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As the last trading day of 2023 comes to a close, investors are eagerly looking ahead to 2024 for new investment opportunities. 2023 was the year of the Magnificent Seven and the S&P 500 (^GSPC), but is there something new to consider ahead of cooling inflation and potential interest rate cuts?
Roundhill Investments Chief Strategy Officer Dave Mazza joins Yahoo Finance to give insight into what is being referred to as "dividend aristocrats" and why they should be considered for investor portfolios in 2024.
"So a dividend aristocrat is a company that has increased their dividend each and every year for 20 or 25 years. There's another group, even stringent to get in — the dividend kings, the dividend monarchs, that's 50 years of consecutive dividend increases," Mazza says. "They tend to be incredibly resilient, if you've been able to increase your dividends for that long of a time period, you have free cash flow to be able to pay those dividends to investors."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video Transcript
JULIE HYMAN: Dave, when we talk about places to look in 2024, I know one of the places you're looking is at high dividend payers. And specifically what we're calling dividend aristocrats, which sounds very fancy. What do we mean by dividend aristocrats? Is it consistent dividend? Is it growth in dividends? What are you focusing on?
- No, it's exactly the consistency of the growth that makes the dividend aristocrat. So a dividend aristocrat is a company that has increased their dividend each and every year for 20 or 25 years. There's another group even stringent to get in, the dividend kings or the dividend monarchs, that's 50 years of consecutive dividend increases.
And why am I looking at that group as an option away from the Magnificent Seven even if the base case is at the Mag Seven continues to power the market higher at least in the beginning of 2024? It's because they tend to be incredibly resilient. If you've been able to increase your rev-- excuse me, your dividends for that long of a time period, you have strong free cash flow to be able to pay those dividends to investors.
And what's interesting is that those names have been incredibly out of favor. In fact, the S&P high yield dividend aristocrats index had its worst ever relative performance, compared to the S&P 500, going back on record last year because they had no-- that index has no exposure to Magnificent Seven, underweight names like technology and overweight staples and utilities. So when you get rate cuts, those are the sectors that historically do well.
I am still concerned, everyone's saying, well let's rotate out of the mega-caps and go buy small caps. Generally, very logical. The challenge is that many small cap companies remain unprofitable. They remain actually challenged because there's such an overweight to regional banks and biotechs, and there's some question marks about just moving into the small cap space. So if I'm looking to rotate, I actually want to stay with high quality names, which you're going to find with the elite dividend growers in the aristocrats and dividend monarch space.