EC Dividend Aristocrat Correlation Pairs

On June 27th, 2014, I published an article discussing pairing Dividend Aristocrats based on their correlations. The 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