2023 Overview

A lot for a greater second half to the yr for the Dividend Aristocrats. After an honest begin to 2H2023 with the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) ticking up 2.59% in July, issues turned bitter fairly shortly. In August the ETF fell by 2.34%, giving up most of July’s positive aspects. To this point in September issues are wanting even worse, by way of September twenty seventh the ETF is down 6.25%, pushing the year-to-date return all the way down to minus 0.70%.

Not the entire dividend aristocrats are sharing the identical destiny because the ETF that tracks these elite dividend paying firms. Let’s check out which particular person aristocrats are driving the return in 2023; 29 dividend aristocrats are beating NOBL by way of month-end August, and 41 are producing optimistic whole returns this yr. These aristocrats are outpacing NOBL after August:

• West Pharma (WST) +73.22%
• Pentair (PNR) +58.09%
• Nucor Corp. (NUE) +31.43%
• Brown & Brown (BRO) +30.77%
• W.W. Grainger (GWW) +29.39%
• A. O. Smith (AOS) +28.39%
• Stanley Black & Decker (SWK) +28.08%
• Ecolab (ECL) +27.09%
• Church & Dwight (CHD) +21.13%
• Linde plc (LIN) +19.55%
• Caterpillar (CAT) +19.16%
• S&P International (SPGI) +17.57%
• Lowe’s (LOW) +17.42%
• Roper Applied sciences (ROP) +16.03%
• Walmart (WMT) +16.01%
• Sherwin-Williams (SHW) +15.37%
• Cardinal Well being (CAH) +14.95%
• Essex Property Belief (ESS) +14.89%
• PPG Industries (PPG) +14.33%
• Clorox (CLX) +14.07%
• Illinois Instrument Works (ITW) +13.49%
• Cintas (CTAS) +12.51%
• Becton, Dickinson (BDX) +10.71%
• Dover Corp. (DOV) +10.68%
• Expeditors Worldwide of Washington (EXPD) +9.22%
• McDonald’s (MCD) +8.42%
• Worldwide Enterprise Machines (IBM) +8.18%
• Automated Information Processing (ADP) +7.84%
• Medtronic (MDT) +6.62%

The S&P 500, as measured by SPDR® S&P 500 ETF Belief (SPY), was down 1.63% in August, outperforming NOBL through the month. Month-to-date by way of September twenty seventh SPY is down 5.40%, once more barely forward of NOBL. NOBL beat SPY in 2022 with a lack of 6.5% in comparison with a lack of 21.65%. SPY began 2023 on stronger footing and is thrashing NOBL by 12.94% year-to-date by way of September twenty seventh. The dividend aristocrats are usually not recognized to persistently beat the S&P 500 index, in reality, the dividend aristocrat index underperformed the S&P 500 index for six out of the final 8 full calendar years.

Nonetheless, for those who look additional again in historical past, the dividend aristocrat index is outperforming the S&P 500 index by about 2.18% per yr between 1990 and 2022. A good portion of this long-term outperformance is attributable to the dot com bubble and the monetary disaster in addition to the speedy years following every market crash. This sample was damaged with the 2020 market crash, maybe the a lot shorter period of the crash and restoration are the explanation. The dot com bubble and the monetary disaster each prolonged for a number of years whereas the 2020 market crash was absolutely recovered in a matter of months. 2022 additionally proved to be a robust yr for the aristocrats as they earned 15.15% of alpha on the S&P, making up for 3 years of underperformance.

Despite the fact that the dividend aristocrats have trailed the S&P for the higher a part of the final 8 years, long-term buyers can relaxation assured that based mostly on historical past, over a for much longer time interval, the dividend aristocrats can maintain their very own. There are at the moment 66 firms within the dividend aristocrat index however robust historic returns for the index will be attributed to solely a handful of them. As an investor, I’m all the time curious the way to establish these drivers of outperformance.

I’ve determined to take away V.F. Company (VFC) from my checklist of dividend aristocrats. Earlier this yr the corporate lower its dividend and won’t qualify for aristocrat standing when the index is up to date subsequent yr. The explanation why I eliminated VFC from my checklist at present is as a result of NOBL has bought its place in VFC as properly. Provided that I exploit NOBL as a benchmark for this technique it is just honest that my universe of dividend aristocrats aligns with the holdings within the ETF.

I wish to current 3 methods that theoretically may establish profitable aristocrats and result in higher efficiency than the dividend aristocrat index. These methods work greatest with a purchase and maintain long-term investing strategy as shall be evidenced by the outcomes. They’re based mostly on quantitative fashions that don’t think about qualitative information; due to this fact it’s prudent that additional due diligence is carried out on all chosen shares.

