Author Topic: Why does the Dividend Aristocrats Index beat the S&P 500?  (Read 24513 times)

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Why does the Dividend Aristocrats Index beat the S&P 500?
« on: April 01, 2015, 12:03:05 PM »
This is a question I posed to a couple of people in the “Survivorship Bias - the single greatest fallacy in investing” thread and no one would address it. Dodge eventually deleted the thread for some reason because his original argument no longer made sense.
 
The index methodology from S&P is available here: http://us.spindices.com/indices/strategy/sp-500-dividend-aristocrats The selection criteria is as follows:

Quote
S&P 500® Dividend Aristocrats® measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.


A tracking ETF was started a little over 1 year ago: NOBL http://www.morningstar.com/etfs/ARCX/NOBL/quote.html .

Many folks use SDY which tracks the High Yield Dividend Aristocrats and is NOT the same thing.

 

Here is the Dividend Aristocrat Index’s performance versus the S&P 500 back to 1989. The Bloomberg terminal actually uses the selection criteria for the index to recreate and back test the index. Meaning it looks at the S&P 500 in 1989 and says of those 500 companies, which have a history of dividend growth for the past 25 years? It adds those companies to the index. This is done every quarter from 1989. The back test goes back until 1989 because standardized quarterly data only started to be provided by Standard and Poors in 1964 with their launch of compustat. 1989 with 25 years of data takes your back to 1964.
 
Why does the Dividend Aristocrat index beat the S&P by 780% since 1989? I am fairly certain it is not because dividend paying companies superior.   

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #1 on: April 01, 2015, 12:06:43 PM »
I had a post (which was deleted along with the thread). I pointed out that the DA lagged the 500 during the first part since inception (2005), with a larger drawdown during the 2008/9 crash. I speculated that perhaps the price appreciation in the recovery/bull market is due to the search for yield during the historically low interest rate environment. You've seen similar historically high performance for other high-yield stocks like the utility sector during this time as well.
« Last Edit: April 01, 2015, 12:13:03 PM by forummm »

Dodge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #2 on: April 01, 2015, 12:09:26 PM »
Probably for the same reason actual performance of Value funds don't do any better than the market as a whole, despite research showing they should.

"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #3 on: April 01, 2015, 12:12:10 PM »
Probably for the same reason actual performance of Value funds don't do any better than the market as a whole, despite research showing they should.

"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

I don't understand this response. It's incredibly cheap to buy 52 large-cap stocks in equalweight and then just use the large dividend streams to buy the laggards to keep it in equal weight. I could approximate this index with $100k or so, with moderate trading costs.

sirdoug007

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #4 on: April 01, 2015, 12:15:57 PM »
"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

+1  Jack Bogle has shown that many of these strategies that result from data mining the past do not actually outperform consistently and especially not when you consider the costs of implementation.

What is the point of your question?  Why should I care that a hypothetical portfolio handily beat the S&P500 since 1989?  I don't have a time machine so knowledge of how much ass it kicked since 1989 does me no good unless you assume it will continue.  Reversion to the mean comes to mind.

If you haven't read this it is worth any investors time: http://www.vanguard.com/bogle_site/sp20020626.html

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #5 on: April 01, 2015, 12:19:59 PM »
Another observation: There's a similar DA for the S&P 1500, which has not outperformed the S&P500 in the last 10 years, even though mid-cap stocks have outperformed large-cap stocks during that time. That tells me that the mid-cap stocks with histories of increasing dividends have actually underperformed stocks in both their own class (mid caps) and the S&P500.

http://us.spindices.com/indices/strategy/sp-high-yield-dividend-aristocrats-index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #6 on: April 01, 2015, 12:29:12 PM »
I had a post (which was deleted along with the thread). I pointed out that the DA lagged the 500 during the first part since inception (2005), with a larger drawdown during the 2008/9 crash. I speculated that perhaps the price appreciation in the recovery/bull market is due to the search for yield during the historically low interest rate environment. You've seen similar historically high performance for other high-yield stocks like the utility sector during this time as well.

Forummm,

Check out: http://seekingalpha.com/article/2975996-the-dividend-aristocrats-and-higher-interest-rates

This seeking alpha article commented on this scenario looking what happened to the index when interest rates were on the rise (ala demand for yield should go down as the risk free rate increases).

Interest rate increases in 1994:


S&P TR vs. Div Aristocrat TR (SPDAUDT)

Bob W

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #7 on: April 01, 2015, 12:38:22 PM »
Can't imagine why well run companies that consistently pay and raise their dividends would not outperform companies that pay no dividends.   Dividends basically say --- "hey,  we are a real business who makes real profits." 

So in the S and P you have a large mix of many companies,  many of which will go under.    My guess is that the dividend heros are very unlikely to go under or even lose much.    Pretty much follows Buffet's first rule. 

As a side note check out this cool list of companies over 100 years old.   I was really surprised by the huge number of them.   http://i.usatoday.net/money/_pdfs/11-0615-centurions.pdf

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #8 on: April 01, 2015, 12:40:13 PM »
Probably for the same reason actual performance of Value funds don't do any better than the market as a whole, despite research showing they should.

"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

The portfolio has ~33% turnover on 54 companies. Let’s say 18 round trip trades per year or 36 transactions. At Vanguard this costs you $252 (7*36) per year. At Interactive Brokers the cost would be negligible. Minimum account fees per year are $120 of which you should get ~$100 back per 50k invested if you enroll in their security lending program. So roughly $20/year on a 50k account and a net credit if you have multiples of 50k. Brokerage costs have gotten so low they should not really be considered if you are buying and holding for long periods. 

