This is the June 2012 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 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. Note: the performance figures are total return as of June 29, 2012.
Performance Summaries (3mo, YTD, and Since Inception)
Over the last three months, the S&P 500 Index (NYSEARCA:SPY) experienced a decline of 3.34%. All of the DG models and the S&P Dividend ETF (NYSEARCA:SDY) had better performance with lower volatility and beta. With the exception of the DG-HYLP model, the other DG models all had gains, led by the DG-IncomeGrowth model. The previous hits to the DG-HYLP model's mining and industrial stocks contributed to the portfolio's 3-month decline. This portfolio will be discussed in more detail below and will be rebalanced in the near future.
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Year-to-Date, the dividend models and SDY are trailing the SPY by around 2 to 3 percentage points, though again, with much lower volatility and beta. Since we generally expect dividend stocks to appreciate at a slower pace than the SPY in up markets, which was the case until the last month or so, there is nothing to be alarmed about in these results. The lower portfolio volatility has made for a smoother ride for DG investors, which is a plus.
Since inception, the original three Dividend Growth models have delivered total returns higher than the SPY and SDY with less volatility. The DG-HYLP model has a later inception date, so the YTD results are more appropriate for this model. All of the DG models have higher volatility-adjusted (Sharpe) and, excluding DG-HYLP by a hair, higher beta-adjusted (Treynor) return ratios than the SPY. In simpler terms, these portfolios produced higher returns for each unit of volatility or beta.
Focus on the High Yield, Low Payout (DG-HYLP) Model
The DG-HYLP model operates a little differently than the others. By choosing DG stocks with higher yields (Div / Price) and lower payouts (Div / Earnings), we end up with low P/E stocks, as the lower payout means earnings are high relative to the dividend and higher yields mean the price is low relative to the dividend. In theory, these stocks are value plays; potentially mispriced stocks. While income-oriented investors will be happy to buy and hold such stocks for the dividend and dividend growth, as a total return investor, I prefer to sell the stock once the value is realized by the market and replace it with another value play. Therefore, this portfolio is scheduled for semi-annual rebalances, and if there are major market moves (e.g. +/-15% before 6 months). Also, because of the extra rebalance and the higher degree of dividend safety in this portfolio, the -20% stop-loss rule that I employ in the other models is NOT used for this model.
Here is a recap of some of the major movers for the DG-HYLP over the last 6 months. Price information is as of June 29, 2012. All percentages are YTD total return.
- Alliance Resource Partners LP (NASDAQ:ARLP): Down -25.8%, mainly due to concerns about coal demand both because of the economic slowdown and potential government regulations that would impact electric utilities' use of coal for new facilities.
- Safeway (NYSE:SWY): Down -13.8%. Grocers have been struggling with increasing costs. While SWY has made progress on cost controls, it still missed earnings in April. Just today, Cantor Fitzgerald suggested that SWY would reduce 2012 guidance and may need to slow down its share buybacks.
- Walgreen Co (WAG): Down 10.6%. WAG has also struggled, with same store sales down 6.4% in April. It also stopped filling prescriptions for customers on Express Scripts (NASDAQ:ESRX) benefits plans, unless customers make payment arrangements, because the two companies couldn't agree on a new contract this year. WAG also bought a 45% stake in Alliance Boots, a large European pharmacy; whether this is a favorable purchase remains to be seen. The firm is due to raise its dividend in August.
- Textainer Group Holdings Ltd (NYSE:TGH): TGH took top honors for the 6-month period with a huge 26.6% gain. The firm leases marine cargo containers worldwide. It reported strong Q1 earnings and high utilization. TGH has been expanding its warehouse facilities and fleet of containers. It also raised it dividend by 8.1%. Despite the huge price appreciation, the stock still has a 4.3% dividend, so I expect that it will make the cut after the rebalance, but the holding will be trimmed.
- Sempra Energy (NYSE:SRE): Up 25.1%. SRE is an energy service holding company, mainly operating in southern California. Its operations include utility services, pipelines and storage (natural gas), and liquefied natural gas. This is one I wish I had purchased. While I still like the company, with the price run-up, the yield has dropped to 3.5%, so there may be higher yielding utilities that unseat SRE from the portfolio. SRE increased its dividend by 25% in March and earnings readily cover the dividend. This is one stock I plan to buy for my own portfolio if the price comes down a bit!
- Microsoft (NASDAQ:MSFT): MSFT was up 17.7% for the 6-month period. Its price has fluctuated; I tried to buy it for my own portfolio around $28.50, but it didn't quite get there. With recent announcements about the Surface tablets, the stock has gone back up. As mentioned in previous updates, this company continues to be a cash cow and has been buying back about $9B in stock each of the last 3 years. The dividend is therefore quite safe and I would expect MSFT to continue raising it.
- Raytheon (NYSE:RTN): RTN was up 16.9%, mostly thanks to a large run-up in the last 2-3 weeks. The firm received some Navy contracts and a buy recommendation from an analyst. While earnings growth is projected to be negative this year, estimates call for an increase next year. RTN's payout ratio is below 40%, so the dividend has room for growth even after getting a 16% bump in April. RTN still yields a respectable 3.6% after the price appreciation. This is another one I wish I had purchased earlier this year!
- Other notable performers: Wal-Mart Stores (NYSE:WMT) up 16.6%, Harris Corp (NYSE:HRS) up 16.0%, and Chinese oil firm CNOOC Ltd (NYSE:CEO) up 15.1%.
After the June CCC list is published, I will follow the criteria outlined in the original DG-HYLP model article to determine the 30 portfolio stocks. The article should be available by next weekend, and the portfolio will be rebalanced based on the closing prices on Friday, July 6.
McGrath RentCorp (NASDAQ:MGRC) has been flirting with my -20% stop-loss rule. Its price has declined around 20 percentage points more than the SPY as of Feb. 4, 2012. Applying my new procedure of factoring in part of the dividend (half in this case, since we are looking at a 6-month time frame), MGRC has not stayed below 21.9% for four consecutive weeks, mainly thanks to a couple well-timed price spikes. In any case, it is a stock to watch, but the dividend appears safe based on earnings estimates.
Over the last 3 months, the DG model portfolios have outperformed the SPY and SDY on both an absolute and adjusted basis. Except for the DG-HYLP portfolio, the others all had lower beta too. August will mark one year for the original three portfolios, and thus far, the results of these metric-based, mostly passive portfolios have been impressive. Hopefully that trend continues!
Disclosure: I am long ARLP.