XOM - My Best Dividend Aristocrats For April 2023

2023-03-30 15:54:11 ET

Summary

• NOBL gave up a big chunk of its January gains in February, finishing the month down 2.36%. March has seen the ETF tumble some more as it's down 1.88% through 3/29.
• I present 3 strategies that can theoretically beat the dividend aristocrat index in the long term.
• After nearly 20 months, all 3 buy-and-hold portfolios continue to generate alpha over NOBL and SPY.

2023 Review

The ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ) fell 2.36% in February and continues to fall in March, pushing the ETF into the red on the year. Albeit this isn't the most favorable start to the year I remain optimistic 2023 will be better than 2022. Through March 29th the ETF is down 1.88% (inclusive of dividend), leaving it with a 1.10% loss year-to-date.

V.F. Corporation ( VFC ) announced a dividend cut earlier this year and is scheduled to be kicked off the dividend aristocrat list at its next rebalancing in 2024. To maintain aristocrat status a company must maintain a consecutive 25 year dividend growth streak measured by comparing annual dividend payouts. Therefore if VF Corporation were to raise its dividend payouts during the latter part of 2023 and payout a larger dividend this year than in the prior year it could retain its status. The likelihood of this happening is not great, especially given that the dividend rate was cut by more than 40%.

The company will remain as a holding in my buy-and-hold portfolios even if it is ultimately removed from the dividend aristocrat list. One portfolio also has a position in Leggett & Platt ( LEG ) that is no longer an aristocrat. And all three portfolios have a position in AT&T ( T ) that has also lost its aristocrat status.

Not all of the dividend aristocrats contributed equally to NOBL's return in 2023; 27 dividend aristocrats are beating NOBL through month-end February, and 31 are generating positive total returns. These aristocrats are outpacing NOBL after February:

• West Pharma ( WST ) +34.81%
• Nucor ( NUE ) +27.04%
• Pentair ( PNR ) +24.94%
• Grainger ( GWW ) +20.48%
• Cincinnati Financial ( CINF ) +17.88%
• Albemarle ( ALB ) +17.27%
• A.O. Smith ( AOS ) +15.23%
• Stanley Black & Decker ( SWK ) +13.97%
• Target ( TGT ) +13.77%
• Franklin Resources ( BEN ) +11.72%
• Clorox ( CLX ) +11.08%
• Dover Corp. ( DOV ) +11.08%
• Ecolab ( ECL ) +9.49%
• C.H. Robinson ( CHRW ) +9.17%
• Essex Property Trust ( ESS ) +7.62%
• Linde plc ( LIN ) +6.81%
• Medtronic ( MDT ) +6.54%
• Illinois Tool Works ( ITW ) +5.83%
• Federal Realty Trust ( FRT ) +5.68%
• PPG Industries ( PPG ) +5.54%
• Church & Dwight ( CHD ) +4.27%
• Lowe's ( LOW ) +3.79%
• T. Rowe Price ( TROW ) +2.95%
• S&P Global ( SPGI ) +2.13%
• Genuine Parts Company ( GPC ) +1.93%
• Realty Income ( O ) +1.60%
• Atmos Energy ( ATO ) +1.30%

The S&P 500, as measured by SPY , fell 2.51% in February but is down only 0.17% through March 29th. NOBL beat SPY in 2022 with a loss of 6.5% compared to a loss of 21.65%. SPY started 2023 on stronger footing beating NOBL by 3.06% in January, it gave up some of this lead in February as the lead has shrunk to 2.83%. In March however, SPY is crushing NOBL extending its lead on the year to 4.55%. 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.

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 February, trailing by 0.97% and 0.82% respectively. March is looking somewhat better thus far, through the 29th the portfolio is down 1.07% compared to a loss of 1.88% for NOBL and a loss of 0.17% for SPY. Year-to-date the portfolio maintains its lead over NOBL but falls further behind SPY. Since inception this portfolio has generated 6.53% of alpha over NOBL and 16.66% of alpha over SPY.

The portfolio consists of 37 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 April 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.

Here is a deeper look at 3 of the most undervalued aristocrats from the table above.

Abbott Laboratories ( ABT ) currently looks to be approximately 23% undervalued. Historically the stock has not appeared to be undervalued often during the last 7 years, based on dividend yield theory. In the image below the black line is the actual price of Abbott Labs since March of 2016. The light green shaded area represents a 0 to 15% undervalued zone. The dark green area represents undervaluation in excess of 15%. The light red shaded area represents a 0 to 15% overvalued zone.

