2024 Review
The optimistic run for the stock market halts in April as the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) slides 4.69%, posting its worst monthly loss since September 2023. Much of this loss was recovered in early May; however, the latter part of the month has not been kind to most dividend aristocrats. Through May 28th (mid-day) NOBL is up only 0.53%. Despite the setback in April, NOBL remains positive year-to-date, +2.46% (1/1/24 – 5/28/24).
Several dividend aristocrats are running at a much faster pace than NOBL in 2024. Let’s take a look at which individual aristocrats are driving the ETFs return through month-end April. The following 39 aristocrats are all outperforming NOBL (+1.92% – Jan – Apr) this year:
|
TICKER |
YTD 24 |
|
XOM |
19.41% |
|
DOV |
16.91% |
|
CL |
16.67% |
|
BRO |
14.86% |
|
CHD |
14.41% |
|
ECL |
14.29% |
|
GPC |
14.27% |
|
CAT |
14.09% |
|
TGT |
13.85% |
|
KMB |
13.46% |
|
WMT |
13.32% |
|
PG |
12.79% |
|
HRL |
12.66% |
|
CINF |
12.59% |
|
MKC |
11.79% |
|
GD |
11.70% |
|
GWW |
11.40% |
|
EMR |
11.29% |
|
NEE |
11.29% |
|
CB |
10.39% |
|
CTAS |
9.48% |
|
PNR |
9.44% |
|
CVX |
9.26% |
|
LIN |
7.69% |
|
ABBV |
6.98% |
|
FAST |
6.10% |
|
KO |
5.65% |
|
CLX |
5.43% |
|
ED |
4.76% |
|
ADP |
4.44% |
|
PEP |
4.37% |
|
LOW |
3.45% |
|
SYY |
2.97% |
|
TROW |
2.85% |
|
CAH |
2.68% |
|
IBM |
2.53% |
|
ATO |
2.45% |
|
FRT |
2.17% |
|
AFL |
2.04% |
The S&P 500, as measured by SPDR S&P 500 Trust ETF (SPY), dropped 4.03% in April, outperforming NOBL during the month. However, SPY is thus far enjoying a much more robust return in May, +5.53% through May 28th. 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 7 out of the last 9 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 9 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 66 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.
Several changes were made to the dividend aristocrat list during the course of 2023 and in early 2024. Last year we saw V.F. Corporation (VFC) and Walgreens (WBA) fall off the list. Kenvue (KVUE) joined after it was spun off from Johnson and Johnson. And in early 2024 we welcomed a new dividend aristocrat, Fastenal (FAST). More recently, 3M Company (MMM) announced a dividend cut, and it will lose its aristocrat status after a very impressive streak of 64 years of dividend increases.
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 |
|
Jan 24 |
-2.98% |
-0.47% |
1.59% |
|
Feb 24 |
2.84% |
2.72% |
5.22% |
|
Mar 24 |
6.70% |
4.60% |
3.27% |
|
Apr 24 |
-5.33% |
-4.69% |
-4.03% |
|
May 24 |
-0.59% |
0.53% |
5.53% |
|
2021 Partial |
9.05% |
6.54% |
9.06% |
|
2022 |
-3.91% |
-6.50% |
-21.65% |
|
2023 |
4.25% |
8.12% |
26.18% |
|
2024 |
0.19% |
2.46% |
11.80% |
|
TOTAL |
9.44% |
10.36% |
20.54% |
|
Alpha over NOBL |
-0.92% |
||
|
Alpha over SPY |
-11.10% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the most undervalued strategy.
The portfolio underperformed NOBL in April by 0.64% and SPY by 1.30%. May, excluding dividends, is thus far looking a much worse, the portfolio is down 0.59% (price only return) through May 28th, while NOBL is up 0.53% and SPY is up 5.53%. Since inception, the portfolio is trailing NOBL by 0.92%, and SPY by 11.10%.
At its peak, this strategy was ahead of both NOBL and SPY by double-digit gains. While such outperformance is not something I am expecting out of this strategy, it has shown merit when stock valuations revert to historical means. It’s expected that a strategy based heavily on valuation will cycle in and out of favor. Today, it would appear that the strategy is very unfavorable as the market is highly driven by technology and AI stocks.
