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2021 Review
September was an awful month for the dividend aristocrats with the NOBL ETF losing 5.69% during the month. This brought the year-to-date return for NOBL to 12.38% through month-end September. The terrible month places 2021 a whopping 7.12% behind the 2019 9-month return of 19.50%. After this major pullback I think any hope of a record setting return this year for NOBL is all but gone. Through October 22nd NOBL is up 5.34%, almost a full recovery from September's losses. With just 2 months left in the year plus a few days in October NOBL would need a total return of 7.24% to beat its best return from 2019. November has historically been the best month for NOBL with the fund averaging 4.57% during the month over the past 8 years. While the chance to set a record calendar year total return remains the odds for it are not high.
There are many individual dividend aristocrats that are still having an excellent year. Here are the best performing aristocrats through month end September.
- Nucor (NUE) +87.64%
- West Pharma (WST) +50.08%
- Exxon (XOM) +49.51%
- Albemarle (ALB) +49.38%
- Federal Realty Investment Trust (FRT) +42.50%
- People's United (PBCT) +39.87%
- Pentair (PNR) +38.11%
- Essex Property Trust (ESS) +37.49%
- General Dynamics (GD) +34.37%
- T. Rowe Price (TROW) +34.17%
- Cincinnati Financial (CINF) +32.89%
- Target (TGT) +30.92%
- S&P Global (SPGI) +30.03%
The S&P 500 total return through month end September is 15.92%, so while the aristocrats are enjoying a solid year, they are trailing the broad US market by a little over 3.5%. October looks to increase this divide as the S&P is performing slightly better than NOBL during the month. The dividend aristocrats are not known to consistently beat the S&P 500 index, in fact the dividend aristocrat index underperformed the S&P 500 index for 5 out of the last 6 full calendar years.
However, if you look further back in history, the dividend aristocrat index is outperforming the S&P 500 index by about 1.75% per year between 1990 and 2020. A significant portion of this long term outperformance is attributable to the dot com bubble and the financial crisis as well as the immediate years following each market crash. This pattern was broken with the 2020 market crash, perhaps the much shorter duration of the crash and recovery are the reason. The dot com bubble and the financial crisis both extended for multiple years while the 2020 market crash was fully recovered in a matter of months.
Even though the dividend aristocrats have trailed the S&P for the better part of the last 6 years, long term investors can rest assured that based on history, over a much longer time period, the dividend aristocrats can hold their own. There are currently 65 companies in the dividend aristocrat index but strong historical returns for the index can be attributed to only a handful of them. As an investor, I am always curious how to identify these drivers of outperformance. I want to present 3 strategies that theoretically could identify winning companies and outperform the dividend aristocrat index.
Valuation
Strategy number 1 is a focus on valuation and more specifically to target the most undervalued dividend aristocrats. In theory, this would be a long-term strategy since it may take a while for undervalued stocks to return to fair valuation. My preferred method for valuation is dividend yield theory, mainly for its simplicity. Unlike other valuation methods, dividend yield theory does not require making assumptions aside from assuming that a given stock will revert back to its long term trailing dividend yield.
Selecting the 10 most undervalued dividend aristocrats each month and adopting a buy and hold investing approach can lead to long term outperformance when the targeted stocks return to fair valuation. It may take a few months or even years to see if this strategy actually pays off. I would predict that it will underperform NOBL for the first few months while we wait for bargain stocks to return to fair value.
In August this strategy underperformed NOBL by 1.38%, however September proved to be a much better month for a valuation strategy. The 10 most undervalued aristocrats for September outperformed NOBL by 2.91%. Over this 2 month period the strategy is now 1.62% ahead of NOBL.
There were three changes to the holdings in this strategy for October. Cardinal Health (CAH), General Dynamics and Exxon were replaced by AbbVie (ABBV), 3M (MMM) and V.F. Corporation (VFC). Through October 22nd this strategy is trailing NOBL by 1.88% with a 3.47% return. We still have a week to go in the month but the chances to bridge this gap are slim. If this return holds the strategy will fall 0.13% behind NOBL over this 3 month period.
The 10 most undervalued dividend aristocrats for November include three changes from the October selections. AbbVie, Chevron (CVX) and 3M are replaced by Amcor (AMCR), Cardinal Health and McCormick & Company (MKC). The table below shows potential undervaluation (column O/U) for each of the 10 chosen aristocrats for November. The data is from October 22nd so the current dividend yield may differ slightly from the stated yield.