 

waltworks

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #9 on: April 01, 2015, 12:43:02 PM »
I don't have a dog in this fight but citing Buffet when talking about dividends... hilarious. BRK has never, ever paid one and probably never will and Buffet is on the record very clearly about why. You might want to check it out.

-W

Can't imagine why well run companies that consistently pay and raise their dividends would not outperform companies that pay no dividends.   Dividends basically say --- "hey,  we are a real business who makes real profits." 

So in the S and P you have a large mix of many companies,  many of which will go under.    My guess is that the dividend heros are very unlikely to go under or even lose much.    Pretty much follows Buffet's first rule. 

As a side note check out this cool list of companies over 100 years old.   I was really surprised by the huge number of them.   http://i.usatoday.net/money/_pdfs/11-0615-centurions.pdf

Dodge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #10 on: April 01, 2015, 12:45:30 PM »
Probably for the same reason actual performance of Value funds don't do any better than the market as a whole, despite research showing they should.

"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

I don't understand this response. It's incredibly cheap to buy 52 large-cap stocks in equalweight and then just use the large dividend streams to buy the laggards to keep it in equal weight. I could approximate this index with $100k or so, with moderate trading costs.

If we compare the 2014 returns of the Bloomberg chart above:



Super-imposed on top of each other and blown-up for fun:



It clearly doesn't match up with the actual 2014 returns of NOBL, which tracks that index:



Despite only being around for about a year, the discrepancy is already showing up in NOBL.  I suspect in a few years, it will start looking just like the SDY comparison:


and


vs actual SDY performance:


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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #11 on: April 01, 2015, 12:48:36 PM »
"Investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world." ~John Bogle

+1  Jack Bogle has shown that many of these strategies that result from data mining the past do not actually outperform consistently and especially not when you consider the costs of implementation.

What is the point of your question?  Why should I care that a hypothetical portfolio handily beat the S&P500 since 1989?  I don't have a time machine so knowledge of how much ass it kicked since 1989 does me no good unless you assume it will continue.  Reversion to the mean comes to mind.

If you haven't read this it is worth any investors time: http://www.vanguard.com/bogle_site/sp20020626.html

You do understand Bogle is selling something right?

Could the reason that this index beats the S&P 500 or VTSAX for that matter be that it uses superior selection criteria compared to the indices's as a whole?

This index starts with the S&P 500 and refines it only selecting companies that have raised dividends for 25 consecutive years. Growing companies can afford to raise their dividend, companies where management is worried about the future of the business may pause growth or cut their dividends. The index is also equally weighted which increases exposure to mid caps within the S&P. The top 100 companies cannot make up 50%+ of the index if the fund is equally weighted. Remember cap weighting is implemented to sell indicies and promote liquidity; not to enhance growth.   

sirdoug007

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #12 on: April 01, 2015, 12:52:38 PM »
If Bogle is selling he should charge more than 5 basis points for it!  And maybe structure the company so he holds a big chunk of it rather than giving it away to the fund holders.

sirdoug007

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #13 on: April 01, 2015, 12:58:30 PM »
This index starts with the S&P 500 and refines it only selecting companies that have raised dividends for 25 consecutive years. Growing companies can afford to raise their dividend, companies where management is worried about the future of the business may pause growth or cut their dividends. The index is also equally weighted which increases exposure to mid caps within the S&P. The top 100 companies cannot make up 50%+ of the index if the fund is equally weighted. Remember cap weighting is implemented to sell indicies and promote liquidity; not to enhance growth.

There are a few things wrong with this line of thinking:

1. Many growing companies do not offer a dividend but offer great total return.  Old or young many good companies reinvest profits at good returns.  You have selected these OUT. 
2. If you want to compare market cap weight to equal weight that is a whole different topic.

If the Dividend Aristocrat method is so good, why hasn't SDY (even if it is not exactly what you recommend) shown outperformance of the total stock market in the last six years?

dandarc

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #14 on: April 01, 2015, 12:59:23 PM »
So you're taking more risk (mid-cap skew), and therefore getting more reward.  Not exactly news.

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #15 on: April 01, 2015, 01:09:11 PM »
Dodge,

Here is the Index SPDAUDT vs NOBL, the S&P 500, and SDY since the inception of SDY. SDY has an expense ratio of 0.35%. I would expect that to weigh on the index on the ETF a bit. Also, there is going to be tracing error because NOBL is updated quarterly while the index is updated as companies issue their results. Replicating the index yourself is probably superior to using NOBL if you have 50k+ invested.


skyrefuge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #16 on: April 01, 2015, 01:10:45 PM »
Thanks for reviving the thread. Here is what I had written, but was unable to post, since it disappeared:

So yes this back test demonstrates a dynamic index created retroactively using the rules that were defined in 2005.

Cool, thanks. In all my reviews of advocates of dividend growth investing, I've never seen that particular data presented (actual dividend-focused fund data shows no clear outperformance); if you're in need of sexual favors, you may find them offered to you if you share this data with them.

Related to the thread topic, I'm not sure if it's quite "survivorship bias", but it's odd/interesting that no fund was created to track this index until 8 years after the index was created.

Maybe that's because the index underperformed for its first 3 years, and fund-creators only make funds out of things that show recent outperformance? And then even after it started outperforming, it still took several years for more years for the fund-creators to decide the outperformance was "real"?

