US equities continued their rally in August, the S&P 500 gained another 7% after the +5.6% in July, this is the best monthly performance since April. The Dividend Aristocrats ended this month up 4% after 5.13% in July. The investors were more optimistic after the Fed stimulus and a shift in policy to average inflation targeting, implying lower rates for longer, and some strong earnings, especially from big techs.
Year-to-date the US Dividend Aristocrats are still down -1.12% underperforming the S&P 500, given the +9.74% for this benchmark. One of the reasons is the allocation of Tech/IT, which is only 1.4% in the US Dividend Aristocrats index. Which is nothing compared to the 28% IT sector allocation of the S&P 500 index.
The Defensive Dividend Aristocrats gained another 2.82% after the 6.3% rally in August, and the total return is now 6.23% in 2020. The defensive version is outperforming the dividend aristocrats and a bit behind the S&P 500 total return index now.
The defensive approach
The Defensive Dividend Aristocrats’ objective is to outperform the Dividend Aristocrats over any five-year rolling time horizon, especially in bear markets. The maximum draw-down (mdd) should be lower.
The idea of the Defensive Dividend Aristocrats is to invest in 10 Dividend Aristocrats that are selected based on price-return and risk-ratios at year-end. Combined with the dividend growth characteristics of all Aristocrats, this should result in a comfortable set of companies for a long-term dividend portfolio.
The Defensive Aristocrats are selected on performance-based criteria:
- Geometric Annual performance of the last 10 years (GeoAP10)
- Win-ratio, the chance of a positive monthly performance (over 7000 calculations)
- Loss-ratio, the chance of a monthly loss multiplied by the weighted average loss
Aspects such as dividend yield or dividend growth are not taken into consideration in this approach.
Read more on: Defensive Aristocrats methodology
Members can use the screener to find the current best dividend aristocrats based on loss-ratio.