Source: Created by Author
Expected Growth
Strategy number 2 is to focus on dividend aristocrats that are expected to have the highest expected growth rates. Historically, there has been a correlation between earnings per share growth and share price appreciation. Companies that have grown their earnings faster have also seen higher total returns. One way to gauge how fast earnings for a company will grow is to leverage analyst forecasts. For this strategy, I decided to use five year EPS growth forecasts combined with current valuation to identify the 10 best aristocrats poised for the fastest growth.
In August this strategy beat NOBL by 3.25%, September was also a strong month for the highest expected growth aristocrats. The 10 aristocrats chosen for September outperformed NOBL by 1.32%. Over this 2 month period the strategy is now 4.45% ahead of NOBL.
There were two changes to the holdings in this strategy for October. Albemarle and People's United were replaced by Illinois Tool Works (ITW) and Stanley Black & Decker (SWK). Through October 22nd this strategy is trailing NOBL by 1.07% with a 4.28% return.
The 10 dividend aristocrats poised for the highest expected growth for November include one change from the October selections. Stanley Black & Decker is replaced by Linde plc (LIN). The table below shows the expected growth rate (column Exp. Growth) for each of the 10 chosen aristocrats for November. The data is from October 22nd so the current dividend yield may differ slightly from the stated yield.
Source: Created by Author
Undervaluation and Growth
Strategy 3 is a blend of the two strategies above with a focus on the fastest expected growth but applied only to undervalued aristocrats. A blend of undervaluation and expected growth could narrow down the best companies between the two strategies. The most undervalued aristocrats may not necessarily be poised for the fastest growth. Additionally targeting only undervalued aristocrats can offer a margin of safety in that securities are purchased for fair or better prices.
In August this strategy beat NOBL by 0.77%, September was a stronger month for the blended strategy. The 10 aristocrats chosen for September outperformed NOBL by 2.29%. Over this 2 month period the strategy is now 3.08% ahead of NOBL.
There were four changes to the holdings in this strategy for October. Franklin (BEN), People's United, Sysco (SYY) and Exxon were replaced by A. O. Smith (AOS), Air Products and Chemicals (APD), Becton, Dickinson (BDX) and V.F. Corporation. Through October 22nd this strategy is trailing NOBL by 0.79% with a 4.56% return.
The 10 chosen aristocrats selected for the blended strategy for November include two changes from the October selections. Air Products and Chemicals and General Dynamics are replaced by Amcor and Cardinal Health. The table below shows potential undervaluation (column O/U) and the expected growth rate (column Exp. Growth) for each of the 10 chosen aristocrats for November. The data is from October 22nd so the current dividend yield may differ slightly from the stated yield.
Source: Created by author
Performance Review
Including the partial returns for October it looks like 2 strategies will remain ahead of NOBL. The most undervalued strategy that is having the weakest return in October thus far might slide behind the ETF over this 3 month period. A buy-and-hold approach for each strategy is also beating NOBL for the 2 month return between August and September. However all 3 buy-and-hold returns are slightly weaker than the individual monthly returns. I think that each of the buy-and-hold portfolios also has a very good chance to offer alpha over NOBL. A buy-and-hold investing approach is one of the easiest strategies to adopt and also very tax friendly. Dividend aristocrats are great quality companies so it would make sense that you hold onto them for a very long period of time. I personally prefer and utilize a buy-and-hold approach in my own portfolios.
Type | Top 10 Under | Top 10 Ex Grow | Top 10 Under & Grow | NOBL |
Individual | -2.31% | 0.52% | -0.85% | -3.93% |
Buy-and-Hold | -2.52% | 0.47% | -0.87% | -3.93% |
O/U | -0.21% | -0.05% | -0.02% | 0.00% |
Final Thoughts
I personally believe each of the 3 strategies outlined above theoretically can beat the dividend aristocrat index over a longer period of time. Investors should keep in mind that selecting individual stocks carries more risk than investing in an index. The simplest and possibly the safest way to invest in the dividend aristocrats is to purchase shares of NOBL. The fund is having a stellar year and has an annualized rate of return of 11.88% since inception.
