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In my last article I showed that a number of dividend paying stocks had good returns during the "lost decade" of 2000 through 2012. Although the market as a whole went nowhere, it seems that a balanced portfolio of well diversified dividend growth stocks, taken from David Fish's CCC list, would have performed well. I pointed out that due to survivorship bias we can't know for sure exactly how such a portfolio would have performed in real time, but that the backtest still gave some valuable information.

In the comments section Chowder mentioned the problem with the survivorship bias, and suggested a group of stocks that would be more suitable for a backtest. He mentioned that he has books of the best 100 stocks to own for 1989, 1991, 1993 and 1996 and that the 34 stocks which appeared on all 4 lists would have been a more representative example of the stocks one actually would have bought in 2000, and would therefore make a much better sample for a backtest. I took the challenge and ran the backtest. The results are presented below.

First an explanation of my method. I took the 34 stocks Chowder listed and looked at their histories. Many were involved in mergers or take-overs, so final results could not be obtained for them because I was unable to obtain the stock price on December 31st, 1999. I decided to assume a worst case scenario. For each of these stocks I purchased an equal weighted position at the beginning of the test period, and then I gave that position a value of $0 at the end of the test period. This, obviously, is not what actually would have happened. Each of these stocks had a buy out price that would have represented the final value, but since I could not find what the starting price was, the ending price was irrelevant in determining a return. By assuming a complete loss for those positions I can be assured that I did not overstate how well the backtest performed. I can be sure that what I present is a worst case scenario, and that actually the portfolio would have done even better.

This chart shows the price on December 31st 1999 (purchase price), the price on December 24th 2012, or when the stock was sold due to a dividend cut or freeze (final value), the number of shares bought starting with an equal weighted value of $1000, the final value of those shares, and the total return. Some stocks would have been sold earlier than December 24th, 2012 due to a dividend cut or freeze. In these cases the final price represents (to my best approximation) the sale price when the dividend cut or freeze became known. All prices are the adjusted prices taken from Yahoo.com.

PurchaseFinalSharesEnd ValueReturn
Abbott Labs(NYSE:ABT)$24.20$65.4741$2,684.27170.54%
Automatic Data Proc.(NASDAQ:ADP)$37.44$57.4826$1,494.4853.53%
Bristol-Myers Squibb(NYSE:BMY)$35.63$32.4628$908.88-8.90%
ConAgra *(NYSE:CAG)$13.79$13.7672$990.72-0.22%
R.R. Donnelley & Sons *(NASDAQ:RRD)$13.41$21.7674$1,610.2462.27%
Fifth Third Bancorp *(NASDAQ:FITB)$35.73$21.9027$591.30-38.71%
Genuine Parts(NYSE:GPC)$15.30$63.8265$4,148.30317.12%
H.J. Heinz *(NYSE:HNZ)$24.41$21.3940$855.60-12.37%
Hershey Foods(NYSE:HSY)$17.60$73.0156$4,088.56314.83%
Kellogg(NYSE:K)$21.02$25.5247$1,199.4421.41%
McDonald's(NYSE:MCD)$30.18$89.2933$2,946.57195.86%
Merck *(NYSE:MRK)$39.51$34.5625$864.00-12.53%
Pall Corp(NYSE:PLL)$16.80$17.8159$1,050.796.01%
PepsiCo(NYSE:PEP)$26.70$69.4337$2,568.91160.04%
Philip Morris(NYSE:PM)$2.61$31.66383$12,125.781113.03%
Pitney Bowes(NYSE:PBI)$26.86$10.6937$395.53-60.20%
RPM(NYSE:RPM)$5.94$29.25168$4,914.00392.42%
Rubbermaid *(NYSE:NWL)$19.42$19.3651$987.36-0.31%
Sara Lee * **(NYSE:HSH)$20.01$16.7649$821.24-16.24%
A. Schulman *(NASDAQ:SHLM)$10.58$8.2294$772.68-22.31%
Shaw Industries #(NYSE:SHAW)$12.66$46.5078$3,627.00267.30%
Sherwin-Williams(NYSE:SHW)$15.96$152.6762$9,465.54856.58%
Torchmark *(NYSE:TMK)$16.91$23.3659$1,378.2438.14%
Tyson Foods *(NYSE:TSN)$13.93$10.3171$732.01-25.99%
Valspar(NYSE:VAL)$16.42$62.2360$3,733.80278.99%
Wal-Mart(NYSE:WMT)$57.12$68.5717$1,165.6920.05%
Walgreen(NYSE:WAG)$25.41$36.4739$1,422.3343.53%
Walt Disney *(NYSE:DIS)$24.69$18.7440$749.60-24.10%
William Wrigley ***(WWY)$25.00$80.0040$3,200.00220.00%

* Stock was sold early due to a dividend cut or freeze.

**Sara Lee is now named Hillshire Brands.

*** William Wrigley (WWY) was bought out by MARS, Inc., but I was still able to find the old price and dividend data for WWY.

# Shaw Industries did not pay a dividend during the test period, but I still included it since Chowder put it on his list of stocks he would have owned.

The other 5 stocks on Chowder's list were:

  • Albertson's, bought out by Supervalu (NYSE:SVU)
  • American Home Products, bought out by Wyeth and then Pfizer (NYSE:PFE)
  • Anheiser-Busch, bought out by Inbev (NYSE:BUD)
  • Banc One, bought out by JP Morgan (NYSE:JPM)
  • US Tobacco, bought out by Altria (NYSE:MO)

Summary. The starting value of the portfolio was $34,000, each stock starting with a value of $1000. The ending value was $71,492.86, even assuming a complete loss for Albertson's, American Home products, Anheuser-Busch, Banc One, and UST. This translates into a total return of 110.27%, easily beating the return of the S&P 500.

This confirms to me, once again, that a diversified portfolio of dividend growth stocks has great potential to beat the market over a long period of time.

Source: No Lost Decade If You Bought Dividend Stocks (Part II)