And then of course once NOBL was finally created, there has been no obvious outperformance (not that the time-period is long enough to be telling of anything). But maybe it's a cautionary tale: the creation of a fund that follows a strategy should be seen as the jumped-the-shark moment for that strategy?


LordSquidworth

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #17 on: April 01, 2015, 01:24:26 PM »
I don't have a dog in this fight but citing Buffet when talking about dividends... hilarious. BRK has never, ever paid one and probably never will and Buffet is on the record very clearly about why. You might want to check it out.

-W

Can't imagine why well run companies that consistently pay and raise their dividends would not outperform companies that pay no dividends.   Dividends basically say --- "hey,  we are a real business who makes real profits." 

So in the S and P you have a large mix of many companies,  many of which will go under.    My guess is that the dividend heros are very unlikely to go under or even lose much.    Pretty much follows Buffet's first rule. 

As a side note check out this cool list of companies over 100 years old.   I was really surprised by the huge number of them.   http://i.usatoday.net/money/_pdfs/11-0615-centurions.pdf

I notice a lot of people like to quote the titans of investing and completely don't understand their quotes.

Buffett's large holdings pay dividends and give him a huge amount of cash. BRK doesn't give a dividend because Buffett believes he can do better with that money than paying it out to shareholders. Once Buffett passes the torch, it won't be long till BRK pays a dividend.

Can't imagine why well run companies that consistently pay and raise their dividends would not outperform companies that pay no dividends.   Dividends basically say --- "hey,  we are a real business who makes real profits." 

So in the S and P you have a large mix of many companies,  many of which will go under.    My guess is that the dividend heros are very unlikely to go under or even lose much.    Pretty much follows Buffet's first rule. 

As a side note check out this cool list of companies over 100 years old.   I was really surprised by the huge number of them.   http://i.usatoday.net/money/_pdfs/11-0615-centurions.pdf

Essentially the dividend aristocrats take the titans of the S&P 500 and ignore all the garbage in the S&P 500. Big surprise it'd out perform...

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #18 on: April 01, 2015, 01:34:34 PM »
This index starts with the S&P 500 and refines it only selecting companies that have raised dividends for 25 consecutive years. Growing companies can afford to raise their dividend, companies where management is worried about the future of the business may pause growth or cut their dividends. The index is also equally weighted which increases exposure to mid caps within the S&P. The top 100 companies cannot make up 50%+ of the index if the fund is equally weighted. Remember cap weighting is implemented to sell indicies and promote liquidity; not to enhance growth.

There are a few things wrong with this line of thinking:

1. Many growing companies do not offer a dividend but offer great total return.  Old or young many good companies reinvest profits at good returns.  You have selected these OUT. 
2. If you want to compare market cap weight to equal weight that is a whole different topic.

If the Dividend Aristocrat method is so good, why hasn't SDY (even if it is not exactly what you recommend) shown outperformance of the total stock market in the last six years?

SDY tracks the HIGH YIELD dividend aristocrats which is a totally different animal.

Quote
The S&P High Yield Dividend Aristocrats® index is designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years.

The S&P High Yield Dividend Aristocrats is weighted by indicated annual dividend yield, with constituents being re-weighted every quarter. The qualifying universe is reviewed once a year in January.

High yielding stocks typically are associated with more risk and lower market caps are associated with more risk. So SDY tracks an index that more heavily weights risk selecting from a riskier index. 

Quote
1. Many growing companies do not offer a dividend but offer great total return.  Old or young many good companies reinvest profits at good returns.  You have selected these OUT. 

I totally agree with this point. I believe dividends are a sign that a company cannot find adequate return for earned cash and returns it to shareholders instead of investing it themselves. A good company, like Berkshire, will never had this problem and can compund profits for their shareholders instead of giving it back and letting their investors get hit with taxes.

Never the less, the Dividend Aristocrat index has handily outperformed the indexes funds many people here hold. I'm posing there is a better way to select investments than the market cap weighting popular with so many indexes.

Quote
If Bogle is selling he should charge more than 5 basis points for it!  And maybe structure the company so he holds a big chunk of it rather than giving it away to the fund holders.

Vanguard holds $3 Trillion dollars at an average expense ratio of 0.24%. This is $7.2 Billion in management fees per year. At a 30% profit margin similar the Black Rock they would be making 2.2 B in earnings per year. This easily equates to 30B+ market cap if Vanguard were a public company. They may be shareholder owned and doing good in the world, but rest assured they are selling something.     

skyrefuge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #19 on: April 01, 2015, 01:40:52 PM »
The index is also equally weighted which increases exposure to mid caps within the S&P. 

This seems like the main area to look in to explain the difference. Here are four other dividend-focused index funds, none of which show outperformance over the 2007-2015 period.

None of those four are equal-weighted. The two Vanguard funds are cap-weighted, and SDY and DVY are dividend-weighted.

It would be interesting to see SPDAUDT (and maybe RSP, the equal-weight S&P500 ETF) overlaid on those four for that 2007-2015 time period.
« Last Edit: April 01, 2015, 01:49:07 PM by skyrefuge »

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #20 on: April 01, 2015, 01:56:31 PM »
The index is also equally weighted which increases exposure to mid caps within the S&P. 

This seems like the main area to look in to explain the difference. Here are four other dividend-focused index funds, none of which show outperformance over the 2007-2015 period.

