This is the August 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.
The performance figures are total return as of August 30, 2012. I track on a weekly basis, but cut this week one day short due to the holiday weekend.
Three of the portfolios now have over one year of data. For now, I will continue to report the 3mo, YTD, and Since Inception time periods. Starting January 1, 2013, when the DG-HYLP hits one year, I will switch YTD to a one-year measure (trailing twelve months).
Performance Summaries (3mo, YTD, and Since Inception)
Over the last three months, the S&P 500 Index (NYSEARCA:SPY) experienced a nice gain of 7.9%, while the S&P Dividend ETF (NYSEARCA:SDY) rose 5.0%. All of the DG models handily beat the SDY, and the DG-Income Growth model also beat the SPY on an absolute total return basis. On a volatility-adjusted basis using the M2 measure, all of the models performed better than the SPY and SDY, thanks to the lower standard deviation of returns for these portfolios.
Year-to-Date, the dividend models are trailing the SPY by 2.5 to 4.5 percentage points, though their returns are still pretty good (~8%) and with much lower volatility and beta. Using the M2 measure, the portfolios are performing closer to the SPY. The four models are all beating the SDY on both an absolute and relative 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 absolute total returns higher than the SPY and SDY with less volatility, though the SPY has almost caught up to the DG-SmallCap model. 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 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 Dividend Aristocrat+ Model
This month, I am providing an update on some of the holdings in the Dividend Aristocrat+ model portfolio. Since the portfolio rebalance on December 31, 2011, just five of the 30 holdings are down, and only one by more than 5.75%. seven of the 30 holdings delivered over 12% in total returns each during these 8 months, exceeding the SPY's total return for the period. The top 15 performers each had a total return over 5.8% and mostly belonged to the Financials, Industrials, Health Care, Info Tech, and Telecom sectors.
Here is a recap of some of the major movers for the Dividend Aristocrats+ portfolio over the last 3 months. For reference, the SPY was up 7.90% for this period. Price information is as of August 30, 2012; all percentages are YTD.
McDonald's (NYSE:MCD): Down 12%. MCD had a strong 2011 year, exceeding a share price of $100, and was due for a pullback. This happened over the summer, due in part to slowing sales and a strong dollar that led to lower than expected revenues and net income. The dividend remains well-covered and should be raised come November.
Utilities: Con Ed (NYSE:ED) is down 2% and Vectren (NYSE:VVC) is down 6%. I was not surprised to see utilities lagging the overall market rise, as their growth is slow. VVC's non-utility coal group lowered its expectations due to lack of demand for coal (i.e. low coal prices). BKH was down, but got a boost last week when it sold its Bakken shale assets to QEP Resources (NYSE:QEP).
Kinder Morgan Partners (NYSE:KMP): Down 3%. KMP had a huge run-up during the last quarter of 2011, so like MCD, it is not surprising for it to have a pullback. The quarterly distribution increased twice this year, so the firm continues to deliver solid income and growth to shareholders. With a 6% distribution, the stock will still be net positive for the year if the share price holds at current levels.
- PPG Industries (NYSE:PPG): Up 30%. PPG has climbed steadily since January. PPG achieved record earnings in 2012Q2, and will be spinning off its commodity chemical business and merging it with Georgia Gulf Corp (GGC). This will allow the company to focus more on coating and specialty chemicals. More information is available here.
Industrials: All three of the Industrial holdings were up. Illinois Toolworks (NYSE:ITW) was up 26%, 3M (NYSE:MMM) was up 12%, and Emerson Electric (NYSE:EMR) gained 9%. ITW lowered guidance in July, but since then increased its dividend by 6%, announced the sale of a majority stake in its laminate business for $1B, which it will use for share buybacks. Activist investor Ralph Whitworth has doubled his stake in ITW to 14.6M shares.
AT&T (NYSE:T): Up 21%. T exceeded earnings expectations both quarters this year, bought back over $4.5B in shares, and increased its buyback authorization by 300M shares in July. T had solid revenue and margin gains, and 10% earnings growth in 2012Q2.
Other Core Holdings that beat the SPY:
Abbott Labs (NYSE:ABT) gained 16%. ABT beat earnings expectations each quarter this year and will soon spinoff of its pharmaceutical unit. It raised its dividend by 6.25% in April.
Altria (NYSE:MO) was up 16%. Part of its run-up was likely due to income investors seeking high yield. MO was yielding over 5.75%, though with the price appreciation, the current yield is now 5.1%. MO met earnings estimates and raised guidance in July. MO is due for a dividend increase in September and continues to buy back shares in addition to its high dividend payout, though the pace has slowed from previous quarters.
Kimberly-Clark Corp (NYSE:KMB) gained 14%. Despite economic and cost challenges, KMB beat earnings expectations both quarters in 2012, and like MO, raised guidance in July. It also increased its dividend in March by 5.7% and its buyback target by $200M in July, returning more of the extra cash flow to investors. The stock seems richly valued at these levels. Even if year-end EPS is met, it will trade at a PE of 16 and has a current yield of 3.5%.
While the DA+ model portfolio lagged the SPY year-to-date, it delivered a respectable 7.5% total return with less volatility. Several of its holdings had significant run-ups, so rebalancing might benefit this portfolio. However, the universe is rather small for this portfolio as there are only about 50 stocks on the Aristocrat list, and some sectors are underrepresented. This doesn't create a lot of opportunity for new stocks to enter the portfolio. Also, this portfolio was meant to be a simple model for the less experienced income investor, so I want to minimize the trading and maintenance. Therefore I will let this portfolio stand pat until its scheduled annual rebalance on December 31, 2012. The DG-IncomeGrowth and DG-HYLP models will implement semi-annual rebalancing.