Thapana Onphalai
2023 Review
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is bouncing back in June after an awful showing in May. Through June 27th NOBL is up 5.96%, in the prior month the fund fell by 5.90%. As of month-end May, NOBL was down 2.18% year-to-date, as of yesterday it’s back up to 3.65%.
Not all of the dividend aristocrats share the fate of NOBL’s return in 2023; 31 dividend aristocrats are beating NOBL through month-end May, and 26 are generating positive total returns. These aristocrats are outpacing NOBL after May:
- West Pharma (WST) +42.37%.
- Pentair (PNR) +24.41%.
- Grainger (GWW) +17.29%.
- Church & Dwight (CHD) +15.39%.
- Clorox (CLX) +14.48%.
- Ecolab (ECL) +13.78%.
- A. O. Smith (AOS) +12.75%.
- S&P Global (SPGI) +10.27%.
- Brown & Brown (BRO) +9.82%.
- Linde plc (LIN) +8.85%.
- McDonald’s (MCD) +8.81%.
- Cardinal Health (CAH) +7.76%.
- Medtronic (MDT) +7.42%.
- Roper Technologies (ROP) +5.46%.
- PPG Industries (PPG) +5.40%.
- Cintas (CTAS) +5.07%.
- Walmart (WMT) +4.41%.
- Atmos Energy (ATO) +4.17%.
- McCormick (MKC) +3.91%.
- C.H. Robinson (CHRW) +3.87%.
- Expeditors Int’l (EXPD) +3.23%.
- Essex Property Trust (ESS) +3.10%.
- Lowe’s (LOW) +1.98%.
- Pepsi (PEP) +1.60%.
- Stanley Black & Decker (SWK) +0.74%.
- Nucor (NUE) +0.53%.
- Kimberly-Clark (KMB) -0.13%.
- Illinois Tool Works (ITW) -0.17%.
- Consolidated Edison (ED) -0.41%.
- T. Rowe Price (TROW) -0.62%.
- Dover Corp. (DOV) -0.83%.
The S&P 500, as measured by SPY, was up 0.46% in May and is up another 3.25% through June 27th. NOBL beat SPY in 2022 with a loss of 6.5% compared to a loss of 21.65%. SPY started 2023 on a stronger footing and is beating NOBL by 9.61% year-to-date through June 27th. 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 67 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 |
4.83% |
3.23% |
6.29% |
|
Feb 23 |
-3.33% |
-2.36% |
-2.51% |
|
Mar 23 |
-0.86% |
0.99% |
3.71% |
|
Apr 23 |
3.06% |
2.12% |
1.60% |
|
May 23 |
-7.87% |
-5.90% |
0.46% |
|
Jun 23 |
6.49% |
5.96% |
3.25% |
|
2021 Partial |
9.05% |
6.54% |
9.06% |
|
2022 |
-3.91% |
-6.50% |
-21.65% |
|
2023 |
1.58% |
3.64% |
13.26% |
|
TOTAL |
6.43% |
3.25% |
-3.23% |
|
Alpha over NOBL |
3.19% |
||
|
Alpha over SPY |
9.66% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the most undervalued strategy.
The portfolio lost to both NOBL and SPY in May, by 1.97% and 8.33% respectively. June, on the other hand, is looking much better, the portfolio is up 6.49% through June 27th. While NOBL is up 5.96% and SPY is up 3.25%. Year-to-date the portfolio is underperforming both NOBL and SPY. However, since inception, it maintains a modest level of alpha, 3.19% over NOBL and 9.66% over SPY. Many dividend aristocrats are struggling this year while technology stocks are driving strong returns for the S&P 500.
The portfolio consists of 38 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 the 10 most undervalued dividend aristocrats chosen for the month of July 2023. The table below shows potential undervaluation (column Over/Under) for each of the 10 chosen aristocrats. The image below is taken from a new spreadsheet I recently created where I am self-computing the 5-year trailing dividend yield. Previously I used Seeking Alpha as a source for the historical yield.
Created by Author
Please note that V.F. Corporation (VFC) cut its dividend earlier this year and will highly likely be removed from the dividend aristocrat list at its reconstitution early next year.
Here is a closer look at Stanley Black & Decker (SWK).
SWK currently looks to be approximately 37% undervalued. In the image below the black line is the actual price since June of 2016. The light green shaded area represents a 0 to 15% undervalued zone. The dark green area represents an undervaluation in excess of 15%. The light red shaded area represents a 0 to 15% overvalued zone.
Created by Author
An estimated daily return test for the period June 2016 through June 2022 yielded positive results in the application of dividend yield theory as a valuation tool. The average return of investing in the stock on all days when the stock appeared to be undervalued was -12.48%. The average return of investing in the stock on all days regardless of valuation was -13.07%. And the average return of investing in the stock on all days when it appeared overvalued was -13.24%. SWK has fallen considerably during the last two years but appears to be leveling off around the $80-$90 price range. Perhaps it’s a good time to take a closer look at this aristocrat for the future.
