Numerous quantitative tests confirm that momentum and dividend growth strategies beat the market. In practice, this was proved by iShares Edge MSCI USA Momentum ETF (MTUM) and ProShares S&P 500 Dividend Aristocrats (NOBL).
Since the beginning of 2014, MTUM (Portfolio 1) outperformed the S&P 500 (Portfolio 3) by almost 3% per year. What is impressive is that this outperformance was produced by slightly higher risk figures, which resulted in a significantly higher Sharpe ratio (measures excess return earned per unit of volatility).
The logic behind the momentum strategies is that stocks that performed well relative to other stocks tend to continue to do so. In the case of MTUM ETF, the fund uses a 6 and 12-month risk-adjusted relative performance. Currently, 125 companies comply with the strategy rules.
Strategies: Portfolio 1 - MTUM; Portfolio 2 - NOBL; Portfolio 3 - the S&P 500
Source: Portfolio Visualizer
Stocks that belong to Dividend Aristocrats ETF are S&P 500 components, which consistently increase dividends every year for at least 25 consecutive years. Such a remarkable track record is not easy to achieve, which shows the business resilience during boom and bust periods. Presently, 57 stocks meet the strategy criteriums.
Although historically, Dividend Aristocrats outperformed the S&P 500 on an absolute and relative basis, since 2014, NOBL ETF (Portfolio 2) underperformed by a minuscule 0.05% per year. However, it had lower volatility and a significantly lower maximum drawdown. Thus, with a Sharpe ratio at 0.94, it outperformed the S&P 500 on a risk-adjusted basis, which had a Sharpe ratio of 0.90.
Presently, ten companies meet the requirements of both ETFs. These companies that simultaneously share both momentum and dividend growth characteristics are presented in the table below.
Source: American Association of Individual Investors
These are all outstanding businesses with economic moats that enabled long-term dividend growth. Although there are no guarantees that they will exhibit the same level of comparative business advantages, the chances are high that a majority of them will continue to excel.
Source: Portfolio Visualizer
Since the beginning of the year, these ten stocks (Portfolio 1) returned 25.24%, and have outperformed the S&P 500 (Portfolio 2) by 2.18%. However, the most significant difference is on the risk side, where the ten Momentum Dividend Aristocrats experienced only 2.31 maximum drawdown and 10.96% standard deviation (volatility). By comparison, the S&P 500 experienced a maximum drawdown of 6.38% and a standard deviation of 14.15%. Consequently, the Sharpe ratio for the ten Momentum Dividend Aristocrats was far above the S&P 500's ratio.
Although these ten stocks already achieved significant YTD gains, historically, the momentum and dividend growth factors show long-term market outperformance. Thus, they could still be interesting to SA readers seeking exposure to extraordinary companies in strong upside momentum.
Compared to the S&P 500 index, this strategy has a concentrated allocation in momentum and dividend growth stocks. Although both investment factors performed in the past, it could be that they will not perform in the future. As securities mentioned in this article involve risks of loss of principal, before using any part of this strategy, an investor needs to carefully analyze his or her risk and return objectives, time horizon, and any other unique characteristics.
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Until the next time, be patient with your strategies and give them time to grow!
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.