Dividend Aristocrats Are Overrated: Here's Where Income Investors Might Want to Look Instead

It is hard to not like an impressive track record. Any stock that lands a spot among the Dividend Aristocrats has a great track record.

To be included in the S&P 500 index, a company must have a market cap of at least $1 billion. The company must increase its dividends for 25 years.

I think there is a good case to be made that Dividend Aristocrats are not as good as they could be. Income investors might want to look here.

The image is from the same source.

Overrated? Yep

Allow me to explain my position. I am not saying that every Dividend Aristocrat is bad. I wrote recently about three Dividend Aristocrats that are worth buying right now.

I think that many of them are not worth it. My view is that the group as a whole is often overlooked by income investors.

Look at the total returns of Dividend Aristocrats over the long term as my first piece of evidence. You don't have to pull up every Dividend Aristocrat on a stock chart to do this. The NOBL is a great proxy. This exchange-traded fund has all of the Dividend Aristocrat stocks.

YCharts has NOBL data.

The S&P 500 index as a whole has soundly beaten the Dividend AristocratsETF in total return since it was launched. Some might argue that this is not surprising. The primary attraction of Dividend Aristocrats is their income and not their growth.

Many investors won't be interested in the yield on the Dividend Aristocrats. The yield on the ProShares S&P 500 Dividend Aristocrats is 1.94%. You would have to invest a lot of money to get that yield.

My last critique is that some of the Dividend Aristocrats only increase their dividends a small amount each year to stay in the club. Over the past three years, the dividend of DOV has risen by a grand total of 4.17%.

An alternative worth considering

I believe that income investors should consider the alternative of buying closed-end funds. They are a type of mutual fund that does not issue new shares. You can buy and sell CEFs on a stock exchange in the same way you can trade an exchange traded fund.

Many CEFs are focused on meeting the needs of income investors. Some funds focus on bonds. Common stocks tend to have lower dividends than preferred stocks.

The AllianceBernstein Global High Income Fund specializes in corporate bonds. It has a yield of 7.2%. The Nuveen Preferred Securities Income Fund invests in preferred stocks and income- producing securities. The distribution yield is 7.3%.

Nuveen Preferred Securities Income Fund

CEFs that trade below their net asset values can be found by investors. The AWF and JPS funds are currently priced below their NAVs.

Pros and cons

There are pros associated with CEFs. Many of them make more money than Dividend Aristocrats. The funds can be bought and sold online.

The bonds and preferred stocks that investors can gain access to are usually purchased through a financial advisor. The best CEFs are run by managers who know how to identify the most promising income- producing assets.

There are some drawbacks to CEFs. Fees are charged by them. You should research the performance of individual CEFs to make sure you get your money's worth. Some CEFs use leverage to increase income and returns. They can increase their volatility.

Most CEFs won't deliver the total returns that stocks will. The focus of the CEFs was on income.

If CEFs received the same level of attention, I might argue that they are over-rated. That is not the case. Many investors don't pay much attention to CEFs. The impressive income track records for CEFs make them worth a look.

No one has a position in any of the stocks mentioned. The ProShares S&P 500 AristocratsETF is recommended by The Motley Fool. There is a disclosure policy for The Motley Fool.