This is the November 2012 update for my four research-based Dividend Growth Model Portfolios. The Dividend Aristocrat+ portfolio focuses mostly on stocks with 25-year+ histories of dividend increases and uses equally weighted sectors. The DG-SmallCap portfolio concentrates on medium and smaller-cap firms with strong dividend growth, with preference to higher yielders. The DG-IncomeGrowth model is similar, but pursues non-small caps with high yields and high dividend growth rates. The newest model, DG-HYLP, screens for high-yield, low-payout ratio stocks as value plays with safe and growing dividends. The first three models were initiated on August 16, 2011, whereas the DG-HYLP was started on January 1, 2012, so there is less data history for that portfolio.
- The performance figures are total return as of November 30, 2012.
- Three of the portfolios now have over one year of data. For now, I will continue to report the 3-mo, YTD, and Since Inception time periods. Starting January 1, 2013, when the DG-HYLP hits one year, I will switch YTD to a one-year measure (trailing twelve months).
Performance Summaries (3-mo, YTD, and Since Inception)
Over the last three months, the S&P 500 Index (SPY) experienced a modest gain of 1.26%, while the S&P Dividend ETF (SDY) rose 3.08%. The SDY is the more comparable benchmark for these dividend growth models, but I'm interested in how dividend growth stocks perform versus the overall market. On a volatility-adjusted basis using the M2 measure, three of the DG models outperformed both the SPY, and two beat the SDY. The DG-HYLP model underperformed in absolute return and had the highest standard deviation of weekly returns among the DG models, which resulted in the negative M2 measure. Alliance Resource Partners (ARLP) may be the culprit for the underperformance, as it has fallen about 12% since the election. Intel (INTC) and Avista (AVA) have also had significant drops in the last month.
Year-to-Date, the dividend models have underperformed the SPY in absolute return, but all have lower volatility and beta. Using the M2 measure, three of the portfolios are outperforming the SPY; only the DG-HYLP model is trailing. Three of the models are also beating the SDY on both an absolute and relative basis. The DG-Small Cap model is weighted more heavily in Financials, Industrials, and Consumer Discretionary than the other models, so it is interesting that its beta is the second lowest, and lower than the DA+ model, which has larger blue-chip stocks. However, the DG-SmallCap also has 18% of its holdings in Utilities, which compensates for the other sectors.
Since inception, the original three Dividend Growth models have delivered absolute total returns higher than the SPY and SDY with less volatility. The DG-HYLP model has a later inception date, so the YTD results are more appropriate for this model. All of the original DG models have higher volatility-adjusted and higher beta-adjusted return ratios than the SPY and SDY. In simpler terms, these portfolios produced higher returns for each unit of volatility or beta.
Focus on the DG-Small Cap Model
This month, I am providing an update on some of the holdings in the DG-Small Cap model portfolio, as it will be rebalanced in the near future. Since the last portfolio rebalance on December 4, 2011, only 5 of the 40 holdings are down, on average around 6%, but none more than 9.4%. 14 of the 30 holdings delivered over 16.3% in total returns each, exceeding the SPY's total return for the period. The top performing sectors were Energy, Consumer Discretionary, Consumer Staples, and Utilities. It is worth noting that two of the three energy holdings were purchased in 2012 because the original energy stocks, coal producers ARLP and Natural Resource Partners (NRP), triggered my stop-loss rule.
Here is a recap of some of the decliners and gainers for the DG-Small Cap portfolio over the last 12 months. For reference, the SPY was up 16.3% for this period. Price information for this section is as of November 30, 2012; all percentage changes are since the December 4, 2011 rebalance.
- Avista Corp.: Down 6.9%. AVA has declined sharply since August, when it reported an earnings decrease due to lower than expected retail loads. It followed this up with a weak Q3 earnings report and a lower 2013 outlook. AVA had losses at its non-utility businesses and weak performance overall. It offered a buyout to 900 non-union employees in an effort to cut costs.