The portfolio consists of 40 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. During the month of June, the 3M position in this portfolio will be sold and reinvested equally among the 10 June selections. It’s worthy to note that 3M accounted for 8.48% of the portfolio as of May 28th, so this will be a sizable shift for the portfolio.
This portfolio pays a more attractive dividend yield relative to both NOBL and SPY. Currently, the portfolio has a dividend yield of 3.07%, relative to just 2.07% for NOBL and 1.27% for SPY. In the prior update the portfolio had a dividend yield of 3.39%, this yield dropped significantly following 3M’s dividend cut.
Here are the 10 most undervalued dividend aristocrats chosen for the month of June 2024. 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
The top 10 list has five changes compared to the prior month. Air Products and Chemicals (APD), C.H. Robinson Worldwide (CHRW), 3M Company (MMM), NextEra Energy (NEE) and T. Rowe Price Group (TROW) are replaced by Becton, Dickinson (BDX), Franklin Resources (BEN), Clorox (CLX), Realty Income (O) and J. M. Smucker (SJM).
Here is a closer look at the dividend yield theory valuation for the five new aristocrats on the list this month.
In the image below, the black line is the actual price since May 2017. 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.
The first chart is for Becton Dickinson.
Created by Author
The following chart is for Franklin Resources.
Created by Author
The following chart is for Clorox.
Created by Author
The following chart is for Realty Income.
Created by Author
The following chart is for J. M. Smucker.
Created by Author
The Fastest Expected Growth Strategy
Strategy number 2 is a focus on dividend aristocrats, who 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 |
|
Jan 24 |
0.61% |
-0.47% |
1.59% |
|
Feb 24 |
3.23% |
2.72% |
5.22% |
|
Mar 24 |
4.97% |
4.60% |
3.27% |
|
Apr 24 |
-6.79% |
-4.69% |
-4.03% |
|
May 24 |
-1.01% |
0.53% |
5.53% |
|
-0.64% |
-1.30% |
||
|
2021 Partial |
11.62% |
6.54% |
9.06% |
|
2022 |
-9.86% |
-6.50% |
-21.65% |
|
2023 |
11.58% |
8.12% |
26.18% |
|
2024 |
0.60% |
2.46% |
11.80% |
|
TOTAL |
12.94% |
10.36% |
20.54% |
|
Alpha over NOBL |
2.58% |
||
|
Alpha over SPY |
-7.60% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.
The portfolio underperformed NOBL by 2.10% in April and SPY by 2.76%. May thus far is just as bad, through May 28th the portfolio is down 1.01% (price only return) while NOBL is up 0.53% and SPY is up 5.53%. Since inception, the portfolio maintains a modest level of alpha over NOBL, +2.58%, but trails SPY, -7.60%.
The fastest expected growth portfolio, despite seeing significant losses, is currently performing the best out of the 3 strategies. At one point it trailed the most undervalued strategy by a wide margin, but it fared much better in the most recent market rally.
The portfolio consists of 36 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. Dividends are reinvested back into the issuing stock, and positions are only trimmed if they lose aristocrat status. This portfolio has a small position, 2.64% allocation, in 3M Company that will be liquidated at the end of May and reinvested equally into the 10 chosen aristocrats for the month of June.
In addition to outperforming NOBL since inception, this portfolio also pays a more attractive dividend yield. Currently, the portfolio has a dividend yield of 2.63%, relative to just 2.07% for NOBL and 1.27% for SPY.
Here are the 10 dividend aristocrats poised for the best total return for the month of June 2024. The table below shows the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats.
Created by Author
The top 10 list has three changes compared to the prior month. Cincinnati Financial (CINF), NextEra Energy, and Sysco (SYY) are replaced by C.H. Robinson Worldwide (CHRW), Ecolab (ECL) and Federal Realty Trust (FRT).
Here is a closer look at the dividend yield theory valuation for each of the three new aristocrats this month.
The first chart is for C.H. Robinson Worldwide.
Created by Author
The following chart is for Ecolab.
Created by Author
The following chart is for Federal Realty Trust.
