Galeanu Mihai
2022 Review
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) fell 4.12% in December and ended the year on a sour note. The 2022 return for the fund was minus 6.5%, this was only the second down year since inception in late 2013 and it was also the worst calendar return. The new year started off better, thus far this month NOBL is up 1.92% through January 25th. With only a few trading days left it is highly likely NOBL will have its first positive return in January since 2019. Not factoring in 2023, January has been the worst month for NOBL with only 3 out of the last 9 January’s seeing positive total returns.
Not all of the dividend aristocrats contributed equally to NOBL’s overall loss in 2022; 32 dividend aristocrats beat NOBL during the year, and 24 posted positive total returns. These were the best-performing aristocrats in 2022:
- Exxon (XOM) +87.38%
- Chevron (CVX) +58.48%
- Cardinal Health (CAH) +54.15%
- Archer-Daniels-Midland (ADM) +39.92%
- Genuine Parts Company (GPC) +26.81%
- Aflac (AFL) +26.35%
- AbbVie (ABBV) +24.04%
- General Dynamics (GD) +21.67%
- Caterpillar (CAT) +17.98%
- Nucor (NUE) +17.38%
- Chubb (CB) +16.00%
- Consolidated Edison (ED) +15.64%
- IBM (IBM) +10.70%
- Coca-Cola (KO) +10.62%
- Atmos Energy (ATO) +9.61%
- Grainger (GWW) +8.74%
- PepsiCo (PEP) +6.76%
- Johnson & Johnson (JNJ) +5.94%
- Emerson Electric (EMR) +5.74%
- Becton Dickinson (BDX) +5.08%
- Air Products and Chemicals (APD) +3.92%
- Amcor plc (AMCR) +3.17%
- Cintas (CTAS) +2.97%
- McDonald’s (MCD) +0.51%
The S&P 500, as measured by SPY, fell by 5.76% in December but is up 4.69% year-to-date (through 01/25). NOBL beat SPY in 2022 with a loss of 6.5% compared to a loss of 21.65%. SPY started 2023 on stronger footing and thus far is beating NOBL by 2.77%. The dividend aristocrat ETF’s 13 month winning streak over SPY is about to come to an end. 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 6 out of the last 8 full calendar years.
However, if you look further back in history, the dividend aristocrat index is outperforming the S&P 500 index by about 2.18% per year between 1990 and 2022. 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. 2022 also proved to be a strong year for the aristocrats as they earned 15.15% of alpha on the S&P, making up for 3 years of underperformance.
Even though the dividend aristocrats have trailed the S&P for the better part of the last 8 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 64 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 aristocrats and lead to better performance than the dividend aristocrat index. These strategies work best with a buy and hold long-term investing approach as will be evidenced by the results. They are based on quantitative models that do not consider qualitative data, therefore it is prudent that further due diligence is performed on all chosen stocks.
The Most Undervalued Strategy
Strategy number 1 is a focus on valuation and more specifically it targets the potentially most undervalued dividend aristocrats. In theory, this is a long-term strategy since it may take some time to fully see the reward of leveraging a valuation approach. 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.
This valuation technique works best for mature businesses with long histories of dividend growth, making the dividend aristocrats an ideal pool of companies to value using this technique.
Selecting the 10 most undervalued dividend aristocrats each month and adopting a buy and hold investing approach can lead to long-term outperformance when/if 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 predict that it will underperform NOBL for the first few months while we wait for bargain stocks to return to fair value.
|
Month |
Most Undervalued |
NOBL |
SPY |
|
Aug 21 |
0.49% |
1.87% |
2.98% |
|
Sep 21 |
-2.99% |
-5.69% |
-4.66% |
|
Oct 21 |
3.63% |
5.95% |
7.02% |
|
Nov 21 |
-2.19% |
-1.76% |
-0.80% |
|
Dec 21 |
10.37% |
6.54% |
4.63% |
|
Jan 22 |
1.04% |
-4.08% |
-5.27% |
|
Feb 22 |
-1.94% |
-2.59% |
-2.95% |
|
Mar 22 |
3.40% |
3.86% |
3.76% |
|
Apr 22 |
-2.14% |
-3.42% |
-8.78% |
|
May 22 |
3.11% |
0.31% |
0.23% |
|
Jun 22 |
-7.30% |
-6.73% |
-8.25% |
|
Jul 22 |
5.00% |
6.56% |
4.55% |
|
Aug 22 |
-3.25% |
-2.78% |
-4.08% |
|
Sep 22 |
-11.39% |
-9.15% |
-9.24% |
|
Oct 22 |
10.07% |
10.31% |
8.13% |
|
Nov 22 |
6.99% |
7.12% |
5.56% |
|
Dec 22 |
-5.41% |
-4.12% |
-5.76% |
|
Jan 23 |
2.98% |
1.92% |
4.69% |
|
2021 Partial |
9.05% |
6.54% |
9.06% |
|
2022 |
-3.91% |
-6.50% |
-21.65% |
|
2023 |
2.98% |
1.92% |
4.69% |
|
TOTAL |
7.90% |
1.53% |
-10.55% |
|
Alpha over NOBL |
6.37% |
||
|
Alpha over SPY |
18.45% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the most undervalued strategy.
