 | +8.9 | +5.8 |
| 2013 | +24.1 | +14.4 |
It shows how the Aristocrats ETF would have performed between 2007 and 2011 (had it existed), and how it actually performed during 2012 and 2013.
In summary, the ETF halved during the credit crash and then took a further five years to recover and catch up with the FTSE 100.
But I wonder how many of us would have kept the faith with this ETF during 2007 and 2008 before the revival. Not many I reckon.
I can’t trust anything daft enough to buy banks at the top of a credit boom
I can’t be sure, but given its awful 2007 and 2008 performance, the Aristocrats ETF must have been full of banks and builders just before they all collapsed.
And I don’t know about you, but I can’t really trust a mechanical approach that did something as daft as buying banks and other debt-dependent shares at the top of a credit boom.
Which kind of puts me off this ETF — and mechanical funds in general!
Nevertheless, current holders of the Aristrocrats ETF have done well so far and good luck to them.
