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This is an 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 preference given 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.

Performance Summary

3-Month (12/2/11-3/2/12),

*(1/1/12-3/2/12 for HYLP)

Total Return10.68%6.41%6.43%6.07%5.95%6.97%
Weekly Avg0.80%0.49%0.49%0.47%0.46%0.76%
Std Dev1.58%1.31%1.46%1.69%1.46%1.05%

Over the last three months, the S&P 500 Index (SPY) had a great run, exceeding the total return performance of all of the DG portfolio models. In general, this is not a surprise, as the DG models all have lower volatility and beta than the S&P. However, even on a volatility or beta-adjusted basis (Sharpe and Treynor ratios respectively), the S&P outperformed all of the portfolios, except the High-Yield, Low-Payout model's Sharpe ratio. However, this model only had 2 months of data so it does not reflect the same time period returns for the weekly averages.

Since Inception (8/16/11, *1/1/12 for HYLP)
Total Return16.13%13.92%15.47%14.40%17.45%6.97%
Weekly Avg0.57%0.48%0.54%0.51%0.59%0.76%
Std Dev3.25%2.57%2.75%2.99%2.49%1.05%

Since inception, the DG models have delivered total returns close to the S&P's total return, but with much less volatility. With the exception of the DG-SmallCap portfolio's Sharpe ratio, all of the DG models had higher volatility-adjusted (Sharpe) and beta-adjusted (Treynor) return ratios than the SPY. In simpler terms, these portfolios produced higher returns for each unit of risk, as measured by volatility or beta. Prior to the recent S&P run-up, the DG models were even further ahead, but ultimately, I'm seeking long-run outperformance.

Focus on the Small Cap Portfolio

This month, I thought I would provide more detailed information about the DG-SmallCap portfolio's holdings. I will highlight a different model with each update. Since the portfolio rebalance on December 4, 2011, eight of the 40 holdings are down, but only one by more than 5%. Ten of the 40 delivered over 10% in total returns during these 3 months. The top 20 performers mostly belonged to the Consumer Discretionary, Financials, Industrials, and Info Tech sectors. A few selected stocks are mentioned below.

  1. Diebold (DBD) delivered the strongest 3-month return (over 25%). It had better than expected earnings in February and offered strong 2012 guidance.

  2. Energy stocks were mixed. Plains All American (PAA) rose nearly 20%, following oil prices higher. The two coal MLPs, Alliance Resource Partners (ARLP) and Natural Resources Partners (NRP), did not fare so well as coal prices have been under pressure. Some electric utilities have closed coal-fired plants to comply with pending government regulations. Natural Resources triggered my -20% sell rule; see below for more information.

  3. Financials and REITs were strong. Realty Income (O), Cullen/Frost Bankers (CFR), and National Health Investors (NHI) all delivered total returns above 10% for the period.

  4. All five of the Industrial holdings were in the Top 20 performers for this period. This included: Waste Management (WM), Northrop Grumman (NOC), McGrath Rentcorp (MGRC), Republic Services (RSG), and Mine Safety Appliances (MSA). Waste Management and McGrath beat estimates and increased their respective dividends. NOC's profits rose despite weaker sales. Republic beat estimates by 8 cents (18%). Mine Safety has its earnings report in April, and it due for a dividend increase in May.

One Portfolio Change

As mentioned above, Natural Resources triggered my -20% performance gap rule, which my data has shown often signals either a dividend cut or a larger decline in the future. If a stock in this portfolio is 20 or more percentage points below the S&P's performance, then it will be replaced. This occurred for Natural Resources on January 3, 2012, as it was 20 points below the S&P's performance, looking at a Google Finance chart starting from March 2011. Therefore, it was sold on January 3, 2012, and replaced with the next candidate from the CCC spreadsheet screen, Magellan Midstream Partners (MMP). There was also $1450 cash from dividends in the account, which was invested in Magellan along with the sale proceeds. Since this time, Natural Resources has fallen another 15%-20%, likely due to the recent news about utilities closing coal plants, as Alliance Resource has also fallen. Magellan is up slightly since January 3.

Note: Atlantic Tele-Network (ATNI), which is held in the Dividend Aristocrat+ portfolio, recently hit the -20% point on a 3-month relative basis. If it stays at this level for 3 more weeks, it will be replaced.


Overall, the DG models are keeping pace with the SPY and doing so with less volatility, which was one of the objectives. I expected the small cap portfolio to have higher beta, but thus far, it has not delivered higher returns. I'm most interested in seeing how the High-Yield, Low-Payout portfolio performs, but more time is needed to collect more data on that strategy. I will continue to monitor and report on these funds, and welcome any feedback and suggestions for improving them.

Source: Dividend Growth Models Update: Keeping Pace With The S&P With Lower Beta