Dividend Model Portfolios Performance Update: 2012 Dividends Received And Rebalancing Schedule

by: Jeff Paul

This is the first 2013 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 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. The newest model, DG-LBHDGR [Low Beta, High Dividend Growth Rate] was just started in January, and I will not formally report on it until 3 months have passed.

Performance Summary

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Over the last three months, all of the DG models have outperformed the S&P 500 (NYSEARCA:SPY) in absolute total return. Given the nice run-up of the SPY recently and the lower beta of the DG model portfolios, this is a pleasant surprise. The DG models' betas have edged upward over the short-term, reflecting some increased volatility in weekly returns. Some energy sector holdings had 15%+ gains over the last 3 months, including: Sunoco Logistic Partners (NYSE:SXL), Plains All American (NYSE:PAA), and Alliance Resource Partners (NASDAQ:ARLP). Smaller cap Industrial stocks Ryder Systems (NYSE:R) and Crane Company (NYSE:CR) also had near 20% gains. Meanwhile, some telecom and technology holdings had negative returns versus the SPY's 6% gain. Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T), and Verizon (NYSE:VZ) declined and also had some large moves both up and down, resulting in more volatile weekly returns. It is also interesting to note that the S&P Dividend ETF (NYSEARCA:SDY) actually had a higher beta than the SPY. On a volatility-adjusted basis using the M2 measure, all of the DG models outperformed both the SPY, and three beat the SDY.

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Over the last 12 months, all of the DG models except for the DG-HYLP beat the SPY and SDY on both a relative and absolute basis. The DG-HYLP suffered some losses in the first half of last year that impact the annual return. ARLP, Walgreen (WAG), and Safeway (NYSE:SWY) declined 17% each on average in the first half of 2012, though they have recovered some of those losses since then. Textainer Group Holdings (NYSE:TGH) was a roller coaster, increasing 27% in the first 6 months, then dropping 22% over the next 3 months, and now is near its 52-week high. The price action of these stocks contributed to the higher beta for the DG-HYLP model, in addition to its lagging performance. I will need to do some analysis on this portfolio before I rebalance it in March to see if there were any indicators that could have avoided some of the volatility and losses. Implementing my "-20% stop loss rule" may help with the losses; I originally did not use this rule for the DG-HYLP as there was less risk of dividend cuts. However, from a total return standpoint, it makes sense to use it.

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Since inception, the original three DG models continue to outperform the SPY and SDY in both relative and absolute return. The DG-IncomeGrowth model has been particularly impressive with its combination of a very low portfolio beta of 0.67 and the highest overall return. This was due in part to one holding that was bought out in the first 3 months for a quick $10,000 gain. Excluding this event, the model would still have a 33% gain and the highest M2 ranking. To be more comparable, I adjusted the calculation for the DG-HYLP's M2 measure to compare against the SPY SPY effective 1/1/2012 [20.8% gain]. While still trailing by 1.5% in absolute terms, with its lower volatility, the DG-HYLP squeaked out a 0.14% relative return advantage based on the M2.

Dividends Collected in 2012

In the comments for last month's update, a reader inquired about the dividends received for each of the models in 2012. I downloaded the data from SmartMoney.com, which is the web site I'm using for the models, and summarized the results below.

2012 Divs Received
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The first three models all exceeded their estimated yields at the time they were last rebalanced. This is not unexpected, as the stocks raised their dividends during the year. The DG-SmallCap model experienced some turnover because 3 stocks triggered the stop-loss, including Natural Resource Partners (NYSE:NRP). NRP was sold one month into the year, and its replacement, Magellan Midstream Partners' (NYSE:MMP) yield was about half of NRP's. The DG-Smallcap model's strong capital appreciation more than makes up for the slight dividend miss.

Portfolio Rebalancing Timeline

Another reader asked when I would update the High-Yield, Low-Payout portfolio. It has been more than 6 months, so it is overdue. I need to hold off for one more month though, as I'm trying to spread out my portfolio rebalances, no more than one per month, to make them more manageable. Some models are also dependent on data that comes out at a certain time. For example, the DG-LBHDGR requires year-end DGRs, which come out in January in the CCC list, and the Dividend Aristocrat+ model needs the January Aristocrat update from S&P. Since this data only changes yearly, these two models have annual rebalancing. The DG-HYLP and DG-IncomeGrowth models focus on higher yield, so 6-month rebalancing makes sense to reduce appreciated holdings and reinvest in ones with higher yield. I haven't decided about the DG-SmallCap model yet, as I'm less interested in it and still not sure I'll continue it, but we'll see how the year goes.

Here is my planned rebalancing schedule going forward:


Rebalance Month


DG-Low Beta, High DGR



Dividend Aristocrat+



DG-High Yield, Low Payout

March, September


DG-Income Growth

April, October



December, [June?]

[may switch to semi]


Overall, the DG models continue to perform very well versus the SPY and to have less volatility, which was one of the objectives. The recent uptick in beta across all of the models is interesting, but they are all still well below the SPY and SDY over a longer time period. I will continue to monitor and report on these funds, and welcome any feedback and suggestions for improving them. Here's to another great year for dividend growth stocks!

Disclosure: I am long ARLP, MSFT, TGH, INTC, VZ, WAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.