Can DGI Aristocrats Beat The Market?

by: Seng Hong Teoh


It is investment truism that the “Average Investor” substantially underperformed the market over the long term.

The average Joe tends to make poor investment decisions (e.g., buy/sell decisions), that are often driven by emotions than sound investing framework, which ended up hurting returns long term.

DGI investing based on Dividend Aristocrats (or DGIA), can enable the average total return investor to beat market returns over the long term, with lower market volatility.

DGIA can also enable certain income investors to receive increasing regular dividend income over the long term.

This article shows the relative outperformance of a Buy and Hold DGIA portfolio over passive SPY investing over varying historical periods from 5 to 20 years inclusive.


I first started to invest seriously in the late 1990s when I was working as an expatriate Actuary in Thailand. A few months later, the Asian Financial Crisis struck, decimating stocks in South East Asian countries. The Thai stock market, as measured by SET (Stock Exchange of Thailand) Index, fell over 75% (from a peak of 1700+ down to less than 400), when I first dipped my toe into stocks. There was literally blood on the streets.

My savings were relatively modest then. Being new to the country, I didn't know which stocks to buy. Fortunately, my mentor introduced me to a good broker who recommended a few of the top banking stocks that went deeply out of favor, but still likely to survive the financial crisis. I gradually expanded my circle of competence, diversified my portfolio to own eventually more than 40 stocks. When my work subsequently took me to Singapore in 2001, I cashed out completely to focus on my new assignment. By then, four stocks were decimated to almost zero/ bankrupt, however, despite these complete losses, my entire portfolio still doubled from a few multi-bagger winners.

For a long time, I thought I did very well with over 100% returns over 2 years. However, today, after many battle scars later, I knew I was just a lucky rookie investor/surfer who caught the wave of a strongly recovering market and exited timely. When I first bought, I did one right thing, which was to retain some cash to continue to take advantage of cheaper bargains, when the market continued to fall further by another 30%-40% from my already super low buy point. When the market eventually bottomed and recovered, those who bought then became a genius market timer. What took me a long time to realize was that had I been more passive in my investing activities, I might have actually quadrupled instead of doubled my money! All the selling and buybacks (driven by the euphoria and fear of losing capital gains, later followed by the greed for more!), actually caused serious underperformance, since during this time, the market actually tripled from my average entry levels and continued to rise. I was a stubbornly slow learner -- it took me many more years and trades to keep relearning this relatively simple lesson, as I thought I was smarter and could beat the market.

Fast forward to 12 years later, when I read this Forbes article that reported that the average investor garnered paltry returns over the long term. Dalbar's 2014 Quantitative Analysis of Investor Behavior (QAIB) showed that the "average investor" only earned 2.5% to 2.6% per annum returns over the last 10- to 20-year periods. The "average investor" is defined to include large and small investors, professionally-advised and self-advised investors. 2.5% is massive underperformance, when compared to a passive buy and hold investment in SPDR S&P500 ETF (NYSEARCA:SPY), with dividends reinvested, which generated nearly 8% to 10% per annum over the same period. The primary reasons for the underperformance were similar to my own past experiences -- investors only have themselves to blame. According to the Forbes article, "Investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion." (Emphasis added).

Thus, I am appealed by the relatively more passive approach from DGI Investing. There are actually many variations to DGI investing; there is no one single "right" way -- Mike Nadel's article here showed that if you ask 10 different DGI investors, each will come up with 10 different lists. So, DGI clearly doesn't have to focus on just the Aristocrats. However, I have a strong personal preference for the Aristocrats. I call this "DGI Aristocrats" or "DGIA" for short. Technically, Dividend Aristocrats are S&P500 constituents that have increased their regular dividend payments for 25 consecutive years or longer. However, my personal requirement is slightly less, as I only require 20 consecutive years of rising regular dividends.

