Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start!

by: Jeff Paul

This is the March 2013 update on my five research-based Dividend Growth [DG] Model Portfolios. The Dividend Aristocrat+ portfolio focuses mostly on stocks with 25-year+ histories of dividend increases and equally weights 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 moderate to high dividend growth rates. The DG-HYLP model 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. The newest model, DG-LBHDGR [Low Beta, High Dividend Growth Rate], was initiated on December 28, 2012. This update is the first report for this model, and it had a great first quarter! Performance figures are as of the March 28, 2013 close.

Performance Summary

Perf 3-mo

Over the last three months, all of the DG models have outperformed the S&P 500 (NYSEARCA:SPY) on an absolute and relative total return basis. Using the M2 measure, all of the DG models outperformed both the SPY by over 220 basis points, with the small cap and low beta models performing exceptionally well. The DG-HYLP was rebalanced last month, so there was a slight hit to its net value due to some commission costs, but it still edged out the SPY. The DG models' betas have come back down during this period; they were all over 0.83 for the previous trailing 3-month period. The S&P Dividend ETF (NYSEARCA:SDY) outperformed the models in absolute terms, but continued to have the highest beta of the group, resulting in a lower M2 measure. Per a reader's request, I added the maximum drawdown for each portfolio during this period. The DG-HYLP and DG-LBHDGR had no weekly declines since January 1.

Perf 12-mo

Over the last 12 months, all of the DG models outperformed the SPY on both a relative and absolute basis. The DG-HYLP suffered some losses in the first half of 2012 that negatively impacted its total return. The other DG models also outperformed the SDY, helping to confirm that more selectivity within the dividend stock universe can lead to better results and lower beta.


Since inception, the original three DG models continue to greatly outperform the SPY and SDY in both relative and absolute return. The DG-IncomeGrowth model has been particularly impressive with its combination of a very low portfolio beta of 0.67. This model will be rebalanced in the next two weeks. To be more comparable, I adjusted the calculation for the DG-HYLP's M2 measure to compare against the SPY effective 1/1/2012 [26.0% gain]. While still trailing by 0.91% in absolute terms, with its lower volatility, the DG-HYLP squeaked out a 1.34% relative return advantage based on the M2. Compared to the SPY, all of the models had lower beta and lower maximum drawdowns.

Focus on the Low Beta, High DGR Model

Since its January 1, 2013 inception, the DG-LBHDGR model portfolio has performed extremely well; it has not had a down week. This model just missed on having the highest total return of the DG models, delivering over 320 basis points above the SPY. It also had the second lowest beta [0.66] despite having younger, faster growing firms, as compared to the larger, more mature firms in the DG-IncomeGrowth model [0.65 beta]. 17 of the 30 holdings had returns above the SPY's 12.65%, and all had positive returns. Strong sectors included consumer discretionary, financials, energy, and consumer staples. Defense stocks, tobacco, health care, and Japanese telecom stocks were weaker. Finally, 14 of the holdings have already increased their dividend this year, at an average growth rate of 12.5%. Obviously these results are just for 3 months, but hopefully this is the start of a strong long-term performance!

Let's look at some of the big gainers. Return figures are from December 28, 2012 to March 28, 2013. The percentage gains reflect only the price appreciation, not the paid dividends.


  • Sunoco Logistic Partners (NYSE:SXL), up 32.1%. SXL has pretty much done nothing but go up since 2009; so much for waiting for a dip to buy it. Its trajectory has steepened the last year though, causing its yield to fall to 3.4%. For the fourth quarter, SXL reported record levels of distributable cash flow, a 41% increase in full year adjusted EBITDA, and raised its dividend each quarter in 2012 to a level 31% above the November 2011 dividend rate. SXL's CEO mentioned an interest in pursuing acquisitions if the assets for sale fit with SXL's growth plans and made financial sense. SXL's February distribution was 16% higher than the previous quarterly distribution.
  • Cracker Barrel Old Country Store (NASDAQ:CBRL), up 28.4%. Last month, CBRL announced a 38% rise in quarterly profits despite inclement weather, beating analyst expectations by 15%. Revenues were up, and the firm raised guidance for 2013. Restaurant sales were up, mainly due to higher menu prices. Restaurant sales at locations open at least one year rose 3.3%. According to one analyst, CBRL is "beating its nearest family dining competitor by 140bps." The firm is also utilizing IT to improve its cost structure. More recently, there was a downgrade to hold, likely due to the recent run-up. CBRL appears to be fully valued at this level, but earnings are projected to grow close to 15% for next year. At the current payout level, there is room for a nice dividend increase later this year too.
  • Walgreens (WAG), up 30.3%. WAG operates the largest network of drugstores in the United States, and is 45% owner of Alliance Boots, a European drugstore chain. WAG provides consumer goods, pharmacy, and health services through its stores, mail order, and web site. In its most recent quarter, WAG reported flat revenue growth, but earnings rose over 10%. Its biggest announcement was a 10-year distribution agreement with AmerisourceBergen (NYSE:ABC), including the right for WAG to purchase a 23% stake in ABC. ABC is a pharmacy services provider, which will help WAG to source and distribute generic drugs worldwide and achieve better purchasing power with drug manufacturers. One potential concern is that customer traffic declined 5% despite a new store format, but the rollout of this format has just started, so hopefully we will see improved results later this year.
  • Western Gas Partners, LP (NYSE:WES), up 29.7%. WES delivered an 18% distribution growth rate for 2012, and has raised its per-share distribution each quarter since July 2009. WES also announced the acquisition of 33.75% interest in two gas-gathering systems from Anadarko Petroleum Corporation (NYSE:APC), and three gas-gathering systems from an affiliate of Chesapeake Energy Corp (NYSE:CHK). These systems serve production from the Marcellus shale in Pennsylvania and are expected to be immediately accretive to WES.
  • Hasbro (NASDAQ:HAS), up 24.3%. HAS has steadily gained since January 1, 2013, despite announcing declines in fourth quarter revenues and earnings. However, operating margins improved to 15.1% and emerging market revenues were up 16%. HAS also initiated cost saving measures, expected to save $100M in annual savings by 2015. It also increased its dividend by 11% to $1.60/share per year, for a current yield of 3.6%, and HAS has $127M remaining in its authorized repurchase plan.

Stop-Loss Update

There were no stocks that triggered my -20% stop-loss rule, however, two stocks have underperformed the SPY by 20% in recent weeks: Harris Corp (NYSE:HRS) and BHP Billiton (NYSE:BBL). This week, HRS narrowed the gap to 18%, so the rule will reset. BBL has continued to decline though, and is now on either its second week, factoring in the recent 2% dividend that was paid. I will continue to monitor BBL. If the stop-loss is triggered, BBL will be replaced with Praxair (NYSE:PX) in the DG-HYLP model. BBL is also held in the DG-IncomeGrowth model, but that whole model is due to be rebalanced so it may fall out anyway.


Collectively, the DG models have outperformed the SPY in absolute and relative total returns during the first three months of 2013, which is a little surprising since we typically expect dividend stocks to underperform during strong upticks in the market. I believe the selection process filters out weaker and overvalued firms, which contributes to the positive gains. I'm particularly pleased with the first quarter results for the new Low Beta, High Dividend Growth model. I will continue to monitor and report on these funds, and welcome any feedback and suggestions for improving them.

Disclosure: I am long BBL, WAG. 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.

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