At PTI we have focused on the Dividend Aristocrats and the Dividend Champions as the two universes of stocks from which we look for individual investments, because we believe that these stocks demonstrate the strength and quality we are looking for when investing. We have created real world portfolios from the Aristocrats, and theoretical portfolios based on the Champions. We have also followed and reported on the returns achieved by the Proshares S&P 500 Aristocrats ETF “NOBL”, which is made up of all the Aristocrats. Over the life on this ETF it has matched the S&P 500.
We recently started researching another Proshares ETF, “REGL”. Whereas NOBL invests in all the Dividend Aristocrats, the stocks in the S&P 500 which have raised their dividend for at least the past 25 years on a row, or more, REGL invests in the stocks in the S&P midcap 400 which have raised their dividend for at least the past 15 years or more. So REGL is another dividend growth ETF, but it focuses on mid cap stocks, rather than the large cap stocks found in NOBL.
REGL has been in existence since 2/5/2015, and in that time it has produced an average annual return of 10.23%. Over the same time frame SPY has produced an annual return of 11.76%.
To get a better idea about the possible long term returns for REGL, we took the stocks presently in the REGL portfolio and looked to see what the returns would have been if the portfolio had started back in 2010. We also used our PAAY system to see how well the stocks with the highest PAAY would have done compared to the stocks with the lowest PAAY, the stock with the mid-level PAAY, and all the stocks, regardless of the PAAY. As a reminder PAAY is a measure of a stock’s relative valuation. Stocks with high PAAY would be considered under-valued, while stocks with low, or even negative PAAY, would be considered to be over-valued. Therefore, we would expect the stocks with the high PAAY, the undervalued ones, to perform better over time.
There are 47 stocks in REGL, so they were divided into groups of 16, 16 and 15 stocks for this study. This first chart shows the results of the 16 stocks with the highest PAAY, with a comparison to SPY over the same time period.
The chart shows that the stocks with the highest PAAY produced an annual return of 18.00% and turned a $100,000 investment in to over $523,000. SPY, as comparison, returned 13.49% and turned the $100,000 into only $354,000.
The following chart shows the middle group of PAAY stocks.
This group produced an annual return of 15.89% and a value of $437,060. Again, this is compared to SPY which produced returns of 13.29% and $348,357.
This third chart shows the returns for the group of stocks with the lowest PAAY.
This group produced an annual return of only 9.28% and had a final value of $242,913. The confirms what we would expect, that the over-valued stocks, the ones with the lowest PAAY, performed the worst over time.
This last chart shows the returns for all 47 stocks combined.
This shows that all 47 stocks, the whole portfolio, produced a return of 14.62%, and a value of $391,259.
These returns demonstrate two things. First, over the ten-year period a portfolio of mid-cap dividend growth stocks would have beaten the market. Second, investing in the most under-valued stocks at the beginning of each year, the stocks with the highest PAAY, produced vastly superior results than any of the other group of stocks, including the market as a whole.
This confirms two of our guiding principles at PTI, that dividend growth stocks, over the long-term, will outperform the market, and that stocks with a higher PAAY will out-perform stocks with lower PAAY, and will out-perform the market as a whole.
We do have to mention one serious problem with the study. It is called survivorship bias. Basically, it means that the stocks which are in REGL right now are not necessarily the ones that would have been in REGL back in 2010. By using the present-day holdings for our study, we are automatically using the “survivors” of the past 10 years. Other stocks which may have been in REGL in the past may have cut their dividend and would been removed from REGL. And these stocks may have hurt the results we would have achieved. If we knew all the stocks that would have been in REGL over the years we could have included them in the study for more accuracy. Unfortunately, we don’t have this information. So, although we believe the above results do give important information, we must understand that they may be affected by the survivorship bias.
Going forward we at PTI will continue to follow REGL, and may integrate this ETF, or the universe of stocks it represents, into some of our portfolios.