Shopping List March 2019 (Beta)

As an experiment, we want to provide on a monthly basis a list of dividend aristocrats from the S&P 500, that we believe are more attractive in relative terms than all other dividend aristocrats. At Optarix we call this list our "shopping list". To determine what goes on the list we are using a combination of price/earning ratio (P/E ratio) and dividend yield that is then translated into a score.

The list for March 2019 looks as follows:

Rank	Name	Ticker	Price (USD)	P/E ratio	Yield
1	AT&T Inc.	T	30.67	8.713	6.74%
2	AbbVie Inc.	ABBV	81.34	10.283	5.35%
3	Cardinal Health Inc	CAH	50.27	10.473	3.75%
4	People’s United Financial Inc	PBCT	17.36	13.252	4.01%
5	Exxon Mobil Corporation	XOM	80.15	16.094	4.08%
6	Franklin Resources Inc.	BEN	33.32	10.413	3.20%
7	Chevron Corporation	CVX	125.31	15.963	3.82%

As a reference: As of writing the S&P 500 (SPX) stands at 2,822.48 and the S&P 500 Dividend Aristocrats stands at 1,187.79.

The intention is to publish our shopping list on a regular basis and then revisit the list in the future.

How To Use The Shopping List
At Optarix we use this shopping list to compile a shortlist of positions we consider adding or increasing in our portfolio. At present we have shares in all of the above except for People's United Financial and Chevron. So we may choose to add these or we may choose to increase our positions in any of the other five over the next five months.

If you wish, you could use this list in different ways:

1. To start a portfolio, invest an equal amount in each of these seven stocks
2. If you have a diversified portfolio already, you can use this list to pick one or several to your portfolio
3. If you have all of them in your portfolio already, then you could consider adding to one or several of these seven positions in your portfolio

Please note that there are several other factors that you may want to consider.

If you choose to start a new position, buy the stock only with an intention to keep them for at least 10 years. At Optarix our preferred holding period is "indefinitely".

The stocks in the shopping list are attractive on our view relative to the other dividend aristocrats in the S&P 500. We cannot say - in fact nobody can - how these stocks will perform in the future, relatively or absolutely. In particular we cannot make any predictions for these stocks as a group or for any of these individual stocks.

We believe, though, that all dividend aristocrats as a group represent a good, long-term investment and should see satisfactory average yearly returns over the next 10 years and beyond. "average yearly returns" means for any give year we may even see a negative return, e.g. the stock market may decrease a large percentage. Keep in mind that in the first decade of the century, the S&P 500 was down by over 60% year-on-year at a point.

You need to do your own due diligence. This post is not investment advice. If you choose to use the information in this post for inspiration and then go on doing more research on your own, then great! The stocks in the shopping list are a great fit for some portfolios. But they can be very bad choices for other portfolios, e.g. in terms of risk exposure to specific markets, industries, currencies, etc. or in terms of your investment goals and many more factors like these.

For the Optarix US portfolio we are considering to start new positions in either People's United Financal (PBCT) or Chevron (CVX) or both in the future. We may also choose to add to our positions that we hold in the other five stocks in the list.

Happy Investing!

Disclosure: We have positions in T, ABBV, CAH, XOM and BEN. We have no plans to initiate new or change existing positions in the next 48 hours.

Feb 2019 Results: +1.54% Active Return vs S&P 500

The start into calendar year 2019 was quite impressive. The upside is that – on paper – the portfolios of many US stock market investors have seen a very good increase of value. On the downside this means that the price/earning ratio (P/E ratio) is increased again significantly. The pool of issues to choose from that are fairly priced, let alone underpriced, has reduced again. Among dividend aristocrats there are only two companies with P/E ratios below 10, i.e. Nucor (Symbol: NUE) and AT&T (Symbol: T). At the other end of the spectrum there are 5 with a P/E ratio above 30, and no less than 27 with a P/E ratio of over 20.

Generally, we use a rule of thumb that the P/E ratio should be no more than what we estimate the annual growth of earnings per share (EPS) will be for the given company over the next 5 to 10 years. Obviously, we cannot look into the future. We don’t know what the share market will be doing this week, this month or this year. It will fluctuate up or down (or both) in some random manner. We are convinced, though, that high-quality companies will do as well as the overall stock market, and dividend aristocrats will increase their dividend each year. And if one them doesn’t, we’ll sell shares that we may have in that company over a short period of time and close that position.

Equally, it’s good to see that occasionally there is a new addition to the list of dividend aristocrats. In Feb 2019 the new entrant was People’s United Financial Inc. (Symbol: PBCT). Using our own ranking system, PBCT is on position 1 of our “shopping list” at the moment. Generally, this means we may start a new position, typically by spreading several buys over the next 12 months.

Let’s now turn to the specific results for the Optarix US portfolio. For the 12 months endings 28 Feb 2019, the S&P returned 2.85% while our US portfolio returned 4.39%. Remember that we calculate all numbers after fees and after all taxes. These numbers mean that the Optarix US portfolio created an active return of +1.54%, i.e. this is the percentage in addition to what the S&P 500 returned for the same period. In the following graph you’ll see the active returns for the 12-month periods ending Feb 2018 to Feb 2019. There are 13 such periods.

This graph shows that overall the Optarix US portfolio did better than the S&P 500. One metric to assess the additional performance considering the additional risk is called “Information Ratio”. The metric is a number without unit. The higher the value the better. For the 12 months period ending 28 Feb 2019, the information ratio of our portfolio vs the S&P 500 was 1.43. Generally, any value greater than 0.6 is considered good or very good.

The following graph shows how the information ratio has developed from Nov 2018 to Feb 2019. Please do not read an upward trend into this graph. There is way too little data to support any trend in any direction. We are sharing this data just so that you get an impression of how the Optarix US portfolio is doing in terms of additional return and additional risk versus the S&P 500.

The annualized performance of the Optarix US portfolio as of 28 Feb 2019 is summarized in the following table:

	Optarix US	S&P 500	Active Return
Trailing 2 years	11.87%	8.67%	3.20%
Trailing 1 year	4.39%	2.85%	1.54%

As always, please keep in mind that past performance is no indicator for future performance. Numerous studies have shown this. We don’t believe that the Optarix US portfolio is any different. If we can get close to the performance of the S&P 500 in the long run, that’d be great. At times we will fall short, e.g. in the 12 months ending 30 Jun 2018 (see graph above).

If the performance is better from time to time, we take that as a bonus not as something that happens just because we are so much smarter. We are not. We are just trying to apply some common sense including a buy-and-hold strategy. And we are happy to share our experiences both good and bad. 

Happy investing!