None of those four are equal-weighted. The two Vanguard funds are cap-weighted, and SDY and DVY are dividend-weighted.

I agree that the equal weight might have a lot to do with it. That chart does not take into account for total returns so it would be discounting all the dividends paid from the stock price.

I would like to see what the Aristocrats Index would look like with cap weighting rather than equal weighting to see if the dividend criteria has anything to do with the out performance.   


skyrefuge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #21 on: April 01, 2015, 04:00:31 PM »
That chart does not take into account for total returns so it would be discounting all the dividends paid from the stock price.

The Morningstar chart I linked? No, that's a total-return chart.

I would like to see what the Aristocrats Index would look like with cap weighting rather than equal weighting to see if the dividend criteria has anything to do with the out performance.

Yeah, too bad out of the zillions of indexes out there, no one seems to have made this one (much less a fund based on it). The closest might be VIG, which tracks the NASDAQ US Dividend Achievers Select Index. It's only 10 years vs. 25, its method used to filter the NASDAQ US Broad Dividend Achiever Index from 265 stocks to 181 is "proprietary" and unspecified, and it uses a modified cap-weighting that limits weights to 4% or less. So not great data, but, eh, it's something. Its performance has been somewhat better than the S&P500 over the 2007-2015 period, but not noticeably so like SPDAUDT, and substantially less so than RSP.

scottish

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #22 on: April 01, 2015, 05:53:43 PM »
Will that Bloomberg terminal spit out a spreadsheet with the holdings year by year?   We could dissect it and get a better feel for what happened...

Indexer

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #23 on: April 01, 2015, 07:38:59 PM »
Quote
If Bogle is selling he should charge more than 5 basis points for it!  And maybe structure the company so he holds a big chunk of it rather than giving it away to the fund holders.

Vanguard holds $3 Trillion dollars at an average expense ratio of 0.24%. This is $7.2 Billion in management fees per year. At a 30% profit margin similar the Black Rock they would be making 2.2 B in earnings per year. This easily equates to 30B+ market cap if Vanguard were a public company. They may be shareholder owned and doing good in the world, but rest assured they are selling something.   

Got a source for that data?  Average ER is 0.18%, and that is just talking all the funds ERs and dividing by the number of funds.  Since their biggest funds also tend to be the cheapest when you look at the average ER based on assets it is even lower.  They also run at-cost.  No profits....   They sell their funds because they think more people should benefit from lower expenses, not because they want to make billions in profits.   Look at the size of Vanguard compared to Fidelity, and then look at the Net Worth of Bogle VS the family that owns Fidelity... and tell me he isn't a saint.



On to the dividend aristocrats index.  Consider what would happen in the index when a company decided to stop paying dividends... and then what would happen in reality.  If a company declares it isn't paying dividends anymore its out of the index.  At the time that the company made that announcement the expected dividend stream was likely priced into the stock price.  Now the stock price drops, but the index has already removed it from the index so the drop isn't included.  You the trader will be competing against every other trader trying to dump it at the same time.  This would explain why SDY and similar funds don't track the index very well.  Just to give you a list of companies this happened with....

Bank of America in 2008, BB&T bank in 2009, Comerica Financial in 2008, Fifth Third bank in 2008, US bancorp in 2009, First Horizon bank in 2008, Gannett company in 2009, General Electric in 2009, Johnson Controls in 2008,  KeyBank in 2009, Legg Masons investments in 2009, M&T bank in 2009, Nucor Steel in 2008, Progressive Insurance in 2008, Regions Financial in 2008, etc. 

2 years worth of companies, and I didn't even list every company from those 2 years.  I left out the companies I figured no one would recognize.  The whole list of companies removed for all years is insanely long.  Now the index doesn't have to worry about the price dropping off a cliff and zero liquidity on the day they remove a stock from the index.  However if you owned all those banks in 2008-2009 imagine 'you' trying to sell those stocks on the day that they announced they weren't paying dividends and everyone else is selling them at the exact same time. 

I'm going to create an index that adds every company the microsecond they post higher than expected earnings and removes every company the microsecond they post lower than expected earnings.  Sounds great right!   Replicating it however...
« Last Edit: April 01, 2015, 07:55:20 PM by Indexer »

hodedofome

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #24 on: April 01, 2015, 08:10:17 PM »
A company that pays a dividend for 25 years is probably a decently run business. It may be considered another way to screen for quality. Quality is a factor that has been shown to outperform the market. It could be that's where the outperformance comes from. The equal weighting certainly helps as well.

innerscorecard

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #25 on: April 01, 2015, 09:05:37 PM »
A company that pays a dividend for 25 years is probably a decently run business. It may be considered another way to screen for quality. Quality is a factor that has been shown to outperform the market. It could be that's where the outperformance comes from. The equal weighting certainly helps as well.

You could also beat the market decently with an ETF of all companies starting with the letter A. Or B. or C. And so on. Turns out, literally any way of weighting other than market-cap weighting is superior in respect to returns. That's why "fundamental indexes" have done well. They simply randomize errors, instead of committing the huge error of weighting by market capitalization.

skyrefuge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #26 on: April 01, 2015, 09:49:27 PM »
On to the dividend aristocrats index.  Consider what would happen in the index when a company decided to stop paying dividends... and then what would happen in reality.  If a company declares it isn't paying dividends anymore its out of the index.  At the time that the company made that announcement the expected dividend stream was likely priced into the stock price.  Now the stock price drops, but the index has already removed it from the index so the drop isn't included.

