This is the year-end 2012 update on 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 a 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 December 28, 2012. I track on a weekly basis and this was the last full week in 2012.
- All of the portfolios now have over one year of data. Starting with this update, I switched the YTD results to a one-year measure.
Performance Summaries (3-mo, One Year, and Since Inception)
Over the last three months, the S&P 500 Index (SPY) declined 2.20% and the S&P Dividend ETF (SDY) declined 0.57%. All of the DG models beat the SPY on an absolute basis with the DG-SmallCap, DG-IncomeGrowth, and DA+ models having positive returns. On a volatility-adjusted basis using the M2 measure, all of the models except the DG-HYLP performed better than the SPY and SDY, but mainly due to superior absolute returns. Interestingly, the DG-SmallCap model had the lowest portfolio beta of the group.
Over the trailing 12 months [TTM], the dividend models are trailing the SPY by 0.4 to 2.5 percentage points, though their returns are still pretty good [~10.5% on average] and with much lower volatility and beta. Using the M2 measure, the portfolios are performing closer to the SPY, with only the DG-HYLP model lagging. The underperformance was due in part to holdings such as Intel (INTC) and Alliance Resource Partners (ARLP). Previously, the DG-HYLP model did not utilize my stop-loss rule to drop underperformers before its semi-annual rebalance; this has been changed going forward. The four models are all beating the SDY on both an absolute and relative basis. The lower portfolio volatility has made for a smoother ride for DG investors, which is a plus.
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 TTM 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 Dividend Aristocrat+ Model
This month, I am providing an update on some of the holdings in the Dividend Aristocrat+ model, as the portfolio will be rebalanced in the near future. Since the last portfolio rebalance on December 31, 2011, just 4 of the 30 holdings are down. 9 of the 30 holdings delivered over 12.1% in total returns each during these 12 months, exceeding the SPY's total return for the period. The top 15 performers each had a total return over 7.25% and mostly belonged to the Materials, Financials, Industrials, and Telecom sectors.
Here is a recap of some of the major movers for the Dividend Aristocrats+ portfolio over the last 3 months. Price information is as of December 28, 2012; all percentages are since December 31, 2011. For reference, the SPY was up 12.1% for this period.
- McDonald's (MCD): Down 12.7%. MCD reported weaker than expected earnings in October, due to increased competition and a weak dollar. MCD declined to a 52-week low around $84 in mid-November after reporting its first sales decline since 2003. It replaced its head of U.S. operations shortly thereafter. The stock has rebounded about 5% since mid-November.
- Utilities: Consolidated Edison (ED) is down 11.5%. ED dropped to a 52-week low in mid-November as well. Hurricane Sandy cost the company an estimated $350M to $450M as it worked to repair the damage. However, ED's third quarter earnings report was good and the company reaffirmed 2012 full-year earnings of $3.65 to $3.85 per share.
- Kinder Morgan Energy Partners (KMP): Down 7.9%. KMP experienced a correction in mid-November, along with other holdings, however, most of the news I found seemed rather positive. The price of oil dropped about 10% between mid-October to mid-November, so I'm guessing that KMP's drop was in sympathy to this change. KMP reported higher Q3 distributable cash flow, and raised its dividend. Its previous acquisition of El Paso Natural Gas contributed to the increases. KMP announced plans for a gas pipeline to Mexico and a 25-year transportation deal, pending regulatory approvals. To the north, KMP's Trans Mountain Pipeline was oversubscribed by 70 percent for December. Overall, the firm seems to be well positioned for continued growth, and I look forward to seeing continued dividend growth as well.
- PPG Industries (PPG): Up 58.9%. PPG has climbed steadily since January. PPG has started the process to spin off its commodity chemical business and merge it with Georgia Gulf Corp (GGC). PPG is positioning itself to be a coatings and specialty chemicals company. Toward this goal, it completed the acquisition of Spraylat Corp, a privately owned industrial coatings company, and announced plans to acquire the North American decorative paint business of AkzoNobel, N.V.
- Illinois Tool Works (ITW) was up 28.5%. ITW reported lower revenue, but higher earnings per share, thanks to lower costs and a share buyback that reduced outstanding shares. The firm's CEO passed away due to illness in mid-November. ITW plans to divest some of its commodity-tied businesses that make up approximately one quarter of the firm. Investor Ralph Whitworth took a large stake in ITW earlier this year and pushed for moves to improve profitability.
- AFLAC (AFL) was up 20.8%, increasing almost non-stop since its summer low around $38. AFL beat revenue and operating income estimates for Q3, and hiked its dividend by 6.1%. Looking forward, AFL expects revenues from Japan to increase 30% to 35% in 2013, far above the previous estimate of 10%. The firm has a strong balance sheet and cash position.
- Leggett & Platt (LEG) was up 14.8%, and has also been increasing since late June. LEG raised 2012 revenue and EPS guidance in late July. The firm posted strong Q3 earnings in October, reporting record earnings of 45 cents per share, a 45% rise from the previous year's third quarter. Gross margins expanded 280 basis points and operating income rose 47%. LEG accelerated its 2013 Q1 dividend to December 2012 to lock in the lower tax rates for its shareholders.
While the DA+ model portfolio lagged the SPY year-to-date in absolute return, it delivered a respectable 10.5% total return with less volatility. This is true for all of the original DG portfolio models. On a related note, I am currently reviewing several research papers on the topic of low-volatility stocks outperforming the market. This is another anomaly in Modern Portfolio Theory, and one that supports dividend growth investing from a total return perspective. I'll report out on these articles after I have reviewed them.
The DA+ portfolio will be rebalanced once I have the official 2013 Dividend Aristocrat list of additions and deletions. Generally, there won't be many changes to the stock holdings, as there aren't that many stocks on the Dividend Aristocrat list, but the funds will be redistributed to equally weight the holdings. Hopefully, 2013 will be as good for the DG models as 2012 was!