The Most Undervalued Technique

Technique no 1 is a give attention to valuation and extra particularly it targets the doubtless most undervalued dividend aristocrats. In concept, it is a long-term technique since it could take a while to completely see the reward of leveraging a valuation strategy. My most popular methodology for valuation is dividend yield concept, primarily for its simplicity. In contrast to different valuation strategies, dividend yield concept doesn’t require making assumptions apart from assuming {that a} given inventory will revert again to its long-term trailing dividend yield.

This valuation method works greatest for mature companies with lengthy histories of dividend development, making the dividend aristocrats a really perfect pool of firms to worth utilizing this system.

Deciding on the ten most undervalued dividend aristocrats every month and adopting a purchase and maintain investing strategy can result in long-term outperformance when/if the focused shares return to honest valuation. It could take just a few months and even years to see if this technique truly pays off. I predict that it’ll underperform NOBL for the primary few months whereas we anticipate discount shares to return to honest worth.

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%
Could 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%
Could 23	-7.87%	-5.90%	0.46%
Jun 23	7.17%	8.08%	6.48%
Jul 23	3.27%	2.59%	3.27%
Aug 23	-3.82%	-2.34%	-1.63%
Sep 23	-8.52%	-6.25%	-5.40%
2021 Partial	9.05%	6.54%	9.06%
2022	-3.91%	-6.50%	-21.65%
2023	-7.12%	-0.70%	12.24%
TOTAL	-2.68%	-1.08%	-4.09%
Alpha over NOBL	-1.60%
Alpha over SPY	1.42%

Click on to enlarge

The desk above reveals the month-to-month and annual returns for the buy-and-hold portfolio of probably the most undervalued technique.

The portfolio trailed NOBL in August by 1.48% and SPY by 2.19%. September to date is wanting simply as unhealthy. The portfolio is down 8.52% (value return solely) by way of September twenty seventh, whereas NOBL is down 6.25% and SPY is down 5.40%. Yr-to-date the portfolio is grossly underperforming each NOBL and SPY because the technique has fallen out of favor this yr. Since inception the portfolio trails NOBL by 1.60% however stays forward of SPY by 1.42%.

To be trustworthy I am not stunned to see this portfolio underperforming at the moment. The expectation of investing in undervalued aristocrats comes with short-term underperformance because the technique targets out of favor aristocrats. I nonetheless consider that in due time this portfolio will ship higher than common returns and outperform NOBL, whereas remaining aggressive with SPY.

At its peak, this technique was forward of each NOBL and SPY by double digit positive aspects. Whereas such outperformance shouldn’t be one thing I’m anticipating the technique has proven advantage when inventory valuations revert again to historic means.

The portfolio consists of 39 distinctive current and former dividend aristocrats. I observe this portfolio by investing $1,000 every month equally cut up among the many 10 chosen aristocrats for that month. The positions are by no means trimmed or bought and all dividends are reinvested again into the issuing inventory.

Listed below are the ten most undervalued dividend aristocrats chosen for the month of October 2023. The desk beneath reveals potential undervaluation (column Over/Beneath) for every of the ten chosen aristocrats. The picture beneath is taken from a brand new spreadsheet I lately created the place I’m self-computing the 5-year trailing dividend yield. Beforehand I used Searching for Alpha as a supply for the historic yield.

Here’s a nearer have a look at Realty Revenue Group (O).

Realty Revenue at the moment appears to be like to be roughly 29% undervalued. Within the picture beneath the black line is the precise value since August of 2016. The sunshine inexperienced shaded space represents a 0 to fifteen% undervalued zone. The darkish inexperienced space represents an undervaluation in extra of 15%. The sunshine purple shaded space represents a 0 to fifteen% overvalued zone.

An estimated day by day return take a look at for the interval September 2016 by way of September 2022 yielded optimistic leads to the applying of dividend yield concept as a valuation software. The typical return of investing within the inventory on all days when the inventory gave the impression to be undervalued was -1.58%. The typical return of investing within the inventory on all days no matter valuation was -3.69%. And the common return of investing within the inventory on all days when it appeared overvalued was -4.85%. Regardless of the favorable utility of dividend yield concept, the final 7 years have been fairly tough for Realty Revenue. The inventory peaked simply previous to the 2020 pandemic crash and has not been capable of set a brand new all-time excessive value since then. Whereas a lot of the pandemic losses had been recovered in subsequent years, since late 2022 the share value has as soon as once more tumbled decrease. In the present day, the inventory presents a traditionally excessive dividend yield of greater than 6%, a degree not seen because the 2020 pandemic lows.