The portfolio finished December with a loss of 5.41%, losing to NOBL by 1.29% but beating SPY by 0.35%. Through January 25th the portfolio has a return of +2.98% and is beating to NOBL but trailing SPY. 2022 was a good year for this portfolio as its 3.91% loss was better than NOBL’s 6.5% loss and significantly better than SPY’s 21.65% loss. Since inception this portfolio has generated 6.37% of alpha over NOBL and 18.45% of alpha over SPY.
The portfolio consists of 34 unique present and former dividend aristocrats. I track this portfolio by investing $1,000 each month equally split among the 10 chosen aristocrats for that month. The positions are never trimmed or sold and all dividends are reinvested back into the issuing stock. Here are all of the positions, the current market value, capital invested, total return and allocation as of January 25th.
|
TICKER |
MARKET VALUE |
CAPITAL INVESTED |
TOTAL RETURN |
CURRENT ALLOCATION |
|
ABBV |
144.07 |
100 |
44.07% |
0.78% |
|
AFL |
386.12 |
300 |
28.71% |
2.08% |
|
AMCR |
312.88 |
300 |
4.29% |
1.69% |
|
AOS |
206.30 |
200 |
3.15% |
1.11% |
|
APD |
129.18 |
100 |
29.18% |
0.70% |
|
ATO |
963.31 |
800 |
20.41% |
5.20% |
|
BDX |
108.52 |
100 |
8.52% |
0.59% |
|
BEN |
943.81 |
800 |
17.98% |
5.10% |
|
CAH |
643.57 |
400 |
60.89% |
3.47% |
|
CLX |
1,406.05 |
1500 |
-6.26% |
7.59% |
|
CVX |
565.92 |
300 |
88.64% |
3.06% |
|
ECL |
1,059.82 |
1100 |
-3.65% |
5.72% |
|
ED |
533.10 |
400 |
33.27% |
2.88% |
|
ESS |
203.60 |
200 |
1.80% |
1.10% |
|
GD |
235.48 |
200 |
17.74% |
1.27% |
|
HRL |
720.33 |
700 |
2.90% |
3.89% |
|
IBM |
245.43 |
200 |
22.72% |
1.32% |
|
KMB |
111.10 |
100 |
11.10% |
0.60% |
|
LEG |
90.46 |
100 |
-9.54% |
0.49% |
|
LOW |
750.76 |
700 |
7.25% |
4.05% |
|
MDT |
927.84 |
1000 |
-7.22% |
5.01% |
|
MKC |
199.94 |
200 |
-0.03% |
1.08% |
|
MMM |
1,093.23 |
1300 |
-15.91% |
5.90% |
|
PNR |
112.81 |
100 |
12.81% |
0.61% |
|
PPG |
200.86 |
200 |
0.43% |
1.08% |
|
ROP |
101.37 |
100 |
1.37% |
0.55% |
|
SHW |
231.04 |
200 |
15.52% |
1.25% |
|
SWK |
927.66 |
1000 |
-7.23% |
5.01% |
|
T |
789.94 |
700 |
12.85% |
4.26% |
|
TGT |
319.80 |
300 |
6.60% |
1.73% |
|
TROW |
987.36 |
1000 |
-1.26% |
5.33% |
|
VFC |
1,035.06 |
1500 |
-31.00% |
5.59% |
|
WBA |
1,407.96 |
1600 |
-12.00% |
7.60% |
|
XOM |
429.21 |
200 |
114.61% |
2.32% |
Here are the 10 most undervalued dividend aristocrats chosen for the month of February 2023. The table below shows potential undervaluation (column Valuation) for each of the 10 chosen aristocrats. The data is from January 26th so the current dividend yield may differ slightly from the stated yield.
