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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 (NYSEARCA: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 (NYSE: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 (NYSE:PAA) rose nearly 20%, following oil prices higher. The two coal MLPs, Alliance Resource Partners (NASDAQ:ARLP) and Natural Resources Partners (NYSE: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 (NYSE:O), Cullen/Frost Bankers (NYSE:CFR), and National Health Investors (NYSE: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 (NYSE:WM), Northrop Grumman (NYSE:NOC), McGrath Rentcorp (NASDAQ:MGRC), Republic Services (NYSE:RSG), and Mine Safety Appliances (NYSE: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 (NYSE: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 (NASDAQ: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.

Disclosure: I am long ARLP, O, NHI.