PeopleImages
Dividend Aristocrat Portfolio Strategy
The Adaptive Momentum Investing (AMI) marketplace service manages a portfolio that invests in dividend aristocrat stocks. The 2022 list of dividend aristocrats, DIVAR22, contains 65 stocks.
DIVAR22 = [‘MMM’,’AOS’,’ABT’,’ABBV’,’AFL’,’APD’,’ALB’,’AMCR’,’ADM’,’ATO’,’ADP’,’BDX’,’BRO’,’BF.B’,’CAH’,’CAT’,’CB’,’CVX’,’CINF’,’CHD’,’CTAS’,’CLX’,’KO’,’CL’,’ED’,’DOV’,’ECL’,’EMR’,’ESS’,’EXPD’,’XOM’,’FRT’,’BEN’,’GD’,’GPC’,’HRL’,’IBM’,’ITW’,’JNJ’,’KMB’,’LIN’,’LOW’,’MKC’,’MCD’,’MDT’,’NEE’,’NUE’,’PNR’,’PEP’,’PPG’,’PG’,’O’,’ROP’,’SPGI’,’SHW’,’SWK’,’SYY’,’TROW’,’TGT’,’VFC’,’GWW’,’WMT’,’WBA’,’WST’]
The investing strategy is composed of two steps:
Monitor the state of the markets and decide if the market is in risk-on, risk-neutral or risk-off, Select the assets to invest, based on their momentum over an evaluation period.
The market three-state risk indicator is described in this article.
When the markets are risk-on, the DIVAR portfolio invests in the top 5 stocks of DIVAR22 ranked by momentum over an evaluation period.
When the markets are risk-off, all the funds are invested in the top ETF from the following list.
[‘IEI’,’IEF’,’TLT’,’DBC’,’UUP’]
When the markets are risk-neutral, all the funds are invested in the consumer staples fund, XLP.
Additional Dividend Aristocrat Portfolios
The list of dividend aristocrat stocks changes in time as new stocks meeting the requirements are added. Also, some stocks are deleted from the list for a number of reasons, such as the company going private or it decreased the dividend paid. In 2008, the list of dividend aristocrats contained 52 stocks.
Of those 52 stocks, only 42 are still traded as public stocks on US stock exchanges. Below is the 2008 list, called here DIVAR08.
DIVAR08 = [‘MMM’,’ABT’,’AFL’,’APD’,’ADM’,’ADP’,’BDX’,’CB’,’CVX’,’CINF’,’CLX’,’KO’,’ED’,’DOV’,’EMR’,’XOM’,’JNJ’,’KMB’,’LEG’,’LLY’,’LOW’,’MCD’,’PBI’,’PEP’,’PPG’,’PG’,’SHW’,’SYK’,’SWK’,’TGT’,’VFC’,’GWW’,’WMT’,’WBA’,’AVY’,’GCI’,’GE’,’JCI’,’MTB’,’PFE’,’STT’,’USB’]
Simulations
The two portfolios were simulated over the time period starting on 1/1/2008 and ending on 12/14/2022. The first table shows the summary performance of the two portfolios (DIVAR08, DIVAR22), along with a portfolio investing in SPY during risk-on (SPY-ON) and of a SPY buy-and-hold benchmark portfolio (SPY B&H).
|
CAGR |
stdev |
maxDD |
Sharpe R |
Sortino R |
|
|
DIVAR08 |
20.60% |
18.98% |
-15.73% |
1.04 |
1.50 |
|
SPY-ON |
22.00% |
15.76% |
-15.73% |
1.35 |
1.85 |
|
SPY B&H |
8.80% |
20.34% |
-55.17% |
0.38 |
0.47 |
The second table shows the annual returns.
|
YEAR |
DIVAR08 |
SPY-ON |
SPY-B&H |
|
2008 |
22.70% |
24.02% |
-36.81% |
|
2009 |
21.92% |
34.28% |
26.36% |
|
2010 |
23.37% |
21.68% |
15.06% |
|
2011 |
0.24% |
17.98% |
1.89% |
|
2012 |
17.41% |
8.15% |
15.99% |
|
2013 |
13.72% |
12.49% |
32.31% |
|
2014 |
13.25% |
14.24% |
13.46% |
|
2015 |
14.50% |
10.34% |
1.25% |
|
2016 |
2.75% |
4.28% |
12.00% |
|
2017 |
15.04% |
22.26% |
21.70% |
|
2018 |
6.31% |
11.53% |
-4.56% |
|
2019 |
14.05% |
24.16% |
31.22% |
|
2020 |
75.71% |
61.62% |
18.37% |
|
2021 |
33.48% |
31.39% |
28.74% |
|
2022 |
39.50% |
27.25% |
-13.17% |
Additional simulation: DIVAR22 returned 36.90% in 2022 YTD.
Discussion
By analyzing the summary performance in table 1 we see that, overall, the DIVAR08 portfolio underperformed the simplest portfolio SPY-ON. It achieved lower return with higher volatility. DIVAR22 would have achieved higher returns, but this portfolio was not available before 2022.
An interesting observation is that in 2022 YTD DIVAR08 achieved higher return than DIVAR22. This is just a random result and no conclusion can be drawn out of it. It simply shows that there is a high level of uncertainty in individual outcomes.
On the other hand, both DIVAR22 and DIVAR08 achieved higher returns than SPY-ON portfolio in 2022. This result may be explained by the fact that the dividend aristocrat stocks performed better than the broad market during the 2022 bear market.
Conclusion
During bear markets the set of dividend aristocrat stocks perform better than the broad market and are suitable for investors seeking a more defensive solution. The universe of stocks used is not overly critical. There is a large latitude in deciding what set should be used. In our experiment, a reduced set of dividend aristocrats from 2008 performed just as well as the current set of 2022.
Be the first to comment