Whilst traders may think that these stalwarts are boring, I actually find these special stocks to be fascinating. This is not only because of the long, consistent, history of regular dividend increases, but also more importantly, when we put these special stocks together into a portfolio, the resulting Sharpe ratio can turn out to be higher than SPY! In other words, DGIA can beat S&P500 index returns over the long term with lower volatility.

That sounded almost too good to be true, even though I am vaguely aware of this possibility from my previous career. My curiosity got the better of me; I just had to perform the following analysis, to validate the hypothesis for myself. I wanted to reduce as much as possible (or completely eliminate) the effects of "survivorship bias" in my personal historical testing. So, I asked myself:

"Could I, 10 years ago (say on Jan 1, 2005), chose 10 DGIA stocks, without knowing their subsequent returns history nor their valuations history, based primarily on their proven track record then (of many consecutive years of regular dividend increases)?"


"Could I, reduce the list down to only 10 stocks, by requiring that 10 years ago, all 10 must already be globally recognized names, with globally diversified operations, genuine stalwarts that had proven "economic moats", and their businesses would never go obsolete?"


"Were the names "boring" 10 years ago?"

It turns out that it is not an impossible task, even if it's not 100% perfect method to select stocks. I started with David Fish's Dividend Champions short list here (which showed the consecutive years of regular dividend increases), and I then selected my 10 DGIA stocks by focusing on the most obvious brand names in the list.

My 10 DGIA Study Stocks


  1. The 10 stocks above are Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), 3M Company (NYSE:MMM), Colgate-Palmolive (NYSE:CL), Emerson Electric (NYSE:EMR), Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT), and Kimberly-Clark (NYSE:KMB). All 10 may have been regarded as "boring" names 10, 20 or even 30 years ago, and they may still be equally "boring" today.
  2. 10 years ago, all 10 were already paying at least 20 consecutive years of regular dividend increases. E.g., in 2005, MMM had already paid 46 consecutive years of regular dividend increases. You may validate the dividend history in either Yahoo! Finance or (Yahoo! Finance show separated special dividend, but 30-year chart showed total dividend, not split between regular and special).
  3. 20 years ago, all these 10 names were already highly established leaders… giant conglomerates in their own right… superior global brands selling products/services that are unlikely to become obsolete in the future… globally diversified businesses with strong "economic moats" in various markets around the world…
  4. I avoided the banking and insurance industry as having spent my career there, I prefer not to invest in this sector over the long term, especially after the Asian Financial Crisis in the late 1990s (subsequently confirmed by the Great Recession in the late 2000s).
  5. I also tried not to have any exposure to tech, or have over-exposures to any one particular sector if possible (but sometimes unavoidable).
  6. All these 10 already have significant international components in their earnings.
  7. For those thinking of buying these stocks today, do read the rest of the article first to consider the impact of valuations on future returns. Unfortunately, some of the stocks are currently trading above their historical valuations.
  8. For further refinement, one may also consider a low payout ratio requirement, as it appears to enhance total returns over the longer term, as covered by Dale Roberts here.

So, selecting these 10 boring DGIA stocks for the study was the easy part. To be clear, this is a study, not my actual portfolio.

The next part is more interesting -- how would a portfolio of this 10 DGIA stocks performed the next 10 years from Jan 1, 2005?

To try to answer this question, I applied the following simple model, using the following data and assumptions:

The Model, Data and Assumptions

  1. Assume a starting capital of $100,000 10 years ago, at Jan 1, 2005.
  2. Test period is ~10 years, up to Dec 23, 2014.
  3. At the start date, split the Original Capital into 10, to buy each of the 10 stocks in equal portions, regardless of individual stock valuations then*.
  4. Buy and Hold, no additional buy or sell activities.
  5. Automatically reinvest all dividends.
  6. No rebalancing throughout. Winners can keep growing as large as they get, losers can keep shrinking as small as they get.
  7. Do nothing else -- points 4, 5, and 6 are essential, to avoid the subjective, emotional, buy / sell decisions, that will most likely cause serious under-performance in the future.**
  8. Stock price data sourced from publicly available Yahoo Finance historical stock price data using the Adjusted Close prices, which according to the website, had "adjusted for Dividends and splits."
  9. Hence, no tax on dividends nor other commission/expenses assumed for simplicity.

