EC Dividend Aristocrat Correlation Pairs

On June 27th, 2014, I published an article discussing pairing Dividend Aristocrats based on their correlationsThe idea behind the article was to further reduce volatility in Dividend Aristocrat positions by pairing together the most uncorrelated Dividend Aristocrats.

Back in June of 2014, the most uncorrelated pair was Medtronic (MDT) and McDonald’s (MCD).The pair had a correlation of just 0.12; which is very low.

In the 2 year period from July 2014 through June 2016, the low correlation Dividend Aristocrat pair reduced volatility:

  • Medtronic annualized standard deviation was 19.9%
  • McDonald’s annualized standard deviation was 17.2%
  • Pair annualized standard deviation was 15.8%
  • S&P 500 annualized standard deviation was 14.8%

Returns were also very high:

  • Pair annualized total returns (without rebalancing) were 15.5%
  • S&P 500 annualized total returns were 5.2%

The returns portion can be attributed to luck; the purpose of pairing off Dividend Aristocrats is not to maximize returns; it is to reduce volatility.

What was interesting about the Medtronic/McDonald’s pair is how intuitively these businesses are ‘opposites’. Medtronic’s largest segment sells devices that treat cardiac and vascular symptoms.

I’m not a health food advocate – I eat at McDonald’s myself from time to time. But even ardent McDonald’s fans will likely agree that the company’s burger/fries/soda meal is far from ‘heart healthy’. One could even argue that McDonald’s is indirectly driving Medtronic’s sales.

Current Pairs Methodology

The 1 year correlation matrix for all 50 Dividend Aristocrats from August of 2015 through July of 2016 can be downloaded here (the spreadsheet provides a much clearer picture than the image below):

Dividend Aristocrats Correlation

The top 10 lowest correlation pairs are listed below:

  1. 0560 Consolidated Edison (ED) and Franklin Resources (BEN)
  2. 0599 Consolidated Edison and Nucor Steel (NUE)
  3. 0685 Consolidated Edison and S&P Global (SPGI)
  4. 0696 Consolidated Edison and AbbVie (ABBV)
  5. 0698 Hormel (HRL) and AbbVie
  6. 0702 Consolidated Edison and Cardinal Health (CAH)
  7. 0707 Consolidated Edison and Dover (DOV)
  8. 0849 Consolidated Edison and Pentair (PNR)
  9. 0922 Consolidated Edison and V.F. Corp. (VFC)
  10. 0972 Consolidated Edison and T. Rowe Price Group (TROW)
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Disclosure: None.

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Dividend Diplomats 4 years ago Contributor's comment

As always, interesting stuff here Ben. I'm digging the correlation analysis. One I definitely haven't seen before and has produced some interesting results!