Dividend Aristocrats: Cluster Analysis Expanded

Includes: DBC, GLD
by: Lowell Herr

In a recent article, twenty Dividend Aristocrats were ranked based on two performance metrics and one volatility factor. In the following analysis, the 20 stocks are supplemented with several dividend ETFs (VIG, DVY, VYM, and IDV) as well as eight low correlated ETFs. The idea is to "cluster" securities with high correlations and pair them with low correlated securities. Since the stocks may not expose low correlations, we include ETFs such as commodities (NYSEARCA:DBC) and gold (NYSEARCA:GLD) knowing in advance they will provide the low correlated securities we are looking for. The logic behind this approach is found in a quote by Richard Bernstein.

"It's not the number of asset classes that determines diversification; it's the correlation among those asset classes that determines diversification."

If one combines dividend aristocrat type stocks with dividend producing ETFs, and then throws in a few low correlated ETFs, we can build a portfolio that will both generate income, lower portfolio risk, while providing a respectable return. The return part of the equation is enhanced by using momentum rankings as we are only going to invest in those securities that outperform SHY, our cutoff ETF.

Security Ranking: The following table shows the ranking of 33 securities and readers can see that the individual stocks take up the top seven spots. In addition to the rankings, pay close attention to the relative and absolute acceleration columns. We are interested in investments that are growing at a faster rate than the competition. WAG and KMB are standouts.

The X/O column is the "Golden Cross" or a measurement between the 13-Day Exponential Moving Average (EMA) and the 49-Day EMA. If the faster moving 13-Day EMA is priced above the slower moving 49-Day EMA the indicator is positive (+) with a green background. This indicator provides an early warning as to the direction the security is moving. Our Buy candidates are all positive.

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Buy-Hold-Sell Recommendations: In the table below we have the Cluster Weighting recommendations. Remember that no security is on the Buy list if it is under performing our cutoff ETF, SHY. Check the Ranking Table for those ETFs or stocks that are eliminated.

Of the ten clusters from this analysis, eight have a security that merits a Buy recommendation. The recommended percentage is found in the Required Percentage column. Those percentages translate into a specific number of shares based on the cash available in the portfolio. Those shares are found in the Required Shares column. Initially, I began with five (5) shares in each security. A new portfolio would begin with zero shares in each security.

As a point of interest, the following stocks and ETFs were "clustered" by using a 0.50 correlation factor.

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Disclosure: I am long WAG, DVY, IDV, VIG, VYM, DBC, GLD, BND, JNK, LQD. 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.

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