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 |
9.41% |
3.23% |
6.29% |
|
Feb 23 |
-3.01% |
-2.36% |
-2.51% |
|
Mar 23 |
-1.79% |
0.99% |
3.71% |
|
Apr 23 |
0.37% |
2.12% |
1.60% |
|
May 23 |
-7.21% |
-5.90% |
0.46% |
|
Jun 23 |
6.70% |
5.96% |
3.25% |
|
2021 Partial |
11.62% |
6.54% |
9.06% |
|
2022 |
-9.86% |
-6.50% |
-21.65% |
|
2023 |
3.57% |
3.64% |
13.26% |
|
TOTAL |
4.20% |
3.25% |
-3.23% |
|
Alpha over NOBL |
0.96% |
1.97% |
8.33% |
|
Alpha over SPY |
7.43% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.
The portfolio lost to both NOBL and SPY in May, by 1.31% and 7.67% respectively. June, thus far is looking more promising, the portfolio is up 6.70% through June 27th. While NOBL is up 5.96% and SPY is up 3.25%. Year-to-date the portfolio is just barely underperforming NOBL and trailing SPY by a wide margin. However, since inception, it maintains a modest level of alpha, 0.96% over NOBL and 7.43% 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 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 was removed from the portfolio in April 2022, 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 the 10 dividend aristocrats poised for the best total return for the month of July 2023. The table below shows the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats.
Created by Author
Here is a deeper look at Albemarle (ALB). Below is the 7-year dividend yield theory chart.
Created by Author
The average return of investing in the stock on all days when it appeared to be undervalued was 37.92%. The average return of investing in the stock on all days regardless of valuation was 20.68%. And the average return of investing in the stock on all days when it appeared overvalued was 13.96%. Albemarle has trended in the overvalued range since late 2020 and has been more volatile than most other aristocrats.
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 |
4.15% |
3.23% |
6.29% |
|
Feb 23 |
-3.45% |
-2.36% |
-2.51% |
|
Mar 23 |
-0.31% |
0.99% |
3.71% |
|
Apr 23 |
2.31% |
2.12% |
1.60% |
|
May 23 |
-6.64% |
-5.90% |
0.46% |
|
Jun 23 |
4.94% |
5.96% |
3.25% |
|
2021 Partial |
9.18% |
6.54% |
9.06% |
|
2022 |
-7.04% |
-6.50% |
-21.65% |
|
2023 |
0.48% |
3.64% |
13.26% |
|
TOTAL |
1.98% |
3.25% |
-3.23% |
|
Alpha over NOBL |
-1.26% |
1.31% |
7.67% |
|
Alpha over SPY |
5.21% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.
The portfolio underperformed in May posting a loss of 6.64%, it trailed NOBL by 0.74% and SPY by 7.12%. June is shaping up to be a better month as the portfolio is up 4.94% through June 27th, trailing NOBL by 1.02% but beating SPY by 1.69%. Since inception the portfolio fell behind NOBL last month for the very first time and has not recovered thus far, it trails the ETF by 1.26%. On a positive note, it still maintains a very modest lead over SPY of 5.21%.
The portfolio consists of 39 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 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 the 10 dividend aristocrats chosen for the blended strategy for July 2023. The table below shows potential undervaluation (column Over/Under) and the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats.
Created by Author
Here is a deeper look at Sysco (SYY). Below is the 7-year dividend yield theory chart.
Created by Author
The average return of investing in the stock on all days when it appeared to be undervalued was 7.61%. The average return of investing in the stock on all days regardless of valuation was 3.27%. And the average return of investing in the stock on all days when it appeared overvalued was 2.30%. Sysco is not a rockstar dividend stock but it continues to trudge along delivering decent long term performance.
Performance Review
The 10 chosen aristocrats for the most undervalued strategy are up 7.05% in June and beating NOBL by 1.09%. The fastest expected growth strategy selections are up 8.00% and beating NOBL by 2.04%. And the blended strategy selections are up 5.86% and trailing NOBL by 0.10%. The fastest expected growth strategy is off to the best start this year seeing positive gains in 5 out of the 6 months thus far. The individual selections are also fairing much better than the long-term buy-and-hold portfolios. However, I still believe that a buy-and-hold approach is the optimal investing path to take with these strategies.
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 |
-3.15% |
13.26% |
4.95% |
3.25% |
|
Buy-and-Hold |
6.43% |
4.20% |
1.98% |
3.25% |
|
O/U |
9.59% |
-9.05% |
-2.97% |
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 9.88% since inception.
2023 is shaping up to be an interesting year for dividend strategies. The S&P 500 had a very poor return in 2022 and seems to be bouncing back this year, driven by strong returns from technology stocks. Dividends aristocrats fared much better in 2022 but are struggling this year. Dividend investing is a marathon, not a sprint and you will find yourself in a slow period from time to time, like right now. The best course of action is to stick with your long-term strategy so long as it still fits your long-term objectives.
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.
Be the first to comment