The Quickest Anticipated Development Technique

Technique quantity 2 is a give attention to dividend aristocrats which are anticipated to develop the quickest within the close to future. Traditionally, there was a correlation between earnings per share development and share value appreciation. Corporations which have grown their earnings sooner have additionally seen increased whole returns. One method to gauge how briskly earnings for an organization will develop is to leverage analyst forecasts. For this technique, I made a decision to make use of a reduced five-year EPS development forecast mixed with a return to honest valuation and the dividend yield to establish the ten greatest aristocrats poised for the very best whole return sooner or later.

Month	Quickest Development	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%
Could 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%
Could 23	-7.21%	-5.90%	0.46%
Jun 23	11.17%	8.08%	6.48%
Jul 23	3.00%	2.59%	3.27%
Aug 23	-1.86%	-2.34%	-1.63%
Sep 23	-8.14%	-6.25%	-5.40%
2021 Partial	11.62%	6.54%	9.06%
2022	-9.86%	-6.50%	-21.65%
2023	0.19%	-0.70%	12.24%
TOTAL	0.81%	-1.08%	-4.09%
Alpha over NOBL	1.89%
Alpha over SPY	4.90%

Click on to enlarge

The desk above reveals the month-to-month and annual returns for the buy-and-hold portfolio of the quickest anticipated development technique.

The portfolio outpaced NOBL by 0.48% in August however trailed SPY by 0.23%. September to date is wanting somewhat worse, by way of September twenty seventh the portfolio is down 8.14% (value return solely) whereas NOBL is down 6.25% and SPY is down 5.40%. Yr-to-date the portfolio stays forward of NOBL by 0.89% however trails SPY by greater than 12%. Nonetheless, since inception, the portfolio maintains a modest degree of alpha over each, 1.89% over NOBL and 4.90% over SPY.

The quickest anticipated development portfolio is at the moment the very best performing of the three methods. At one level it was trailing probably the most undervalued technique by a large margin however 2023 has seen market tendencies shift in favor of development shares.

The portfolio consists of 34 distinctive current and former dividend aristocrats. I observe this portfolio by investing $1,000 every month equally cut up amongst the ten chosen aristocrats for that month. The positions are by no means trimmed or bought and all dividends are reinvested again into the issuing inventory. Individuals’s United was faraway from the portfolio in April 2022, as the corporate was acquired by M&T Financial institution (MTB); the worth of the place was reinvested equally amongst the ten chosen aristocrats for April.

Listed below are the ten dividend aristocrats poised for the very best whole return for the month of October 2023. The desk beneath reveals the anticipated development fee (column EPS + Valuation) for every of the ten chosen aristocrats.

Here’s a nearer have a look at Brown-Forman Company (BF.B). Under is the 7-year dividend yield concept chart.

The typical return of investing within the inventory on all days when it gave the impression to be undervalued was 4.89%. The typical return of investing within the inventory on all days no matter valuation was -2.05%. And the common return of investing within the inventory on all days when it appeared overvalued was -4.08%. Brown-Forman set an all-time excessive value in late 2020 and has typically trended decrease over the past roughly 2.5 years. Dividend yield concept instructed the inventory was overvalued for all of 2020, 2021 and a portion of 2022. After the latest pullback the inventory seems to be grossly undervalued.

The inventory by no means paid a really beneficiant dividend yield however at present’s yield of 1.5% is likely one of the greatest buyers have seen within the final 7 years. Throughout the 2020 pandemic crash the yield briefly exceeded 1.5%. Previous to 2020 we noticed Brown-Forman exceed a 1.5% yield in 2017. The trailing 5 yr common dividend yield has trended decrease over the past 7 years from a excessive of 1.4% in 2017 to its present degree of 1.14%.

The Blended Technique

Technique 3 is a mix of the primary two methods, with a give attention to the quickest anticipated development however utilized solely to undervalued aristocrats. A mix of undervaluation and anticipated development may slim down the very best aristocrats between the 2 methods. Probably the most undervalued aristocrats could not essentially be poised for the quickest development. Moreover concentrating on solely undervalued aristocrats can supply a margin of security in that securities are bought for honest or higher costs.

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%
Could 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%
Could 23	-6.64%	-5.90%	0.46%
Jun 23	8.48%	8.08%	6.48%
Jul 23	3.38%	2.59%	3.27%
Aug 23	-2.63%	-2.34%	-1.63%
Sep 23	-8.16%	-6.25%	-5.40%
2021 Partial	9.18%	6.54%	9.06%
2022	-7.04%	-6.50%	-21.65%
2023	-3.99%	-0.70%	12.24%
TOTAL	-2.55%	-1.08%	-4.09%
Alpha over NOBL	-1.47%
Alpha over SPY	1.55%

Click on to enlarge

The desk above reveals the month-to-month and annual returns for the buy-and-hold portfolio of the blended technique.

