BOSTON ( TheStreet Ratings
) -- The Dividend Stars
portfolio rose 2.85% in February on a total return basis, underperforming the benchmark S&P 500 Index over the same period by 0.53 percentage point.
Since being launched Nov. 10, the Dividend Stars portfolio has returned 9.82% versus 10.94% for the S&P 500, a lag of 112 basis points. So far in 2012, the portfolio is trailing the S&P 500 by 2.1 percentage points. (Please note: The benchmark will be changed to the Dow Jones U.S. Dividend 100 Index beginning in March.) The current portfolio offers an average dividend yield of 2.71% versus 2.0% for the S&P 500.
Since the start of 2012, investors have turned away from defensive sectors and dividend-paying stocks, and have assumed more risk. According to Merrill Lynch research, low-quality stocks (those with a C&D quality ranking) have returned 20.4% this year, while stocks with a higher-quality rating (A or A+) have returned only 5.7%.
As is often the case during periods of increased market confidence, investors are bidding up companies with greater-than-average leverage, are more volatile and cyclical in nature. The best-performing sectors in the month were technology, financials and energy (all cyclical sectors), while the best-performing factors in the month were low-price-to-book and high beta. Deeper-value names that had been left for dead are now coming back to life as optimism abounds and investors seek higher growth names with higher return potential. Translation: The risk trade is most certainly on.
It's no surprise that dividend-paying stocks have been brushed aside in favor of lower-quality, higher-beta names. Based on the aforementioned Merrill Lynch research, non-yielding stocks significantly outperformed in the month; stocks with zero yields returned 3.53% versus stocks with a yield of 3.16% or higher, which returned minus 1.49%. The trend this year is even more significant as zero yielders have returned 6.82%, while the highest-yielding stocks have returned minus 6.7%.
I'm never happy to underperform the index, but based on some of the statistics I've provided, it's quite evident that dividend stocks have fallen out of favor of late. This doesn't mean that I will change the methodology of the strategy. In fact, I'm quite pleased with the performance, given the numerous headwinds. What I do think makes sense is a change of the benchmark from the S&P 500 to the Dow Jones U.S. Dividend 100 Index (DJUSDIVT).
The Dow Jones U.S. Dividend 100 Index consists of 100 stocks that are selected based on four fundamentals-based characteristics (cash flow to total debt, return on equity, dividend yield and five-year dividend growth rate) and are subject to screens for dividend payment consistency, size and liquidity. Going forward, I will be using this index to track performance, as I believe it offers a better representation of the Dividend Stars strategy. On a total return basis, since the launch in November, the Dividend Stars portfolio has returned 9.82% versus 8.06% for the Dow Jones index. So far in 2012, the Dividend Stars portfolio has returned 5.96% versus 4.62% for the DJUSDIVT.