This is the July 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 Aug. 16, 2011, whereas the DG-HYLP was started on Jan. 1, 2012, so there is less data history for that portfolio.
- The performance figures are total return as of July 27, 2012, as I track on a weekly basis.
- I changed my risk-adjusted measure to the Modigliani Measure (M2), as I believe it is easier to interpret than the traditional Sharpe ratio. Essentially, it scales the excess return of the portfolio to the risk level of the market benchmark, and then reports the difference, which represents the excess risk-adjusted return over the benchmark. Because this is excess relative to the benchmark, it provides a better sense of how the portfolio did versus trying to compare Sharpe ratios. I do plan to write an article on how to make these calculations and discuss the different metrics.
Performance Summaries (3mo, YTD, and Since Inception)
Over the last three months, the S&P 500 Index (SPY) experienced a slight decline, while all of the dividend growth (DG) models gained. The four model portfolios beat the S&P Dividend ETF (SDY), both in absolute return and on a volatility-adjusted basis (M2 Measure). The DG-IncomeGrowth portfolio continues to have the lowest beta of all of the models, and for the trailing quarter, it had the best returns as well. The previous hits to the DG-HYLP model's mining and industrial stocks contributed to the portfolio's 3-month decline, however several new holdings from last month's rebalance have performed very well.
- Target (TGT) is up 6.4% since the rebalance on July 3, 2012.
- A. Schulman (SHLM), a specialty plastics maker, beat earnings estimates with improving margins and raised full-year guidance. It is up 6.3%.
- Molex (MOLX), an electronic components maker, is up 4.0%.
- Rogers Communications (RCI) is up 6.8%, despite an earnings miss. This may be a dividend yield play, as it was yielding over 4.3d% prior to the run-up.
Year to date, the dividend models and SDY are trailing the SPY by 1.3 to 3.8 percentage points, though again, with much lower volatility and beta. The four models are all beating the SDY on both an absolute and relative basis, and are close to the SPY on a volatility-adjusted basis. 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 other DG models have higher volatility-adjusted and higher beta-adjusted return ratios than the SPY and SDY. In simpler terms, these portfolios produced higher returns for each unit of volatility or beta.
Focus on the Small Cap Dividend Growth Portfolio
This month, I am providing an update on some of the holdings in the DG-SmallCap portfolio. Since the portfolio rebalance on Dec. 4, 2011, five of the 40 holdings are down, but none by more than 5.75%. 14 of 40 delivered over 12.8% in total returns during these 8 months, exceeding the SPY's total return for the period. The top 20 performers mostly belonged to the Consumer Staples, Financials, Utilities, and Energy sectors.
Here is a recap of some of the major movers for the DG-SmallCap portfolio over the last 3 months. The SPY was down slightly for this period. Price information is as of July 27, 2012. All percentages are 3-month (April 27-July 27).
- McGrath Rentcorp (MGRC): Down -10.6%. MGRC has its quarterly earnings report this week and I am interested to see what it says. The stock price has flirted with my -20% stop-loss rule for the last few months, though never for 4 consecutive weeks, so it remains a holding. The dividend payout ratio is under 50%, so the dividend should be safe, though increases have been small in recent years.
- Microchip Technology (MCHP): Down 6.1%. The stock has declined since announcing plans to purchase Standard Microsystems Corp (SMSC) for $939M in cash. There is some litigation around this acquisition, regarding a potential breach of fiduciary duty by SMSC's Board of Directors.
- Sempra Energy (SRE): Up 10.3%. 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 stock is also in the DG-HYLP portfolio. While I still like the company, with the price run-up, the yield has dropped to 3.4%, so income investors may prefer a higher yielding stock. 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!
- McCormick & Company, Inc. (MKC): Up 10.0%. McCormick manufactures, markets, and distributes spices, condiments, seasoning mixes, and other products to retailers, food service, and food manufacturing businesses. MKC's Q2 results showed revenue growth on higher prices and earnings met expectations. The firm confirmed full-year earnings estimates of around $3/share, giving it a low 41% payout ratio and room to continue growing its dividend.
- National Health Investors (NHI): Up 9.9%. NHI is a real estate investment trust (REIT) that invests in health care properties. There was not a lot of news in the last three months, but the stock was yielding near 5.5%, so I'm guessing the recent run-up is at least partially from income investors seeking higher yields from low beta stocks. NHI still yields 4.9% even after the recent 10% price increase.
- Northeast Utilities (NU): Up 9.5%. NU completed its merger with NSTAR, and is the largest utility servicing the New England area. The stock received an upgrade from Deutsche Bank in June, and has raised its dividend twice this year, currently yielding 3.4%. Bloomberg's noted that part of NU's rise was from the "flock to safety" by investors.
- Community Trust Bancorp (CTBI): Up 7.5%. CTBI is a regional bank in the Southeast U.S. It recently reported its second consecutive quarter of record earnings and increased its dividend by 1.6%, which extends its years of dividend growth to 32. While the stock's yield is a respectable 3.7%, its dividend growth rate (DGR) is low. This seemed to be a theme with several of the small cap stocks that made the final screening list. I would recommend considering financial stocks from the other portfolios (DG-HYLP or DA+), as there are some nice options with better DGRs. NHI is a higher yielding small-cap choice.
Over the last three 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 than the SDY too. Next month's update will bring the original three models to their one-year anniversary. So far, the results of these metric-based, mostly passive portfolios have been quite good both for income-focused investors and total return investors. We will see what Year 2 brings!