Best Top Dividend Vs. Top Non-Dividend Stocks For Risk Adjusted Total Return

by: Richard Shaw

There are some "top" NYSE or NASDAQ dividend stocks with a higher risk adjusted return than the S&P 500 over each of 3, 5 and 10 years, and more non-dividend stocks on those exchanges with higher risk adjusted return -- but not too many of either.

The non-dividend stocks produced higher nominal and risk adjusted turns as well.

We did a study of top dividend stocks a few days ago, and some of our commenters asked for a comparison with non-dividend stocks, which we provide here.

Here is how we identified the superior risk adjusted stocks:

Top Dividend: They paid and increased dividends each year for at least 5 years; were among the 200 highest yielding of those stocks after eliminating the 10 highest yielding ones; and they must be available through the NYSE or NASDAQ.

Top Non-Dividend: They must not have paid any dividends in the past 12 months or in the most recently completed fiscal year; must have at least $5 billion in market-cap; and they must be available through the NYSE or NASDAQ.

We then calculated the risk adjusted total return for each group and identified those for which that return was higher than the nominal total return of the S&P 500 for each of 3, 5 and 10 years.

We defined risk adjusted total return for the purpose of this study as the nominal total return divided by the ratio of the subject stock standard deviation divided by the S&P 500 standard deviation.

In other words, if the subject stock had a higher volatility, the nominal return was adjusted down proportionately; and if the subject stock had a lower volatility, the nominal return was adjusted up proportionately.

Out of the thousands of stocks on the NYSE and NASDAQ, there were only 10 top dividend stocks and only 18 top non-dividend stocks that had a higher risk adjusted total return than the S&P 500 -- probably at least a demonstration of the risk reducing power of diversification over single stock positions.

The 10 dividend stocks are:

Kimberly-Clark Corporation (NYSE:KMB)
Altria Group Inc. (NYSE:MO)
Reynolds American Inc (NYSE:RAI)
Enterprise Products Partners LP (NYSE:EPD)
Genesis Energy LP (NYSE:GEL)
Magellan Midstream Partners, L.P. (NYSE:MMP)
Sunoco Logistics Partners (NYSE:SXL)
CMS Energy Corp (NYSE:CMS)
Dominion Resources Inc (NYSE:D)
Sempra Energy (NYSE:SRE)

This table provides the details of their nominal returns, volatility, relative volatility, risk adjusted return, yield and sector.

Had you owned these 10 stocks in equal weights in a buy-and-hold pattern over the three periods, your composite returns would have been 25%, 28% and 15% over 3, 5 and 10 years respectively. Your 12-month trailing yield would be 3.79%.

That compares to returns of 16%, 18% and 7% for the S&P 500, with a trailing yield of 1.89%.

The dividend stocks came from the consumer defensive, energy, and utilities sectors (as classified by Morningstar).

Altria in this group is the only member of the S&P 100 to have a higher multi-period risk adjusted total return than the S&P 500.

The 18 non-dividend stocks are:

W. R. Grace & Co. (NYSE:GRA)
SBA Communications Corp (NASDAQ:SBAC)
AutoZone Inc (NYSE:AZO)
LKQ Corporation (NASDAQ:LKQ)
O'Reilly Automotive Inc (NASDAQ:ORLY), Inc. (NASDAQ:PCLN)
Arch Capital Group Ltd (NASDAQ:ACGL)
Ocwen Financial Corporation (NYSE:OCN)
Actavis PLC (ACT)
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)
Biogen Idec Inc (NASDAQ:BIIB)
Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN)
Alliance Data Systems Corporation (NYSE:ADS)
B/E Aerospace Inc (NASDAQ:BEAV)
Fiserv, Inc. (NASDAQ:FISV)
Kansas City Southern, Inc. (NYSE:KSU)
Cerner Corporation (NASDAQ:CERN)
3D Systems Corporation (NYSE:DDD)

This table provides the details of their nominal returns, volatility, relative volatility, risk adjusted return, yield and sector.

Had you owned these 18 stocks in equal weight over the 3 periods -- (and that is much less likely to have been the case than for the dividend stocks, because there is no metric to have chosen them back then, whereas the dividend payment pattern of the dividend stocks is more likely to have called out to be chosen) -- your returns would have been 55%, 53% and 27% over 3, 5 and 10 years respectively. Your trailing yield would be zero.

The non-dividend stocks came from the basic materials, consumer services, consumer cyclical, financial services, healthcare, industrials, and technology sectors (as defined by Morningstar).

The problem with non-dividend stocks being a group definition is that there really isn't any kind of metric to use to select these stocks. At least with top dividend stocks, they have some redeeming valuation and performance attributes for which they might be selected, even if they do not produce a higher risk adjusted return. However, merely not paying dividends and meeting some minimum market-cap is not a useful basis for selecting stocks.

This is what our readers requested, but we would think that a more useful exercise would be to use some stock selection criteria such a GARP or high quality/low volatility, for example to select a universe, and then see which of those produced higher risk adjusted returns. We will do that sometime and report how they do.

A larger observation though, is that a well diversified portfolio, such as the S&P 500 is hard to consistently beat on risk adjusted return basis.

Risk Adjusted Total Return of Top Total Return Stocks

As an additional study, we identified the 200 top total return stocks for 2013 that are available through the NYSE or NASDAQ. We whittled that group down to 144 by requiring standard deviation data for 10 years, as well as for 5 and 3 years.

Here is a snippet of the list.

The balance of the list is available in PDF format for free download from our site at this link (with better resolution than the reduced size fragment above).

The stocks range in 2013 total return from 58% to 298%. Only 7 of the 144 stocks yield 2% or more. Numerous had lower total returns for the 3,5 and 10 years periods. Only 34 had better risk adjusted total rewards over 3,5 and 10 years.

Disclosure: QVM has positions in KMB as of the creation date of this article (January 11, 2014). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.