Nope. I suppose all dividend-focused indexes are different, but S&P Dividend Aristocrats index specifically says that it only removes companies at its January rebalance, or, at one of the other quarterly rebalances the administrators feel like it'd need to be removed in January anyway. Only if the company is removed from the underlying S&P 500 is it removed immediately.

S&P 500 Dividend Aristocrats Methodology (pdf)

Furthermore, a dividend cut doesn't always result in a dive in the stock price. Sometimes the opposite happens, presumably as shareholders say "yay, they're smart enough to stop giving away their money!" So even if an index does immediately eject a company immediately after a dividend cut, that might not necessarily give the index an unfair advantage over a fund that implements that index.

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #27 on: April 02, 2015, 06:35:39 AM »
I looked into the source of the tracking error between NOBL and SPDAUDT. As NOBL seems to be off the index by 3-4% since inception. I realized SPDAUDT is the Dividend Aristocrat Index Total Return tracker meaning dividend reinvestment was left out. SPDAUDP is the price tracker.

Here is the chart showing SPDAUDT, SPDAUDP, and NOBL. Noble should have a slight tracking error from the 35bp expense ratio, but it appears to have outperformed the price tracker for a year now. I would expect this to revert to a 35bp tracking error in the future.


LordSquidworth

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #28 on: April 02, 2015, 06:54:17 AM »
Bank of America in 2008, BB&T bank in 2009, Comerica Financial in 2008, Fifth Third bank in 2008, US bancorp in 2009, First Horizon bank in 2008, Gannett company in 2009, General Electric in 2009, Johnson Controls in 2008,  KeyBank in 2009, Legg Masons investments in 2009, M&T bank in 2009, Nucor Steel in 2008, Progressive Insurance in 2008, Regions Financial in 2008, etc. 

Oh look. A bunch of bank and insurance companies during the worst financial melt down since the Great Depression.

ChrisLansing

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #29 on: April 02, 2015, 07:04:00 AM »
I don't have a dog in this fight but citing Buffet when talking about dividends... hilarious. BRK has never, ever paid one and probably never will and Buffet is on the record very clearly about why. You might want to check it out.

-W


This is pretty much true, but to be very very technical BRK did pay a 10 cent's per share dividend in 1967.   


It's interesting, at least to me, that many of BRK's holdings are dividend Aristocrats.   

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #30 on: April 02, 2015, 07:16:43 AM »
Quote
Quote
If Bogle is selling he should charge more than 5 basis points for it!  And maybe structure the company so he holds a big chunk of it rather than giving it away to the fund holders.

Vanguard holds $3 Trillion dollars at an average expense ratio of 0.24%. This is $7.2 Billion in management fees per year. At a 30% profit margin similar the Black Rock they would be making 2.2 B in earnings per year. This easily equates to 30B+ market cap if Vanguard were a public company. They may be shareholder owned and doing good in the world, but rest assured they are selling something.   

Got a source for that data?  Average ER is 0.18%, and that is just talking all the funds ERs and dividing by the number of funds.  Since their biggest funds also tend to be the cheapest when you look at the average ER based on assets it is even lower.  They also run at-cost.  No profits....   They sell their funds because they think more people should benefit from lower expenses, not because they want to make billions in profits.   Look at the size of Vanguard compared to Fidelity, and then look at the Net Worth of Bogle VS the family that owns Fidelity... and tell me he isn't a saint.

Source: https://about.vanguard.com/who-we-are/fast-facts/

You are right about the Average ER, it is 0.18%. I googled for the 0.24%.

From the Vanguard website:

Quote
Average expense ratio - 0.18% (U.S. fund expenses as a percentage of 2014 average net assets)

Total assets - About $3 trillion in global assets under management, as of December 31, 2014

I was wrong. Vanguard's revenue is closer to $5.4 Billion. 

Here is a little about Vanguard employee compensation: https://careers.vanguard.com/vgcareers/why_vgi/benefits/compensation.shtml

Also retirement:

Quote
As a crew member, you can build lifetime assets and security by participating in the Vanguard Retirement and Savings Plan (RSP). You have several ways to build your retirement savings:
From your first day, Vanguard will set aside an amount equal to 10% of your base pay each quarter. You'll be 100% vested in this account after six years of service.
You'll be automatically enrolled in the 401(k) portion of the RSP at 4% of your base pay. However, you can set aside any amount, from 0% to 50% of your pay.
After you've worked one full year, Vanguard will match your contributions, up to 4% of base pay.
You also have access to discounted financial plans and other planning tools.

So 10% set aside for you in some sort of company retirement account (pension?) along with 4% matching on your 401k.

PTO starts at 18 days and increases with tenure.

The point is Vanguard has money. It is not a charity. Vanguard is still a business. The founder, Bogle, has a responsibility to the company to promote their product.

 

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #31 on: April 02, 2015, 07:23:12 AM »
Will that Bloomberg terminal spit out a spreadsheet with the holdings year by year?   We could dissect it and get a better feel for what happened...

I found this:



http://www.suredividend.com/list-of-dividend-aristocrats-from-1989-to-2014/

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #32 on: April 02, 2015, 07:39:54 AM »
The index is also equally weighted which increases exposure to mid caps within the S&P. 

This seems like the main area to look in to explain the difference. Here are four other dividend-focused index funds, none of which show outperformance over the 2007-2015 period.

None of those four are equal-weighted. The two Vanguard funds are cap-weighted, and SDY and DVY are dividend-weighted.