Created by Author
The Fastest Expected Growth Strategy
Strategy number 2 is a focus on dividend aristocrats that are expected to grow the fastest in the near future. 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 a discounted five-year EPS growth forecast combined with a return to fair valuation and the dividend yield to identify the 10 best aristocrats poised for the best total return in the future.
|
Month |
Fastest Growth |
NOBL |
SPY |
|
Aug 21 |
5.12% |
1.87% |
2.98% |
|
Sep 21 |
-4.42% |
-5.69% |
-4.66% |
|
Oct 21 |
5.92% |
5.95% |
7.02% |
|
Nov 21 |
-2.06% |
-1.76% |
-0.80% |
|
Dec 21 |
7.09% |
6.54% |
4.63% |
|
Jan 22 |
-4.42% |
-4.08% |
-5.27% |
|
Feb 22 |
-0.10% |
-2.59% |
-2.95% |
|
Mar 22 |
3.71% |
3.86% |
3.76% |
|
Apr 22 |
-2.19% |
-3.42% |
-8.78% |
|
May 22 |
0.12% |
0.31% |
0.23% |
|
Jun 22 |
-8.94% |
-6.73% |
-8.25% |
|
Jul 22 |
6.09% |
6.56% |
4.55% |
|
Aug 22 |
-2.69% |
-2.78% |
-4.08% |
|
Sep 22 |
-11.37% |
-9.15% |
-9.24% |
|
Oct 22 |
13.68% |
10.31% |
8.13% |
|
Nov 22 |
6.14% |
7.12% |
5.56% |
|
Dec 22 |
-7.53% |
-4.12% |
-5.76% |
|
Jan 23 |
5.71% |
1.92% |
4.69% |
|
2021 Partial |
11.62% |
6.54% |
9.06% |
|
2022 |
-9.86% |
-6.50% |
-21.65% |
|
2023 |
5.71% |
1.92% |
4.69% |
|
TOTAL |
6.37% |
1.53% |
-10.55% |
|
Alpha over NOBL |
4.83% |
||
|
Alpha over SPY |
16.92% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.
The portfolio finished December with a loss of 7.53%, losing to NOBL by 3.41% and to SPY by 1.77%. Through January 25th the portfolio is up 5.71%, and thus far beating NOBL and SPY. The portfolio picked up some momentum late last year but it wasn’t enough to bring the annual return ahead of NOBL, ultimately the portfolio finished the year with a loss of 9.86%. Since inception, this portfolio has generated 4.83% of alpha over NOBL and 16.92% of alpha over SPY.
The portfolio consists of 29 unique present and former dividend aristocrats. I track this portfolio by investing $1,000 each month equally split amongst the 10 chosen aristocrats for that month. The positions are never trimmed or sold and all dividends are reinvested back into the issuing stock. People’s United (PBCT) was removed from the portfolio in April, as the company was acquired by M&T Bank (MTB); the value of the position was reinvested equally amongst the 10 chosen aristocrats for April. Here are all of the positions, the current market value, capital invested, total return and allocation as of January 25th.
