Geoff Considine

Dividend Aristocrats Will Continue to Outperform

Typo alert:

Article says:
"For the two years through March of 2007, DVY had average annual returns of -35.8% per year..."

It should read:
"For the two years since March of 2007, DVY had average annual returns of -35.8% per year"

Dividend Aristocrats Will Continue to Outperform

DKCO:

Ahh--but you have neglected a crucial factor. Let's say that a model predicted two years ago that bonds would out-perform stocks over the future years. Then the market crashed. And your point would be that any bond portfolio would have out-performed in a market crash, so big deal. But, the model--when it predicted this--did not know that the market would crash. The model was implying something important. Same here. Anyone can say that a low Beta portfolio has and should out-perform in a down market, but we did not know there would be a down market when I wrote the original article. Make sense?


On May 04 07:26 PM dkco wrote:

> Geoff
> A quick skim of some of the characteristics of your simulation, beta
> of about 0.60 and equal weighted positions of the dividend aristocrats
> would indeed predict outperformance of the cap-weighted S&P 500
> over the period when it fell 25%. Equal wighted stocks significantly
> outperformed cap-weighted during the time, and a portfolio with a
> beta of 0.6 should roughly fall 60% of the amount of the market (and
> rise only 60%). 60% of -25% is -15%. So, the combination of the portfolio
> beta and equal weightedness is the primary explanation for the dividend
> portfolio's performance, not what stocks they are, or, even that
> they pay dividends. A comparable analysis would hold for any basket
> of stocks, dividend paying or not, with a portfolio beta of 0.60.
> I know, most low beta stocks pay dividends, but not all, and not
> all div-payers are financials.

Dividend Aristocrats Will Continue to Outperform

Yes, but there is little evidence that investors as a whole are rational. Witness bubbles and other speculative extremes. There are a range of data points that suggest that investors are not rational. One of my favorites is that low Beta strategies tend to return more than they should (Fama and French 2004 showed this). In a perfect market CAPM would be correct--and you would be correct--but Fama and French 2004 shows that this is clearly not the case, even over long periods.


On May 03 08:54 PM Flav wrote:

> Geoff:
> If agents are rational and forward looking, and past information
> of returns and risk are at their disposal; knowing that a montecarlo
> simulation which uses this information shows that a basket of stocks
> will outperform the S&P, shouldn't create an arbitrage opportunity
> that will soon erase the return diferential, so that the future expected
> return of this basket is the same of that of the S&P?

Dividend Aristocrats Will Continue to Outperform

Alan:

Trust me--I am well aware that -18% is not a happy outcome. For the people who are net short or who have otherwise sustained no losses in the last couple of years, I am duly impressed. For the institutional investors and retail investors who maintain net long positions, relative out-performance matters a great deal. The Dividend Aristocrats have turned a REALLY bad year into far less substantially bad year. You seem to be suggesting that the only good strategy is one that never has losses. If you believe that this is possible, I wish you luck.

If price appreciation is anemic, I will be very grateful for the dividends for my net long positions.

With regard to comments from donzelion and Whidbey:

The theory etc. behind why companies pay dividends and why investors care is long and interesting. Dividends are a signal to investors. Some companies have tried to exploit this with leveraged dividend strategies or simply payouts that were simply too high to be sustained. Dividends that are raised or maintained over long periods can signal managements approach to growth, etc. Yes, companies can and do cut their dividends and they may do so in the future. Do you think that the out-performance of the Aristocrats in 2008 was just coincidence? Time will tell.

Regards,

Geoff

The Do-It-Yourself Market-Neutral Portfolio

Steve:

Over the last 12 months, I get about the same result--depending on whether you drop OMM when it was delisted due to acquisition or substitute its acquirer. Either way, the portfolio is down by an amount close to the S&P500, as you suggest. That said, note that the R^2 of 20% or less over long periods of time means that it is not really a good idea to benchmark against something like the S&P500--most of the volatility in the portfolio is not due to moves in the S&P500. A "market neutral" apporoach that has fairly high volatility (like this one) may not drop when the market drops--or it may--the market direction is not the driver. In this case, the credit crisis has been a big driver because of the exposure to banks here.

This kind of portfolio is a good one to monitor over the long haul--thanks for the reminder :)

Geoff

The Do-It-Yourself Market-Neutral Portfolio

Hi Dan:

Yahoo's stock screener also gives CEF's--it is free and easy. In this case, with the P/E criteria that I used, these industries ended up with high representation--this is a consequence of looking for low Beta and low P/E.

The Do-It-Yourself Market-Neutral Portfolio

Well, you will note that several of the holdings are Canadian. Second, we have Mitsui ADR's. Oil companies tend to have performance that is correlated to emerging markets--just because a number of these economies are driven by oil. This study was performed in the U.S. currency and there are more domestic companies than non-U.S. companies, but the strategy will hold up with quite a few variations. Again, I stress that this article is a demonstration of a concept rather than being an ideal portfolio.

The Do-It-Yourself Market-Neutral Portfolio

Ralph:

Thanks for your comments. QPP's projections do depend on historical correlations, volatility, etc. I have gone to some lengths to avoid 'over fitting' but every analysis using historical data is subject to the specifics of these data. QPP's projections do not, however, simply rehash historical returns, volatilities, and correlations. I have research showing how QPP works for a real portfolio of stocks over 30+ years. Also, this idea of a very low Beta / low R^2 / low correlation portfolio using only long positions has been demonstrated in a number of my other papers. Could correlations shift so much that this approach fails? Certainly. Any analysis is subject to the potential for the world to shift.

The fact that this portfolio has done well in recent bull and bear markets AND that the monthly returns exhibit such low R^2 and Beta makes me feel that these results are fairly robust. Obviously this portfolio has too much energy exposure to be a real choice for a total equity portfolio. I would be worried about how this portfolio would do in the event that oil drops a lot...that can can tested using the correlation of the portfolio to an oil index--I didn't do that in the article, but it would be easy enough using QPP.

BTW, DIAMX has a lot of energy exposure, too. If you look on Morningstar here:

quicktake.morningstar....;Symbol=DIAMX&...

you will see that DIAMX has an R^2 with respect to the Goldman Sachs Natural Resources Index of 71%---that is quite high. This means that movements in this index explain 71% of the variability in the returns on DIAMX.