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 |
|
Jan 24 |
-1.09% |
-0.47% |
1.59% |
|
Feb 24 |
2.69% |
2.72% |
5.22% |
|
Mar 24 |
5.38% |
4.60% |
3.27% |
|
Apr 24 |
-5.76% |
-4.69% |
-4.03% |
|
May 24 |
-1.08% |
0.53% |
5.53% |
|
-2.10% |
-2.76% |
||
|
2021 Partial |
9.18% |
6.54% |
9.06% |
|
2022 |
-7.04% |
-6.50% |
-21.65% |
|
2023 |
8.63% |
8.12% |
26.18% |
|
2024 |
-0.23% |
2.46% |
11.80% |
|
TOTAL |
10.00% |
10.36% |
20.54% |
|
Alpha over NOBL |
-0.36% |
||
|
Alpha over SPY |
-10.53% |
The table above shows the monthly and annual returns for the buy-and-hold portfolio of the blended strategy.
The portfolio underperformed NOBL in April by 1.07% and SPY by 1.73%. May is thus far looking worse, the portfolio is down 1.08% (price only return) through May 28th, while NOBL is up 0.53% and SPY is up 5.53%. Since inception, the portfolio is trailing NOBL by 0.36% and SPY by 10.53%.
The blended strategy was an attempt to merge the best of the most undervalued and fastest expected growth strategies. For the longest time, this was the worst-performing strategy, however, since November 2023 this portfolio slid ahead of the most undervalued portfolio but continues to trail the fastest expected growth portfolio.
The portfolio consists of 39 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. Dividends are reinvested back into the issuing stock, and positions are only trimmed if they lose aristocrat status. Similar to the two prior portfolios, the blended portfolio, has a position in 3M Company that will be liquidated at the end of May. Currently, 3M accounts for 5.24% of this portfolio.
This portfolio, similar to the prior two, also pays a more attractive dividend yield relative to NOBL and SPY. Currently, the portfolio has a dividend yield of 2.87%, relative to just 2.07% for NOBL and 1.27% for SPY. Similar to the two prior portfolios, the dividend yield did experience a drop from the prior month on account of the 3M dividend cut.
Here are the 10 dividend aristocrats chosen for the blended strategy for June 2024. 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
The top 10 list has three changes compared to the prior month, but since they are exactly the same as the fastest expected growth strategy, there are no new charts to present here.
Performance Review
We have already seen how the buy-and-hold strategies are performing in May, so now let’s look at how the chosen stocks for the month are doing as well. The 10 chosen aristocrats for the most undervalued strategy are up 4.03%, and performing the best. The fastest expected growth strategy selections are down 2.49%, and since the blended strategy selections for the month were the same, this strategy has the same return. The fastest expected strategy was off to the best start in 2024, year-to-date through April 26th it had a return of +5.09%. Relative to +4.37% for the blended strategy and +3.10% for the most undervalued strategy. However, through May 28th, the most undervalued strategy has taken the lead, +6.40%, relative to +1.66% for the fastest expected growth, and +0.97% for the blended strategy. For perspective, NOBL is up 2.46% this year, while SPY is up a staggering 11.80%.
Here is a comparison of the buy-and-hold portfolios and the individual monthly selections for each strategy. A buy-and-hold approach is a much more tax-friendly investing strategy. It is also working out much better for the most undervalued strategy, but not for the fastest expected growth strategy or the blended strategy.
The one thing we can glean from the individual selections seeing a higher return than the buy-and-hold portfolios is that newly invested capital is being allocated at much more favorable returns than the buy-and-hold portfolio is experiencing as a whole. This is the case for the fastest growth and blended portfolios, and not for the most undervalued strategy.
|
Type |
Most Undervalued |
Fastest Growth |
Blended |
NOBL |
|
Individual |
6.95% |
20.81% |
13.71% |
10.36% |
|
Buy-and-Hold |
9.44% |
12.94% |
10.00% |
10.36% |
|
O/U |
2.49% |
-7.87% |
-3.70% |
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 posted a respectable gain in 2023. Since inception, the fund has had an annualized rate of return of 10.23% since inception.
2023 was a wild year for dividend stocks, but unfortunately, the market was driven by more growth-oriented stocks and companies focused on Artificial Intelligence. This trend is also becoming more prevalent in 2024. I think there is a place for dividend stocks in everyone’s portfolio. Dividend investing is a marathon, not a sprint, and you will find yourself in a slow period from time to time. 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 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. Also, some of my returns may be off by a few basis points from those you’ll see from other sources on the web.
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