Dividend Aristocrats & Correlation Part 1: McDonald's & Medtronic - Sure Dividend Sure Dividend

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Dividend Aristocrats & Correlation Part 1: McDonald’s & Medtronic

Published 6/27/14

McDonald’s (MCD) & Medtronic (MDT) form an extraordinary pair for investors looking to maximize diversification gains.  McDonald’s & Medtronic have the lowest correlation of any pair of Dividend Aristocrat stocks.  The two company’s correlation is only .1173.

More on Correlation

The lower the correlation, the better.  Two stocks with a correlation of 1 would move exactly the same direction each day.  Stocks with a correlation of 0 have no similarity to each other.  Finally, a correlation of -1 would be a pair of stocks that move inverse of each other.  McDonald’s & Medtronic’s correlation of .1173 shows the two stocks are almost completely unrelated to each other.  Correlation’s change over time.  The measurements for standard deviation and correlation in this article are all taken over the most recent 10 year period.  Using long periods shows the overall relationship between two stocks, rather than a short snap-shot which is more heavily impacted by one-time events and randomness.

The Benefits of Correlation

Low correlation benefits shareholders by reducing portfolio standard deviation.  The lower the standard deviation, the less your portfolio bounces around.  Simply put, low standard deviation provides peace of  mind.  McDonald’s long-term standard deviation is 20.14%, while Medtronic’s is 24.13%.  Buying an equal amount of McDonald’s and Medtronic will result in holdings that have a standard deviation of just 16.60%.  Standard deviation is reduced about 6 percentage points due to the low correlation of these two stocks.

McDonald’s & Medtronic are Very Different

McDonald’s is the largest fast food company in the world.  In 2013 McDonald’s served almost 3 million people every hour.  The company’s flagship products are the Big Mac and McDonald’s Fries, among other items.  McDonald’s is focused on cheap food and quick service.  The company has a long history of rewarding shareholders, with 37 consecutive years of dividend increases.

Medtronic is the world’s largest medical technology company.  Medtronic served over 9 million people in 140 countries last year through its medical therapies which treat cardiac and vascular disease, diabetes, neurological conditions, and musculoskeletal conditions.

McDonald’s is a low-tech business that sells cheap food to consumers.  Medtronic is a high-tech business that sells medical devices and therapies to health care professionals.  The stark differences in business model are what makes these two businesses’ stocks nearly completely uncorrelated.

McDonald’s-Medtronic Portfolio Bundle

Together, an equal position in Medtronic and McDonald’s would have the following characteristics:

Medtronic and McDonald’s both rank highly based on the 8 Rules of Dividend Investing.  Medtronic ranks at 31 out of 120, while McDonald’s is in the Top 10.

Closing Thoughts

McDonald’s may indirectly provide customers to Medtronic due to the company’s less-than-healthy menu.  This is not to say that McDonald’s should be regulated or is evil in any way.  Customers know that McDonald’s is not focused on high quality healthy food, but on cheap food made fast, and the same way every time.

Medtronic and McDonald’s complement each other not because they have similarities, but because they are so different.  The biggest similarity the two businesses have is their long history of rewarding shareholders through dividend payments.  McDonald’s and Medtronic have both coincidentally paid increasing dividends for 37 consecutive years.

Dividend Aristocrat stocks have outperformed the market by 2.88 percentage points per year over the last 10 years.  Carefully selecting which Dividend Aristocrats you invest in based on the strength of the company as well as correlation to other Dividend Aristocrats will very likely enhance your risk adjusted return going forward.  Out of all 54 Dividend Aristocrats, McDonald’s and Medtronic are the least correlated; together, they offer the greatest gains from diversification.

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