|
TICKER |
MARKET VALUE |
CAPITAL INVESTED |
TOTAL RETURN |
CURRENT ALLOCATION |
|
ALB |
1,243.35 |
1100 |
13.03% |
6.62% |
|
APD |
127.25 |
100 |
27.25% |
0.68% |
|
CAT |
1,446.56 |
1100 |
31.51% |
7.70% |
|
CB |
1,261.11 |
1000 |
26.11% |
6.71% |
|
CINF |
110.66 |
100 |
10.66% |
0.59% |
|
CLX |
292.85 |
300 |
-2.38% |
1.56% |
|
CVX |
111.17 |
100 |
11.17% |
0.59% |
|
ECL |
601.18 |
700 |
-14.12% |
3.20% |
|
ESS |
203.60 |
200 |
1.80% |
1.08% |
|
GWW |
308.25 |
300 |
2.75% |
1.64% |
|
IBM |
1,173.50 |
1000 |
17.35% |
6.25% |
|
ITW |
218.48 |
200 |
9.24% |
1.16% |
|
LIN |
304.35 |
300 |
1.45% |
1.62% |
|
LOW |
611.42 |
600 |
1.90% |
3.26% |
|
MCD |
791.08 |
700 |
13.01% |
4.21% |
|
MDT |
556.01 |
600 |
-7.33% |
2.96% |
|
MMM |
257.48 |
300 |
-14.17% |
1.37% |
|
NUE |
2,295.56 |
1700 |
35.03% |
12.22% |
|
O |
322.21 |
300 |
7.40% |
1.72% |
|
PPG |
509.50 |
500 |
1.90% |
2.71% |
|
PBCT |
200 |
-100.00% |
0.00% |
|
|
SHW |
106.72 |
100 |
6.72% |
0.57% |
|
SWK |
904.49 |
1000 |
-9.55% |
4.82% |
|
SYY |
1,842.77 |
1800 |
2.38% |
9.81% |
|
T |
110.97 |
100 |
10.97% |
0.59% |
|
TGT |
534.36 |
500 |
6.87% |
2.85% |
|
TROW |
789.60 |
800 |
-1.30% |
4.20% |
|
VFC |
1,187.82 |
1800 |
-34.01% |
6.32% |
|
WST |
440.90 |
400 |
10.22% |
2.35% |
|
XOM |
118.85 |
100 |
18.85% |
0.63% |
Here are the 10 dividend aristocrats poised for the best total return right now. The table below shows the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats. The data is from January 26th so the current dividend yield may differ slightly from the stated yield.
Created by Author
The Blended Strategy
Strategy 3 is a blend of the first two strategies, 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 aristocrats 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.
|
Month |
Blended |
NOBL |
SPY |
|
Aug 21 |
2.64% |
1.87% |
2.98% |
|
Sep 21 |
-3.42% |
-5.69% |
-4.66% |
|
Oct 21 |
2.70% |
5.95% |
7.02% |
|
Nov 21 |
-2.56% |
-1.76% |
-0.80% |
|
Dec 21 |
10.07% |
6.54% |
4.63% |
|
Jan 22 |
-0.71% |
-4.08% |
-5.27% |
|
Feb 22 |
0.49% |
-2.59% |
-2.95% |
|
Mar 22 |
3.48% |
3.86% |
3.76% |
|
Apr 22 |
-5.04% |
-3.42% |
-8.78% |
|
May 22 |
1.28% |
0.31% |
0.23% |
|
Jun 22 |
-6.23% |
-6.73% |
-8.25% |
|
Jul 22 |
4.56% |
6.56% |
4.55% |
|
Aug 22 |
-3.29% |
-2.78% |
-4.08% |
|
Sep 22 |
-10.88% |
-9.15% |
-9.24% |
|
Oct 22 |
9.97% |
10.31% |
8.13% |
|
Nov 22 |
6.38% |
7.12% |
5.56% |
|
Dec 22 |
-5.32% |
-4.12% |
-5.76% |
|
Jan 23 |
2.80% |
1.92% |
4.69% |
|
2021 Partial |
9.18% |
6.54% |
9.06% |
|
2022 |
-7.04% |
-6.50% |
-21.65% |
|
2023 |
2.80% |
1.92% |
4.69% |
|
TOTAL |
4.34% |
1.53% |
-10.55% |
|
Alpha over NOBL |
2.81% |
||
|
Alpha over SPY |
14.89% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.
The portfolio fell by 5.32% in December, trailing NOBL by 1.2% but beating SPY by 0.44%. Through January 25th the portfolio is up 2.80% and is beating NOBL but not SPY. The portfolio narrowly lost to NOBL in 2022 by a margin of 0.54%. Since inception, this portfolio has generated alpha of 2.81% over NOBL and 14.89% over SPY.
The portfolio consists of 36 unique present and former dividend aristocrats. I track this portfolio by investing $1,000 each month equally split amongst the 10 chosen aristocrats for that month. The positions are never trimmed or sold and all dividends are reinvested back into the issuing stock. People’s United (PBCT) was removed from the portfolio in April as the company was acquired by M&T Bank; the value of the position was reinvested equally amongst the 10 chosen aristocrats for April. Here are all of the positions: the current market value; capital invested; total return; and allocation as of January 25th.
