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Dividend Aristocrats & The Sharpe Ratio: Part 3 of 4


Published March 19th, 2015

In Part 3 of the 4 part series on Dividend Aristocrats & The Sharpe ratio, we take a look at the performance of a strategy that goes long the 10 highest ranked Dividend Aristocrats using the Sharpe Ratio with a 10 year look back period.   Each year, the portfolio is rebalanced and reinvested into the 10 ‘best’ Dividend Aristocrats based on the Sharpe Ratio.

As a caveat, daily price data (adjusted for splits and dividends) was not available for all members of the Dividend Aristocrats over the last decade. The following stocks were removed from the study due to insufficient (or total lack of) price data. The dates that affect the study are show below.

Not having this data does create some bias in the study. Not including these 5 stocks should not materially affect results, however. The constituents of the Dividend Aristocrats Index from 2005 to now are pasted below:

Dividend Aristocrats from 2005 to 2015

Results of Study

The strategy of investing in the ‘best of the best’ of the Dividend Aristocrats by sorting by Sharpe ratio using a 10-year look back period outperformed the S&P 500 over the last 10 years. In fact the strategy beat the S&P 500 in 7 out of the last 10 years.

With that said, the strategy underperformed the Dividend Aristocrats Index over the same time period. Over the last 5 years, the Sharpe strategy has outperformed the Dividend Aristocrats Index, but over the 5 years before that, the Sharpe strategy underperformed the Dividend Aristocrats Index. The image below shows total returns by year:

Performance by Year

Top Sharpe Ratio Dividend Aristocrats by Year

The top 10 Dividend Aristocrats sorted by 10 year Sharpe ratios are shown below.

Top Constituents by Year

As you can see, a few stocks make the list year-after-year. The two most prevalent are Jack Daniel’s maker Brown-Forman (BF.B) and medical supplies corporation C.R. Bard (BCR). The results of this study show that long-term Sharpe ratios are not good predictors of future returns, but BF.B and BCR’s respective risk-adjusted returns over the last decade are impressive nonetheless.

Conclusions

The primary (and somewhat disappointing) conclusion to draw from this study so far is that long-term Sharpe ratios are not reliable predictors of future returns. They only show the relationship between historical risk and return. Going into this experiment, I thought that perhaps a long-term Sharpe ratio strategy would offer either reduced volatility or increased returns, but that is not the case.

Coming Up:  Dividend Aristocrats & The Sharpe Ratio Part 4 of 4

In the conclusion to the 4 part series on Dividend Aristocrats & The Sharpe ratio, I will take an in depth look at the 5 current highest ranked Dividend Aristocrats using the valuation-adjusted Sharpe Ratio.

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