The portfolio trailed NOBL in August by 0.29% and SPY by 1.00%. September to date is wanting barely worse, the portfolio is down 8.16% by way of September twenty seventh whereas NOBL is down 6.25% and SPY is down 5.40%. Yr-to-date the portfolio is down 3.99% and underperforming each NOBL and SPY. Since inception, the portfolio trails NOBL by 1.47%, however stays forward of SPY by 1.55%.

The blended technique was an try to merge the very best of probably the most undervalued and quickest anticipated development methods. Nonetheless, to date it has not proven any promise because it has trailed each methods just about since inception.

The portfolio consists of 39 distinctive current and former dividend aristocrats. I observe this portfolio by investing $1,000 every month equally cut up amongst the ten chosen aristocrats for that month. The positions are by no means trimmed or bought and all dividends are reinvested again into the issuing inventory. Individuals’s United was faraway from the portfolio in April as the corporate was acquired by M&T Financial institution; the worth of the place was reinvested equally amongst the ten chosen aristocrats for April.

Listed below are the ten dividend aristocrats chosen for the blended technique for October 2023. The desk beneath reveals potential undervaluation (column Over/Beneath) and the anticipated development fee (column EPS + Valuation) for every of the ten chosen aristocrats.

Here’s a nearer have a look at Walgreens (WBA). Under is the 7-year dividend yield concept chart.

The above chart might be precisely what you don’t want to see for a inventory that you’re invested in. Just about for the final 7 years Walgreens share value has declined with just a few alternatives to swing commerce some upside. Extra lately the identical development continued as we have now seen Walgreens dip once more in August and September. Whether or not it is a good entry level, time will inform, however buying and selling for about $21 a share Walgreens deserves a more in-depth look.

The inventory nonetheless sports activities a traditionally excessive dividend yield at present of 9.28%. It is onerous to consider that 7 years in the past Walgreens paid a dividend yield barely above 2%. Even the pandemic low yield in extra of 5% appears to be like insignificant to at present’s almost double digit yield. I will surely warning a radical assessment of the corporate prior to creating any funding choice.

Efficiency Overview

Now we have already seen how the buy-and-hold methods are performing in September so now let us take a look at how the chosen shares for the month are doing as properly. The ten chosen aristocrats for probably the most undervalued technique are down 10.32%. The quickest anticipated development technique choices and the blended technique choices for September had been the identical and each are down 10.75%. The quickest anticipated development technique is off to the very best begin this yr, seeing optimistic positive aspects in 6 out of the 9 months to date. The person choices are additionally faring a lot better than the long-term buy-and-hold portfolios, with the year-to-date return being 12.59% by way of September twenty seventh. Nonetheless, I nonetheless consider {that a} buy-and-hold strategy is the optimum investing path to take with these methods.

Here’s a comparability of the buy-and-hold portfolios and the person month-to-month choices for every technique. As you’ll be able to see the buy-and-hold portfolios are nonetheless performing a lot better than if we purchased and bought the ten chosen aristocrats every month. A buy-and-hold strategy can be a way more tax-friendly investing technique.

Kind	Most Undervalued	Quickest Development	Blended	NOBL
Particular person	-11.99%	3.57%	-4.16%	-1.08%
Purchase-and-Maintain	-2.68%	0.81%	-2.55%	-1.08%
O/U	9.31%	-2.76%	1.61%	0.00%

Click on to enlarge

Last Ideas

I personally consider every of the three methods outlined above can theoretically beat the dividend aristocrat index over a protracted time frame. These methods are based mostly on easy rules of valuation and anticipated returns, and they’re straightforward to grasp and implement. Traders ought to remember that choosing particular person shares carries extra danger than investing in an index. The best and probably the most secure method to put money into the dividend aristocrats is to buy shares of NOBL. The fund completed 2021 with a unbelievable return, carried out a lot better than the S&P in 2022 and has an annualized fee of return of 10.51% since inception.

2023 is shaping as much as be an fascinating yr for dividend methods. The S&P 500 had a really poor return in 2022 and appears to be bouncing again this yr, pushed by robust returns from expertise shares. Dividends aristocrats fared a lot better in 2022 however bought off to a poor begin this yr. Dividend investing is a marathon, not a dash and you can see your self in a sluggish interval every now and then. The very best plan of action is to stay together with your long-term technique as long as it nonetheless suits your long-term aims.

The dividend aristocrat information within the pictures of this text got here from my stay Google spreadsheet that tracks the entire present dividend aristocrats. As a result of this information is up to date constantly all through the day, you could discover barely completely different information for a similar firm throughout the pictures. Additionally a few of my returns could also be off by just a few foundation factors from these you will see from different sources on the net.