(* This is a potential area for improvement.

** However, I submit that if the valuations are substantially overvalued, a case can be made to trim the holdings a little)

The Results (finally!)

Here are the 10-year investing results:

  1. Investing in SPY: After 10 years, the original $100,000 initial investment (with dividends reinvested) became $210,117. The Total Return CAGR is 7.71% per annum, a little low by historical standards, as the investment was made at the start of 2005 when the market was relatively high. Still, 7.71% is 3 times the returns of the Forbes "Average Investor" noted earlier in this article, so, not a shabby result!
  2. Investing in DGIA: After 10 years, the original $100,000 initial investment (with dividends reinvested) became $264,773. The Total Return CAGR is 10.23% per annum, outperforming SPY by 2.52% per annum! The difference in the 2 final portfolio values is $54,655, or 26% of the final SPY portfolio!

I was floored by the outstanding DGIA result.

I had not expected it to be that significant. Prior to the study, I thought it may have underperformed slightly, which turned out incorrect. Seriously, the 10 DGIA stocks were "boring", and are usually "expensive"! What caused the long-term outperformance?

Was there a single "outlier" stock that outperformed massively? Not really. After 10 years:

  1. SPY grew 2.1 times (principal).
  2. The worst DGIA performer was Wal-Mart, which grew 2.0 times, only, slightly below SPY.
  3. The rest are either on par, or outperformed SPY.
  4. The best DGIA performer was McDonald's, which grew 3.9 times.
  5. The main reason for McDonald's outperformance is because of the depressed share price in 2005 when first bought. McDonald's share price fell over a prolonged 3+ year period, until it reached bottom in 2003, before restarting its long-term ascent slowly -- by the start of 2005 when the stock was assumed bought for this study, the stock clawed back only half of the loss from the 1999 peak, and continued higher after 2005. Future returns would be even higher if McDonald's was purchased earlier at the 2003 bottom.
  6. Thus, this leads to an important buying principle for Dividend Aristocrats -- that it is better to buy when the stock is fairly/under-valued or when the share price is depressed/has crashed, as it can then lead to higher long-term returns in the future.
  7. Whilst it can be scary to buy DGIA stocks when the price made new 1-, 2- or 3-year lows, note that during this period, McDonald's continued to pay increasing dividends each and every year, despite the prolonged price fall.
  8. For Income Investors, it is also comforting to know that throughout this 10-year period which included the Great Recession, the regular dividend from each and every 10 DGIA stocks had risen every year over the 10-year period. The income investor who is focused on the rising regular dividend income is more likely to avoid the emotional selling that could cause substantial underperformance long term during significantly depressed stock prices.

The following portfolio chart comparison is clearer -- it compared the Total Portfolio Value (including reinvested dividends, from a starting capital of $100,000) of the DGIA vs. SPY over the 10-year period:

One important point. Notice how the green line from the DGIA portfolio never fell below the $100,000 original principal during the Great Recession (but SPY fell substantially below it).

DGIA not only outperformed SPY by 2.5% per annum CAGR, it did so with lower volatility. Psychologically, this is very important to the investor. During the depths of the Great Recession, when Total Income is rising, and Total Returns still positive, there is no sane reason for the DGIA investor to panic sell into the Crash. The long-term odds to successfully stay the course with this sound DGIA investing strategy should improve substantially.

Possible Criticism

A possible criticism is that this result only shows 10-year investing period, and the answer may not apply for other shorter or longer investing periods such as 5 or 20 years. To address this criticism, I have done a more detailed comparison beyond the 10-year duration above, to cover every single investing years from 5 to 20, using the same 10 DGIA stocks, model, data and assumptions. The results are summarized below.