It would be interesting to see SPDAUDT (and maybe RSP, the equal-weight S&P500 ETF) overlaid on those four for that 2007-2015 time period.

Skyrefuge,

Here is SPDAUDT total return overlaid with the S&P 500 Equal Weighted Index total return.



It seems like the equal weighting employed by SPDAUDT has more to do with its performance over the S&P than the constituents being dividend aristocrats. SPDAUDT does show some out-performance over the S&P EWI during the recession and slight under-performance before the recession. I tend to think the constituents of the dividend aristocrat index are of higher quality on a whole than the S&P 500 leading to them holding up better during "flights to safety". Quality has been shown to be an out-performance indicator and using the SPDAUDT selection criteria is just one way to select for quality. Equal weighting looks to do the rest.

I think the big take away from this is the float weighting of indexes is not the most effective way to allocate a portfolio.

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #33 on: April 02, 2015, 07:56:56 AM »
Turns out, literally any way of weighting other than market-cap weighting is superior in respect to returns. That's why "fundamental indexes" have done well. They simply randomize errors, instead of committing the huge error of weighting by market capitalization.

This is obviously not true. Sometimes other indexes outperform. Sometimes they lag.

theoverlook

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #34 on: April 02, 2015, 08:20:27 AM »
No comment on the Dividend Aristocrats, but I am surprised that a user would be able to delete their entire thread and have all the replies disappear along with it.  That's a strange configuration for a public forum.

brooklynguy

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #35 on: April 02, 2015, 09:18:04 AM »
No comment on the Dividend Aristocrats, but I am surprised that a user would be able to delete their entire thread and have all the replies disappear along with it.  That's a strange configuration for a public forum.

Didn't you read the fine print when you signed up as a participant in this forum?  I hope so, because there's an important clause about the moderators' ability to erase you from existence, not only on this forum, but IRL.

sirdoug007

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #36 on: April 02, 2015, 09:51:00 AM »
I tend to think the constituents of the dividend aristocrat index are of higher quality on a whole than the S&P 500 leading to them holding up better during "flights to safety". Quality has been shown to be an out-performance indicator and using the SPDAUDT selection criteria is just one way to select for quality. Equal weighting looks to do the rest.

I think the big take away from this is the float weighting of indexes is not the most effective way to allocate a portfolio.

Here's an idea.  Maybe the performance of the Dividend Aristocrats has something to do with the popularity of dividend strategies in the last 10 years.  A self fulfilling prophesy!

I think this could be especially true when dividend stocks "pay" more than treasuries and high quality corporate bonds.  Many people think they are getting close to risk free return with the dividend aristocrats.  That is obviously not true as you own equity and not secured debt, but that doesn't stop people from believing it (especially for relatively short periods).  See Keynes quote below :)
« Last Edit: April 02, 2015, 09:52:42 AM by sirdoug007 »

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #37 on: April 02, 2015, 10:19:06 AM »
The index is also equally weighted which increases exposure to mid caps within the S&P. 

This seems like the main area to look in to explain the difference. Here are four other dividend-focused index funds, none of which show outperformance over the 2007-2015 period.

None of those four are equal-weighted. The two Vanguard funds are cap-weighted, and SDY and DVY are dividend-weighted.

It would be interesting to see SPDAUDT (and maybe RSP, the equal-weight S&P500 ETF) overlaid on those four for that 2007-2015 time period.

Skyrefuge,

Here is SPDAUDT total return overlaid with the S&P 500 Equal Weighted Index total return.



It seems like the equal weighting employed by SPDAUDT has more to do with its performance over the S&P than the constituents being dividend aristocrats. SPDAUDT does show some out-performance over the S&P EWI during the recession and slight under-performance before the recession. I tend to think the constituents of the dividend aristocrat index are of higher quality on a whole than the S&P 500 leading to them holding up better during "flights to safety". Quality has been shown to be an out-performance indicator and using the SPDAUDT selection criteria is just one way to select for quality. Equal weighting looks to do the rest.

I think the big take away from this is the float weighting of indexes is not the most effective way to allocate a portfolio.

I don't think that's the takeaway. Midcaps in general outperformed large caps during the 2005-present era. But largecaps in general outperformed midcaps during the 15 years before that. Equalweighted indexes look great the past 10 years, and terrible the 15 years before that. I think market weighting in general may be a reasonable way to create an index. There are other ways as well. Some will outperform in some years, and underperform in others. I think market cap weighting the entire market may be the best for the long term simply because it minimizes the trading costs, and provides a proportional ownership of the entire market.

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #38 on: April 02, 2015, 10:23:41 AM »
I tend to think the constituents of the dividend aristocrat index are of higher quality on a whole than the S&P 500 leading to them holding up better during "flights to safety". Quality has been shown to be an out-performance indicator and using the SPDAUDT selection criteria is just one way to select for quality. Equal weighting looks to do the rest.

I think the big take away from this is the float weighting of indexes is not the most effective way to allocate a portfolio.

Here's an idea.  Maybe the performance of the Dividend Aristocrats has something to do with the popularity of dividend strategies in the last 10 years.  A self fulfilling prophesy!

I think this could be especially true when dividend stocks "pay" more than treasuries and high quality corporate bonds.  Many people think they are getting close to risk free return with the dividend aristocrats.  That is obviously not true as you own equity and not secured debt, but that doesn't stop people from believing it (especially for relatively short periods).  See Keynes quote below :)

See the performance of the Index during a period of rising interest rates in 1994 in a post near the top.