- Harris Corp. (HRS): Down 9.4%. In fairness, I should note that HRS is actually up for the last 12 months. It was recently added to the DG-Small Cap portfolio when Diebold (DBD) triggered the stop-loss rule and was sold. For comparison, DBD is down another 11.3% since October 5th, so while performing poorly, the addition of HRS actually helped the portfolio slightly. The purchase was made at the 52-week high though, and the price fell shortly thereafter when HRS was downgraded. HRS also reported a loss in fiscal Q1 due to impairment charges. Excluding charges, HRS actually beat earnings expectations.
- Owens & Minor (OMI): Down 8.8%. OMI's 1-year chart looks like a roller coaster. Every time it spikes up, something brings it back down to around $27. Most recently, OMI's streak of four straight quarters of year-over-year [YoY] profit increases was broken in October, and it missed earnings expectations by 24%. This is the third straight quarter that OMI has delivered earnings below consensus estimates. The firm's 2013 forecast also fell short of Wall Street's expectations.
- Plains All American Pipeline (PAA): Up 39.5%. PAA raised its distribution to 54.25 cents per unit, its 13th consecutive quarterly distribution increase. It also had a recent 2-for-1 stock split in early October. In November, PAA beat revenue and earnings estimates. The other strong performing pipeline MLPs were Sunoco Logistic Partners (SXL), up 31.7%, and Magellan Midstream Partners (MMP), up 29.3%.
- McCormick & Co. (MKC): Up 32.2%. McCormick manufactures, markets, and distributes spices, condiments, seasoning mixes, and other products to retailers, food service, and food manufacturing businesses. MKC's Q3 results showed YoY revenue growth due to previous acquisitions and price increases, and earnings beat expectations. Gross margins also improved by 50 basis points and operating income increased 12%. The firm confirmed full-year earnings estimates of around $3.05/share, and MKC recently announced a 9.7% dividend increase. Based on the new dividend, MKC still has a low 45% payout ratio and room to continue growing its dividend.
- National Health Investors (NHI): Up 32.1%. NHI is a real estate investment trust (REIT) that invests in health care properties. In November, NHI reported a 9.2% increase in funds from operations [FFO], with annual FFO projected at $3.15/share, which readily covers its dividend. NHI also raised its dividend for the second time in 2012, providing investors with an additional 3% raise. NHI still yields 4.9% despite its price being near its 52-week high.
- Sempra Energy (SRE), up 29.1%. SRE is an energy service holding company, mainly operating in southern California. Its operations include utility services, pipelines and storage (natural gas), and liquefied natural gas. SRE beat earnings estimates for the third quarter, though revenues declined from the previous quarter. SRE has beaten estimates for four consecutive quarters, though revenues have declined for the last three. Management believes the firm is on-track to meet annual guidance of $4.00 to $4.30 per share, pending a utility commission rate decision and excluding impairment charges.
In prior articles, I wrote about using relative price changes as a predictor for dividend cuts and larger price declines. Under this stop-loss rule, when a stock underperforms the SPY by 20 percentage points for 4 consecutive weeks, the stock will be sold. Replacements are based on the original screens for each model at the last rebalance, with preference to the stock with higher yield and higher dividend growth rates.
There are no stocks that triggered the stop-loss in the last month, though Consolidated Edison (ED) is close to underperforming the SPY by 20%. It resides in the Dividend Aristocrat+ model, which is due to be rebalanced at year-end anyway. AVA is also now 20% below the SPY, but the DG-Small Cap model is about to be rebalanced.
The DG portfolios continue to perform very well compared to the SPY and with betas 20% lower than the overall market. Several of the stocks in my DG portfolios raised their dividends in the last few months, which provided support and higher income streams for owners of those shares. The DG-Small Cap portfolio will be rebalanced in the next two weeks. I'm curious to see what stocks appear in the screening process, and how many are lesser-known names that might offer some alpha as well as dividends.