In our article yesterday, "Top 12 Stocks Held by 10 Dividend ETFs", one reader asked if we could compare the performance of a portfolio of those 12 stocks with the performance of the ETFs. That seems a reasonable question, so we prepared something along those lines presented here.
This table is one of the standard exhibits in our monthly subscription letter, "Rational Risk Equity Income Investor". It compares the performance over 10-years of equal weighted portfolios of selected dividend stocks to the performance of the S&P 500 (NYSEARCA:SPY), and four dividend ETFs: SDY, DVY, VYM and VIG.
To analyze the 12 stocks from the article yesterday, we simply modified our standard exhibit by creating an equal weighted portfolio of the 12 stocks and inserting them into the standard exhibit. That data has a gray shaded header in the table.
The table uses shading (green through yellow and red) in each row to indicate the ranking from best to worst performance. Green does not mean good and red does not mean bad - they just create a ranking.
click image to enlarge
Compare to 4 Dividend ETFs and the S&P 500:
The 12 stocks generally underperformed the selected dividend ETFs and the S&P 500 in rising markets and had less severe down movements in the worst times.
They provided a higher cash distribution.
They were in the pack or better for volatility and total return for 3-years and 5-years. We don't know how they would have done over 10-years relative to the dividend ETFs, because the ETFs don't have a 10-year history.
They outperformed the S&P 500 in all dimensions except for 3-year total return when they generated 24.12% annualized return versus 25.34% for the S&P 500.
Overall, they did pretty well.
Quarter-by-Quarter Total Return vs. S&P 500
This chart shows the difference between the total return of the 12 stock portfolio versus the S&P 500 index on a quarter-by-quarter basis for the past 10 years.
The 12 stock portfolio underperformed in 14 of 40 quarters, most recently for 3 back-to-back quarters. Nonetheless, the outperformance quarter made up for that.
This chart points out an important fact to remember, regardless of what you own -- growth or value, dividends or none, domestic or foreign -- you won't win every quarter, and must be prepared for period of back-to-back quarterly underperformance for any portfolio design.
Beta - Reactivity to Movements in the S&P 500:
One potential frustration for dividend investors is feeling disappointed that when the S&P 500 spurts up, their stocks don't do the same -- seeming to be stuck in the mud. Over the short-term, the Beta parameter helps to explain that.
Beta basically describes the price movement sensitivity to price movements in the benchmark over the measurement period (S&P 500 in this case, with a 3-year measurement period).
Here is the 3-year Beta of the 12 stock portfolio and the comparison ETFs:
- 12 stock portfolio: 0.74
- SPY: 1.00
- SDY: 0.78
- VYM: 0.88
- VIG: 0.82
The other three data columns for the three sets of selected dividend stocks from our letter are: 0.83 for the Quantitative List, 0.77 for the Subjective List, and 0.43 for the Performance List.
We hope this helps put the top 12 stocks held by 10 dividend ETFs in good perspective. We didn't do a study of each of the 10 dividend ETFs separately here, but the 4 used a good cross section of the 10.
Disclosure: Among securities identified in this article, QVM has positions in SPY in some managed accounts as of the creation date (March 28, 2012).
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.