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Dividend Aristocrats & Momentum

Published on January 21st, 2015

Momentum in stock returns has been proven to exist.  Stocks with high returns over a given time frame (usually between 3 and 12 months) tend to outperform over the next month.  What happens when you apply this concept to the stocks in the Dividend Aristocrats Index?  The answers were not what I expected.


The total return over the previous year was used to calculate momentum.  The 10 highest momentum Dividend Aristocrats make up the Dividend Aristocrats-Momentum portfolio.  The portfolio is rebalanced annually.  Note that the rebalance period is annual and not monthly, which significantly reduces turnover.


Surprisingly, the Dividend Aristocrats-Momentum portfolio underperformed the Dividend Aristocrats Index over the last decade.  I believe this is due to reducing the rebalance period from monthly to annually, which likely minimized any gains from momentum.  The stocks in the portfolio at the start of each calendar year are below:

Momentum-Dividend Aristocrats by Year

The return for each calendar year is shown below.  DA-M is the Dividend Aristocrats-Momentum portfolio.  DA is the Dividend Aristocrats Index.  S&P is the S&P 500 Index.

Dividend Aristocrats Momentum Returns

Excluding disastrous relative performance in 2009, the Dividend Aristocrats-Momentum strategy actually outperformed the Dividend Aristocrats Index by 0.25% per year.  The strategy appears to struggle when during market rebounds from large crashes.  This is because the Dividend Aristocrats-Momentum strategy selects the stocks that fell the least during a recession.  As a result, the strategy does not benefit much from the recovery of stocks that had steep drawdowns.

Picking The Losers Methodology

What happens if we apply the same strategy, but in reverse?  Instead of selecting the best performing Dividend Aristocrats from the previous year, select the worst performing Dividend Aristocrats and hold for 1 year.  The results are discussed below.


Interestingly, the ‘losers’ strategy also underperformed over the test period.  Seeing that both the biggest winners and the biggest losers underperformed, on average, shows that the best performing Dividend Aristocrats are the most stable; those that have low stock price standard deviations and do not experience huge price swings either up or down.

The ‘losers’ strategy outperformed the Dividend Aristocrats Index in 2009, when the Dividend Aristocrats-Momentum strategy faired so poorly.  The 10 stocks selected for the ‘losers’ strategy each year are shown below, along with returns for each year.  DA-L stands for Dividend Aristocrats-Losers, DA stands for the Dividend Aristocrats Index, and S&P stands for the S&P 500 Index.

Dividend Aristocrats Losers

The above image shows the Top 10 stock selections each year for the Dividend Aristocrats-Losers strategy.  The image below shows total return for each year.

Dividend Aristocrats Losers Returns



At first glance, it would be tempting to combine the two strategies into one strategy; use the Dividend Aristocrats-Momentum stocks during normal market conditions, and the Dividend Aristocrats-Losers stocks when the market experiences large drawdownds.  This strategy would likely only work in backtests.  A protracted 2 year+ drawdrown would eliminate the benefits of the strategy.

The financial and academic literature is clear:  momentum works when applied over shorter-time frames.  Momentum did not work in this case because stocks were held for 1 year.  If the momentum portfolio was rebalanced monthly instead of annually, it likely would have done better.  However, limiting a monthly rebalanced momentum portfolio to just the Dividend Aristocrats Index does not make much sense.

The benefit of the Dividend Aristocrats Index is that it is comprised primarily of high quality businesses suitable for long-term holdings.  Reducing holding time to one month eliminates the benefit of the Dividend Aristocrats Index.  Similarly, the benefit of a momentum strategy is that it can quickly sort large numbers of stocks or investable securities and select the securities with the strongest returns.  Limiting the selection universe to just ~50 stocks impedes the strength of the momentum strategy.

Momentum and long holding periods are not compatible strategies.  I believe the security, stability, and minimal frictional costs (brokerage fees, research time, slippage, etc.) outweigh the potential boost in performance one could get from constantly churning a portfolio monthly for top momentum stocks.  Momentum puts the focus on stock prices and away from the underlying business in which one is invested.

The biggest winners and biggest losers in the Dividend Aristocrats Index likely have higher stock price volatilities than the stocks that perform consistently in the middle year after year.  These Dividend Aristocrats embody what the Dividend Aristocrats Index is all about; high quality businesses that produce consistent growth year after year.  In a future post, Sure Dividend will test the Dividend Aristocrats with the lowest stock price volatility year after year.

Sources and Disclaimer

The vast majority of data used in this article came from Yahoo! Finance.  Information was not available on 5 historical Dividend Aristocrats.  These 5 stocks have not been included in the study, which does bring some survivorship bias into the study from years 2005 to 2008.  The stocks that do not have information, along with the years they were Dividend Aristocrats are:

If you know where to find historical price and dividend data for the companies above, please email me at ben@suredividend.com.

Additional data sources for this article:

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