As the S&P Europe 350 Dividend Aristocrats Index marks its 10-year anniversary, we take a quick look at the methodology and the performance of this smart beta index.

The smart beta S&P Europe 350 Dividend Aristocrats Index turns 10-years old.

According to S&P Dow Jones Indices, dividends have historically contributed approximately one third of total equity returns. Through a focus on companies that have delivered consistent dividend payments the index aims to provide a sustainable approach to capture these returns.

The index measures the performance of an equally weighted allocation to large-cap, blue chip companies within the parent S&P Europe 350 Index that have consistently increased dividends every year for at least 10 years.

“The S&P Europe 350 Dividend Aristocrats has hugely outperformed the S&P Europe 350 over almost every interval, which is expected given that these are quality companies that have both the ability to grow their business and their payouts consistently over time. The outperformance of the S&P Europe 350 Dividend Aristocrats over 10 years is almost 300bps annually,” said Vinit Srivastava, Senior Director of Strategy Indices at S&P Dow Jones Indices.

Compared to the S&P Europe 350, the Dividend Aristocrats index delivered superior long-term returns at a lower level of volatility. Over the ten years to 31 August 2015 the index produced an annualised return of 8.7% with a realised volatility of 14.3%. In comparison, over that same period, the benchmark returned 5.8% with a volatility of 15.0%.

The index methodology screens the parent index for companies which have increased dividends every year for at least 10 consecutive years. This shortlist of names is then equal weighted to create an index which, in the words of S&P DJI, “best represents the performance of this group of stocks and treats each constituent as a distinct investment opportunity without regard to its size”. To avoid over concentration of risk in particular sectors, sector weights are capped at 30% of the index.

Comparing constituents now to those included at the time of launch 10 years ago highlights some interesting developments in the European investment landscape. The importance of maintaining a dependable dividend policy has spread throughout Europe, with nine countries represented in the index today compared to only four in 2005. In 2015 the dominant sector is healthcare with 22%, while in 2005, the dominant sector was industrials with 27%. Whilst financials as a sector had the second largest weight with 21% in 2005, it dropped out of the top 5 in 2015.

While there isn’t an exchange-traded fund tracking this particular index, State Street Global Advisors, through its SPDR ETFs range, does offer a broad range of Dividend Aristocrats-branded ETFs based on the same index methodology. Fund include the SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV LN), the SPDR S&P Euro Dividend Aristocrats UCITS ETF (EUDI LN), the SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV LN) and the SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF(PADV LN).