An estimated daily return test for the period March 2016 through March 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 15.80%. The average return of investing in the stock on all days regardless of valuation was 5.69%. And the average return of investing in the stock on all days when it appeared overvalued was 2.48%.

Here is a dividend yield theory chart for T. Rowe Price Group ( TROW ).

The average return of investing in the stock on all days when it appeared to be undervalued was 5.74%. The average return of investing in the stock on all days regardless of valuation was -1.16%. And the average return of investing in the stock on all days when it appeared overvalued was -8.48%.

Here is a dividend yield theory chart for Sherwin Williams ( SHW ).

The average return of investing in the stock on all days when it appeared to be undervalued was 10.43%. The average return of investing in the stock on all days regardless of valuation was 4.65%. And the average return of investing in the stock on all days when it appeared overvalued was 3.35%.

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.

The table above shows the monthly and annual returns for the buy-and-hold portfolio of the fastest expected growth strategy.

The portfolio did not extend its excellent start to the year in February ultimately falling 3.01% and trailing both NOBL and SPY. March is not looking so great either, the portfolio is outpacing NOBL by 0.06% and trailing SPY by 1.65% through March 29th. However, given the above average return in January the portfolio maintains a comfortable lead over NOBL and SPY year-to-date. Since inception, this portfolio has generated 6.31% of alpha over NOBL and 16.43% of alpha over SPY.

The portfolio consists of 33 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 ( 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 April 2023. The table below shows the expected growth rate (column EPS + Valuation) for each of the 10 chosen aristocrats.

Here is a deeper look at 3 of the fastest expected growth dividend aristocrats chosen for April 2023.

Here is a dividend yield theory chart for Automatic Data Processing ( ADP ).

The average return of investing in the stock on all days when it appeared to be undervalued was 17.17%. The average return of investing in the stock on all days regardless of valuation was 12.86%. And the average return of investing in the stock on all days when it appeared overvalued was 10.94%.

Here is a dividend yield theory chart for Nordson ( NDSN ).

The average return of investing in the stock on all days when it appeared to be undervalued was 12.28%. The average return of investing in the stock on all days regardless of valuation was 9.00%. And the average return of investing in the stock on all days when it appeared overvalued was 8.25%.

Here is a dividend yield theory chart for Realty Income ( O ).

The average return of investing in the stock on all days when it appeared to be undervalued was 7.17%. The average return of investing in the stock on all days regardless of valuation was 4.02%. And the average return of investing in the stock on all days when it appeared overvalued was 2.48%.

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.

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 February, trailing NOBL by 1.09% and SPY by 0.94%. March is looking better thus far, at least compared to NOBL. Through March 29th the portfolio is down 0.71% compared to a loss of 1.88% for NOBL and a loss of 0.17% for SPY. Since inception, this portfolio has generated alpha of 2.82% over NOBL and 12.94% over SPY. The lead over NOBL has improved slightly since last month and the portfolio still maintains a comfortable cushion over SPY.

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 April 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.

Here is a deeper look at 3 of the dividend aristocrats chosen for April 2023 in the blended strategy.

Here is a dividend yield theory chart for Clorox ( CLX ).

The average return of investing in the stock on all days when it appeared to be undervalued was 2.61%. The average return of investing in the stock on all days regardless of valuation was 1.48%. And the average return of investing in the stock on all days when it appeared overvalued was 0.95%.

Here is a dividend yield theory chart for S&P Global Inc ( SPGI ).

The average return of investing in the stock on all days when it appeared to be undervalued was 17.88%. The average return of investing in the stock on all days regardless of valuation was 7.92%. And the average return of investing in the stock on all days when it appeared overvalued was 7.80%.

Here is a dividend yield theory chart for Sysco ( SYY ).

The average return of investing in the stock on all days when it appeared to be undervalued was 12.17%. The average return of investing in the stock on all days regardless of valuation was 6.50%. And the average return of investing in the stock on all days when it appeared overvalued was 5.28%.

Performance Review

The 10 chosen aristocrats for the most undervalued strategy are down 2.40% in March and trailing NOBL by 0.52%. The fastest expected growth strategy selections are up 0.46% and beating NOBL by 2.34%. The blend strategy is down 1.30% and beating NOBL by 0.58%. The fastest expected growth strategy is off to the best start this year seeing positive gains in all 3 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.

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 10.51% 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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