The Full Results

A quick explanation of the above columns. Using the earlier 10-year result in the blue row:

  1. Column [1] showed that the investment is assumed to start on Jan 1, 2005 (or 10 years ago)
  2. Column [2] showed the duration of investing, which is 10 years.
  3. Column [3] showed the SPY Total Return CAGR (with reinvested dividends) = 7.71% per annum.
  4. Column [4] showed the DGIA Total Return CAGR (with reinvested dividends) = 10.23% per annum.
  5. Column [5] showed the excess Total Return of DGIA over SPY (10.23% - 7.71% = 2.52%).

I was floored by the robustness of DGIA Investing.

DGIA simply outperformed SPY in nearly all of these varying timeframes (except for only 2 of the 16 data points). The average outperformance from all the 16 data points is 2% per annum.

More detail:

  1. Green rows (when SPY outperformed DGIA): In 2 out of 16 data points (the more recent 2009 and 2010 start year), SPY outperformed DGIA. This is because the SPY price had fallen more in 2009-2010, giving higher returns upon recovery (17.29% and 15.56% respectively). While underperformed, DGIA still returned the highest absolute returns during this period (13.96% and 13.47% respectively), a result I will gladly accept. When comparing DGIA vs. SPY from a strategy perspective, it appears that DGIA has cleverly traded long-term outperformance with lower volatility, for lower maximum returns during the extremely good times.
  2. Orange row (when SPY absolute return is lowest): In Start Year 2000, with 15 years investing duration, SPY only returned 4.23% per annum over this period, vs DGIA 7.65% per annum. The returns were lower, since the start of the year 2000 coincided with the near peak of the dot-com bubble when nearly every stock was substantially over-valued. This leads to the corollary principle, that when the individual stock valuation is too high, it is better to avoid buying that stock, and instead, better to buy the other DGIA stocks that are fairly or under-valued.

Note this study assumed the DGIA investor buys all 10 stocks at the same time, regardless of the prevailing valuation (!), and still beat the market with lower volatility!

I have yet to compare the DGIA strategy against VDIGX, the highly popular Vanguard Dividend Growth mutual fund. This is something I hope to do one day in the near future.


We saw from the Forbes article above that the average Joe substantially underperformed the market over the past 10 to 20 years, earning roughly 2.5% per annum returns. The main reason for the substantial underperformance is largely due to Joe himself -- Joe tends to make poor investment (e.g., buy/sell) decisions, typically driven by emotions, which ended up hurting his long term returns.

DGI and DGIA investing is highly promising as a potential solution to Joe, to try to beat market performance, with lower volatility. It may be as close to free lunch as Joe will ever get from Mr. Market!

The selection of the 10 DGIA stocks above should not be too difficult for Joe. All the 10 names were "boring" names, equally recognizable to Joe today as they were 10 or 20 years ago, and are likely to stay that way in the future. In addition, Joe may consider to avoid highly overvalued stocks, and favor those with low dividend payout ratios to obtain even higher outperformance over the longer term.

The consistently rising regular dividend income, during the difficult investing periods like the Great Recession should be a plus to Joe. If Joe can continue to focus on the continually rising dividend income, he can safely ignore and simply dismiss the temporarily depressed price as "noise." This gives Joe excellent chances to stay the course and beat the market over the long term, including substantial outperformance over the average investor in the Forbes article. Perhaps in decades to come, the Average Joe who has successfully applied DGIA investing over decades may turn into Super Joe.

I have enjoyed writing this article. This article would not have been possible if it were not for the giant authors who stood long before me. There were too many to acknowledge here, however, I would just like to mention 3 whose recent articles for/against DGI investing have inspired the topic for this work -- to Mike Nadel, Chuck Carnevale and Dale Roberts, thank you for your outstanding generosity, and I look forward to continue reading your articles in the future.

Disclosure: The author is long KO, JNJ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author may initiate positions in the names mentioned in this article over the next 72 hours.