I don't think dividends are the reason the index has outperformed. It probably has more to do with quality. MSFT and GOOG are two high quality tech names that are not in the index because they don't have enough dividend history, not many would disagree Berkshire is high quality but doesn't pay dividends, so using dividends to select for quality may not be the best metric but seems to be a decent indicator. Most of the out-performance was due to equal weighting, ie tilting toward the mid caps in index rather that over weighting the mega caps like XOM and IBM. 

skyrefuge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #39 on: April 02, 2015, 10:45:11 AM »
Here is SPDAUDT total return overlaid with the S&P 500 Equal Weighted Index total return.

And here it is with the S&P 500 Cap Weighted Index total return added (in purple):



So yeah, the two equal-weight indexes track each other much more closely than the cap-weighted index does (10.7% and 10.1% CAGR for EWI vs. 8.0% CAGR for CWI), suggesting the weighting is a lot more important than the dividends.

I think the big take away from this is the float weighting of indexes is not the most effective way to allocate a portfolio.

I think you kind of need to define "most effective" before making that statement. Sure, any index that weights its components differently than a cap-weighted index will have different results, but they won't be universally "better". In the case of equal-weighting, you're almost always going to be increasing your tilt toward smaller companies, and thus, probably increasing your risk. Sure, you can create an index with a higher expected-return than a cap-weighted index, but if it also has a higher expected risk (meaning its risk-adjusted return is no better), does that make it "more effective"?

I mostly don't like the idea of equal-weighted indexes because they're terribly inelegant. In a cap-weighted index, if a company takes its 3 product divisions and splits them into 3 separate companies, nothing really changes in my portfolio, which makes sense, since nothing in the underlying financial picture has really changed. But in an equal-weighted index, suddenly money gets taken out of all the other companies I'm invested in so that I can have 3x more of my money in the newly-divided company? Huh?

I'm also skeptical of alternative weightings because they're pretty obvious attempts by financial companies to find ways to profit within the increasing trend towards indexing. All the "indexing" money will just end up going to Vanguard unless other companies can differentiate themselves, so alternative weightings are a way for them to say "hey, we're still adding value you can't get at Vanguard, so give your money to us!" That doesn't mean no one will ever create a better index than Vanguard, but their more-selfish motivations give them a higher burden of proof in my mind.

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #40 on: April 02, 2015, 10:51:25 AM »
I don't think that's the takeaway. Midcaps in general outperformed large caps during the 2005-present era. But largecaps in general outperformed midcaps during the 15 years before that. Equalweighted indexes look great the past 10 years, and terrible the 15 years before that. I think market weighting in general may be a reasonable way to create an index. There are other ways as well. Some will outperform in some years, and underperform in others. I think market cap weighting the entire market may be the best for the long term simply because it minimizes the trading costs, and provides a proportional ownership of the entire market.

Midcap Blend vs Large Cap Blend (very similar to S&P 500 performance wise) for the 15 years before 2005.

Midcap Blend   Large Cap Blend

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #41 on: April 02, 2015, 10:56:15 AM »
I don't think that's the takeaway. Midcaps in general outperformed large caps during the 2005-present era. But largecaps in general outperformed midcaps during the 15 years before that. Equalweighted indexes look great the past 10 years, and terrible the 15 years before that. I think market weighting in general may be a reasonable way to create an index. There are other ways as well. Some will outperform in some years, and underperform in others. I think market cap weighting the entire market may be the best for the long term simply because it minimizes the trading costs, and provides a proportional ownership of the entire market.

Midcap Blend vs Large Cap Blend (very similar to S&P 500 performance wise) for the 15 years before 2005.

Midcap Blend   Large Cap Blend


http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

Not sure if or why Rick's numbers differ from yours.


Dodge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #43 on: April 02, 2015, 11:17:08 AM »
Dodge,

Here is the Index SPDAUDT vs NOBL, the S&P 500, and SDY since the inception of SDY. SDY has an expense ratio of 0.35%. I would expect that to weigh on the index on the ETF a bit. Also, there is going to be tracing error because NOBL is updated quarterly while the index is updated as companies issue their results. Replicating the index yourself is probably superior to using NOBL if you have 50k+ invested.



Based on Skyrefuge's post, the SPDAUDT index updates either at the January rebalance, or quarterly as well, so this doesn't explain the growing divide between SPDAUDT and NOBL.  It seems NOBL is following in the footsteps of SDY.  Something else is going on.  Perhaps the better question is:

Why does the Dividend Aristocrats Index beat the S&P 500, but no one following the index does?

or

Why can't the dramatic outperformance of the Dividend Aristocrats Index be replicated in the real world?

Dodge

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #44 on: April 02, 2015, 11:18:41 AM »
No comment on the Dividend Aristocrats, but I am surprised that a user would be able to delete their entire thread and have all the replies disappear along with it.  That's a strange configuration for a public forum.

Me too.  I thought it would get a "Moved to Graveyard" tag, with the link still active.  That's how it typically has worked for me anyway.

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #45 on: April 02, 2015, 11:20:47 AM »
I think you kind of need to define "most effective" before making that statement. Sure, any index that weights its components differently than a cap-weighted index will have different results, but they won't be universally "better". In the case of equal-weighting, you're almost always going to be increasing your tilt toward smaller companies, and thus, probably increasing your risk. Sure, you can create an index with a higher expected-return than a cap-weighted index, but if it also has a higher expected risk (meaning its risk-adjusted return is no better), does that make it "more effective"?

