Optimizing The Dividend Aristocrats

by: Lowell Herr

What does a portfolio look like when made up of S&P 500 Dividend Aristocrats and optimized using projections from Geoff Considine's Quantext Portfolio Planner? In the analysis below, thirty-seven (37) stocks that have yields in excess of 2.0% were selected as possible portfolio candidates.

Before looking at the QPP analysis, below are the constraints placed on the 37 dividend stocks. Obviously, the total percentage allocation needs to sum to 100%. No stock may occupy more than 8% of the portfolio. The solver within the spreadsheet was set to maximize the Return/Risk ratio as projected by the QPP software.

The following screenshot shows the QPP analysis in more detail. This portfolio is projected to return nearly 6.5%, or about 50 basis points below that assumed for the S&P 500. The projected standard deviation is a very low 8.0%, giving a Return/Risk ratio of 0.81, a very high value. Maximizing this ratio was the objective for this optimization.

The analysis included five years of data, and during this period, the portfolio nearly doubled the S&P 500 with much lower volatility -- 8.7% vs. 18.9%. As one might expect from dividend aristocrats, the yield is a high 2.9%.

If one is looking for a low beta portfolio with respectable returns, optimizing for a maximum Return/Risk ratio using dividend aristocrats has a high probability of serving investor interests.

Disclosure: I am long PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.