This is the April 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 in January 2013. Performance figures are as of the April 26, 2013 close.
Over the last three months, all of the DG models 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, with the DG-IncomeGrowth and DG-LBHDGR models performing exceptionally well. I was surprised to see the Small Cap model's beta at a low 0.64, even lower than the DG-LBHDGR model. The S&P Dividend ETF (NYSEARCA:SDY) outperformed three of the models in absolute terms. Its beta has come back down compared to the previous 3-month period (1.09). The maximum drawdowns for the DG models all remain below the SPY.
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 DG-SmallCap and DG-IncomeGrowth 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 0.66. To be more comparable, I adjusted the calculation for the DG-HYLP's M2 measure to compare against the SPY effective 1/1/2012 (27.26% gain). While still trailing by 0.69% in absolute terms, with its lower volatility, the DG-HYLP squeaked out a 1.61% relative return advantage based on the M2 measure. Compared to the SPY, all of the models had lower beta and lower maximum drawdowns.
Focus on the Dividend Aristocrat+ Model
Since its February 1, 2013, rebalance, the DA+ model portfolio (+5.78%) outperformed the SPY (+5.34%) with much lower beta. 16 of the 30 holdings had returns above the SPY's 5.34%, and 8 holdings had negative returns. Note that these figures only consider capital appreciation. Stronger sectors included healthcare, utilities and consumer staples. Industrials and energy stocks were weaker.
Let's look at some of the gainers and decliners. Return figures are from February 1 to April 26, 2013. The percentage gains reflect only the price appreciation, not the paid dividends.
- AbbVie (NYSE:ABBV), up 22%. ABBV has had a great run the last few weeks. Last week, ABBV reported a 21% increase in YoY quarterly earnings excluding one-time items, beating expectations by a penny. First quarter revenues rose 3.7% despite ABBV having some patent expirations on its cholesterol pills. Its Humira treatment for rheumatoid arthritis grew 16%, now providing over half of ABBV's revenues. Sharing are at an all-time high, but the stock still yields around 3.5%.
- Verizon (NYSE:VZ), up 20%. In mid-April, VZ posted higher than expected quarterly profits, thanks to its wireless business. VZ benefited from lower costs and popularity of its data sharing plans. There has also been a lot of news since the earnings release about VZ pursuing the 45% stake in Verizon Wireless owned by Vodafone (NASDAQ:VOD), a deal worth over $100B, perhaps closer to $130B, which would make VZ the largest U.S. phone operator. VZ's stock has run up to $54 with a yield of 3.8%, which is below its more typical 4.5%-5% range.
- Vectren Corp (NYSE:VVC), up 17%. Since December 2012, VVC had a continuous upward trajectory, going from around $28 to near $38. Not bad for a utility stock, and even at its current high, VVC still yields 3.9%. VVC missed its latest quarterly earnings estimate, but beat on revenues. The utility business, consisting of gas and electric services, performed well, but the nonutility group lost money, particularly the coal mining division. For the year, VVC projects earnings of $1.90 to $2.10 per share. At a P/E of 19, with 5% earnings growth projections, low dividend growth rate, and 72% payout ratio, VVC appears overvalued at this point. However, as the DA+ model is not actively traded, it will not be removed from the portfolio. However, holders of this stock may want to consider reducing their stake.
- Microsoft (NASDAQ:MSFT), up 17%. MSFT beat earnings estimates for its third quarter, earning 72 cents per share, despite declining PC sales. MSFT announced plans to produce smaller tablets and will announce its next-generation Xbox on May 21. The Windows Phone 8 platform continues to slowly gain market share, accounting for 5.6% of 2013Q1 sales in the U.S. In addition, activist hedge fund ValueAct Capital took a $2B stake in MSFT. ValueAct said it sees MSFT as undervalued and it wants to work with management to implement strategies that generate a superior return on investment. MSFT's stock has responded favorably to all of the recent news, achieving a new 52-week high.
- Nucor (NYSE:NUE), down 8%. NUE has fallen about 10% since early March. The firm's first quarter net income fell 39% on lower volume and lower steel prices, though this was still higher than estimates. Full year earnings projections have declined about 22% in the last 60 days according to Yahoo Finance. NUE said it expects to see improved performance during the second quarter, though it warned that import levels and ongoing economic and political uncertainty continue to hurt its business. Based on projected 2013 earnings of $1.90 per share, NUE has a 77% payout ratio and its last two dividend increases have been very small, at 0.2 cents per share. Income investors looking to keep up with inflation should probably look elsewhere.
- Emerson Electric (NYSE:EMR), down 5%. Since its mid-February earnings report, EMR has drifted downward slowly, going against the rise of the SPY. First quarter earnings met expectations and revenues came in above estimates. Management lowered capital expenditures, being cautious "until economic visibility improves." Since December 2012, EMR rose twice as much as the SPY, so a slight pullback is not unexpected given no upside surprises in the first quarter report. TheStreet.com seemed to reiterate a buy recommendation practically every week for EMR from February through April, but it has not helped the stock to achieve new highs.
On April 5, 2013, BHP Billiton (NYSE:BBL) triggered my -20% stop-loss rule, which sells a stock when it underperformed the SPY by 20 percentage points for 4 consecutive weeks. BBL was replaced with Praxair (NYSE:PX) in the DG-HYLP model.
The DG models continue to outperform the SPY in absolute and relative total returns in 2013, which is a little surprising since we typically expect dividend stocks to underperform during strong upward motion in the market. This outperformance was achieved with lower beta, reasonable yields, and continued dividend growth. What more could an investor ask for?
Author's Note: There is a possibility that this may be my last update on the DG Model Portfolios. I have been asked to develop a DG portfolio for a local wealth management firm's clients, and assuming all goes well with that venture, I will likely need to stop writing for SA due to corporate compliance policies. I would like to take a moment to thank SA and the community for all of the interest in these models, the positive comments, and the constructive feedback. I've learned a lot, and thoroughly enjoyed sharing my experience and engaging in the dialogues. Hopefully I can find a way to continue contributing on a limited basis.