I mostly don't like the idea of equal-weighted indexes because they're terribly inelegant. In a cap-weighted index, if a company takes its 3 product divisions and splits them into 3 separate companies, nothing really changes in my portfolio, which makes sense, since nothing in the underlying financial picture has really changed. But in an equal-weighted index, suddenly money gets taken out of all the other companies I'm invested in so that I can have 3x more of my money in the newly-divided company? Huh?

I'm also skeptical of alternative weightings because they're pretty obvious attempts by financial companies to find ways to profit within the increasing trend towards indexing. All the "indexing" money will just end up going to Vanguard unless other companies can differentiate themselves, so alternative weightings are a way for them to say "hey, we're still adding value you can't get at Vanguard, so give your money to us!" That doesn't mean no one will ever create a better index than Vanguard, but their more-selfish motivations give them a higher burden of proof in my mind.

That is a good analogy of a company spinning of a division and all of a sudden you own a higher % of the company in an equal weight index. My problem with cap weighting is it essentially forces you to buy high when you are adding money. For example, during the tech boom in 1999-2000 as tech companies became more and more valuable your contributions to a float/cap weighted index fund bought larger and larger proportions of the high flying tech companies as they grew.

Float/Cap weighting is used to facilitate indexing. Ie. Vanguard cannot stash $3T into the stock market if they are not stashing most of it in AAPL. If all of a sudden Vanguard said we will equal weight everything in the S&P 500, they would have to invest $6B in each company which means they would have to own about 25 of the component companies outright! I do agree equal weighting doesn't make a lot of sense but neither does float weighting. There has to be a better way to weight a portfolio than saying 50% Total Market, 20% International, 30% Bonds <- or whatever variation. Using VTSAX and calling it a day really tilts a portfolio toward large caps and even mixing in mid and small cap funds heavily weights the largest mid and small cap companies.     

I would qualify the most effective portfolio is one that gives you even exposure to all market caps, sectors, and geographies. It should hold uncorrelated assets, bonds, and alternatives. I completely agree with you about financial companies trying to find ways to profit and get some business away from Vanguard. I would like to find ways to allocate funds within Vanguard to minimize the effect of allocating funds according to market cap.

index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #46 on: April 02, 2015, 11:26:05 AM »
Quote
Based on Skyrefuge's post, the SPDAUDT index updates either at the January rebalance, or quarterly as well, so this doesn't explain the growing divide between SPDAUDT and NOBL.  It seems NOBL is following in the footsteps of SDY.  Something else is going on.  Perhaps the better question is:

Why does the Dividend Aristocrats Index beat the S&P 500, but no one following the index does?

or

Why can't the dramatic outperformance of the Dividend Aristocrats Index be replicated in the real world?

Dodge,

Read the thread!

Spoon feeding now... See the post from earlier:

I looked into the source of the tracking error between NOBL and SPDAUDT. As NOBL seems to be off the index by 3-4% since inception. I realized SPDAUDT is the Dividend Aristocrat Index Total Return tracker meaning dividend reinvestment was left out. SPDAUDP is the price tracker.

Here is the chart showing SPDAUDT, SPDAUDP, and NOBL. Noble should have a slight tracking error from the 35bp expense ratio, but it appears to have outperformed the price tracker for a year now. I would expect this to revert to a 35bp tracking error in the future.



index

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #47 on: April 02, 2015, 11:33:36 AM »

http://www.forbes.com/sites/rickferri/2013/04/29/no-free-lunch-from-equal-weight-sp-500/

Not sure if or why Rick's numbers differ from yours.

I don't think they do. It looks like large caps did outperform from 1990-1999 though the divergence started in 1997 so the out-performance period seems more appropriate to say 97-99. The large caps were participating in the tech boom during this time period. Its not hard to have a bunch of large caps showing tremendous growth in price when they are trading at 10x revenue!!! The trend quickly corrected in 2000. Heck two of the ten largest companies in the S&P 500 effectively went out of business! (Lucent and AOL).

forummm

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #48 on: April 02, 2015, 11:48:21 AM »
No comment on the Dividend Aristocrats, but I am surprised that a user would be able to delete their entire thread and have all the replies disappear along with it.  That's a strange configuration for a public forum.

Me too.  I thought it would get a "Moved to Graveyard" tag, with the link still active.  That's how it typically has worked for me anyway.

Yeah. I thought we learned some stuff on the thread that others may have benefitted from learning as well.

tj

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Re: Why does the Dividend Aristocrats Index beat the S&P 500?
« Reply #49 on: April 02, 2015, 11:49:23 AM »
Quote
I would qualify the most effective portfolio is one that gives you even exposure to all market caps, sectors, and geographies. It should hold uncorrelated assets, bonds, and alternatives. I completely agree with you about financial companies trying to find ways to profit and get some business away from Vanguard. I would like to find ways to allocate funds within Vanguard to minimize the effect of allocating funds according to market cap.

I would guess the simplest way for you to achieve this strategy at Vanguard would be to consider the Vanguard Managed Payout Fund with the payouts re-invested of course.

They will be adding alternatives to this fund.

https://personal.vanguard.com/us/funds/snapshot?FundId=1498&FundIntExt=INT#tab=2

http://blogs.wsj.com/moneybeat/2015/03/10/vanguards-alt-fund-has-investing-community-abuzz/