|
TICKER |
MARKET VALUE |
CAPITAL INVESTED |
TOTAL RETURN |
CURRENT ALLOCATION |
|
ABT |
112.18 |
100 |
12.18% |
0.62% |
|
ADP |
95.46 |
100 |
-4.54% |
0.53% |
|
AMCR |
312.88 |
300 |
4.29% |
1.73% |
|
AOS |
185.69 |
200 |
-7.16% |
1.02% |
|
APD |
653.33 |
500 |
30.67% |
3.60% |
|
ATO |
746.51 |
600 |
24.42% |
4.12% |
|
BDX |
422.61 |
400 |
5.65% |
2.33% |
|
BEN |
210.31 |
200 |
5.15% |
1.16% |
|
CAH |
490.69 |
300 |
63.56% |
2.71% |
|
CAT |
146.46 |
100 |
46.46% |
0.81% |
|
CINF |
229.63 |
200 |
14.81% |
1.27% |
|
CLX |
292.85 |
300 |
-2.38% |
1.62% |
|
CTAS |
260.63 |
200 |
30.31% |
1.44% |
|
ECL |
1,163.85 |
1200 |
-3.01% |
6.42% |
|
ESS |
203.60 |
200 |
1.80% |
1.12% |
|
GD |
588.51 |
500 |
17.70% |
3.25% |
|
HRL |
624.51 |
600 |
4.09% |
3.45% |
|
IBM |
1,394.73 |
1100 |
26.79% |
7.70% |
|
ITW |
118.85 |
100 |
18.85% |
0.66% |
|
KMB |
139.31 |
100 |
39.31% |
0.77% |
|
LOW |
533.66 |
500 |
6.73% |
2.94% |
|
MDT |
1,077.36 |
1200 |
-10.22% |
5.94% |
|
MMM |
966.53 |
1300 |
-25.65% |
5.33% |
|
O |
439.24 |
400 |
9.81% |
2.42% |
|
PBCT |
200 |
-100.00% |
0.00% |
|
|
PPG |
428.56 |
400 |
7.14% |
2.36% |
|
ROP |
102.22 |
100 |
2.22% |
0.56% |
|
SHW |
765.46 |
700 |
9.35% |
4.22% |
|
SWK |
958.84 |
1100 |
-12.83% |
5.29% |
|
SYY |
736.83 |
700 |
5.26% |
4.07% |
|
T |
110.97 |
100 |
10.97% |
0.61% |
|
TGT |
534.36 |
500 |
6.87% |
2.95% |
|
TROW |
868.29 |
900 |
-3.52% |
4.79% |
|
VFC |
1,048.95 |
1500 |
-30.07% |
5.79% |
|
WBA |
510.39 |
600 |
-14.94% |
2.82% |
|
WST |
221.67 |
200 |
10.83% |
1.22% |
|
XOM |
429.21 |
200 |
114.61% |
2.37% |
Here are the 10 dividend aristocrats chosen for the blended strategy for February 2023. The table below shows potential undervaluation (column Valuation) and the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats. The data is from January 26th, so the current dividend yield may differ slightly from the stated yield.
Created by Author
Performance Review
The 10 chosen aristocrats for the most undervalued strategy are up 6.37% in January and beating NOBL by 4.45%. The fastest expected growth strategy selections are up 9.22% and beating NOBL by 7.29%. The blended strategy is up 5.15% this month and beating NOBL by 3.23%. All strategies are off to a great start in 2023 and thus far performing better than the buy-and-hold portfolios. I still believe that a buy-and-hold approach is the optimal investing method for these strategies and performance should be measured over longer periods of time.
Here is a comparison of the buy-and-hold portfolios and the individual monthly selections for each strategy. As you can see the buy-and-hold portfolios are still performing much better than if we bought and sold the 10 chosen aristocrats each month. A buy-and-hold approach is also a much more tax friendly investing strategy.
|
Type |
Most Undervalued |
Fastest Growth |
Blended |
NOBL |
|
Individual |
-4.93% |
0.47% |
1.92% |
1.53% |
|
Buy-and-Hold |
7.90% |
6.37% |
4.34% |
1.53% |
|
O/U |
12.83% |
5.89% |
2.42% |
0.00% |
Final Thoughts
I personally believe each of the 3 strategies outlined above can theoretically beat the dividend aristocrat index over a long period of time. These strategies are based on simple principles of valuation and expected returns, and they are easy to understand and implement. 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 finished 2021 with a fantastic return, performed much better than the S&P in 2022 and has an annualized rate of return of 10.62% since inception.
The dividend aristocrat data in the images of this article came from my live Google spreadsheet that tracks all of the current dividend aristocrats. Because this data is updated continuously throughout the day, you may notice slightly different data for the same company across the images.
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