Seeking Alpha
Value, long-term horizon, dividend investing, dividend growth investing
Profile| Send Message| ()  

The Premise

A year ago, I published an article applying the "Dogs of the Dow" strategy to the Dividend Challengers, so it's only natural that I present a recap of that strategy. The original article can be found here, so I won't repeat the full text, but I said the following:

'It seems only natural to apply this strategy to a listing of companies that have increased their dividends for many years. The logic is the same: The yields on depressed stocks will have been driven up, giving the investor a group of candidates that have not only rebound potential, but also a strong dividend that "pays them to wait." (Note that I am submitting separate articles about the "Dogs" of the Dividend Champions (25 or more years of increases) and Contenders (10-24 years), so please look for those, as well.) As you may be aware, Dow Jones keeps separate indices for Utilities and Transports, so its "Dogs" exclude those groups. (One exception is that Telecommunications providers - which many of us consider Utilities - are included in the Dow Jones Industrial Average, so I will also include them.) The DJIA also excludes Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPS), and foreign stocks (traded as American Depository Shares, or ADRs), among other classifications, so I will also exclude those from consideration.'

Here was the resulting table of selections:

Company

Ticker

No.

12/30

Div.

Payout

TTM

Name

Symbol

Yrs

Price

Yield

%Ratio

P/E

National Presto Ind.

NPK

8

93.60

8.81

99.88

11.33

United Community Bp.

UCBA

5

5.53

7.96

4400.00

553.00

National CineMedia

NCMI

5

12.40

7.10

131.34

18.51

Cheviot Financial

CHEV

8

7.44

6.45

154.84

24.00

Birner Dental Mgmt.

BDMS

8

16.00

5.50

127.54

23.19

Reynolds American

RAI

8

41.42

5.41

98.68

18.25

Verizon Commun.

VZ

7

40.12

4.99

80.32

16.11

Lockheed Martin

LMT

9

80.90

4.94

46.78

9.46

American Greetings

AM

8

12.51

4.80

30.15

6.29

Waste Management

WM

9

32.71

4.34

69.27

15.96

I went on to mention several other companies with yields close to or above 4%, and to say that they might also be worthy of additional study. I used the description of "Danger Dogs" to alert readers to the Payout Ratios that were near or above 100% and the "overdue" dividend increase -- more than a year since the most recent increase - United Community Bancorp, possible signs that caution was advised.

The Results are in...

The following table shows how the 2012 Dividend Challenger Dogs did:

Company

Ticker

12/30/11

12/31/12

Price

2012

Total $

Total %

Name

Symbol

Price

Price

Change

Divs.

Return

Return

National Presto Ind. *

(NPK)

93.60

69.10

-24.50

12.50

-12.00

-12.82

United Community Bp.

(UCBA)

5.53

6.05

0.52

0.44

0.96

17.36

National CineMedia

(NCMI)

12.40

14.13

1.73

0.88

2.61

21.05

Cheviot Financial

(CHEV)

7.44

9.30

1.86

0.32

2.18

29.30

Birner Dental Mgmt.

(BDMS)

16.00

17.10

1.10

0.88

1.98

12.38

Reynolds American

(RAI)

41.42

41.43

0.01

2.33

2.34

5.65

Verizon Commun.

(VZ)

40.12

43.27

3.15

2.02

5.17

12.87

Lockheed Martin

(LMT)

80.90

92.29

11.39

4.15

15.54

19.21

American Greetings

(AM-OLD)

12.51

16.89

4.38

0.60

4.98

39.81

Waste Management

(WM)

32.71

33.74

1.03

1.42

2.45

7.49

Average Return:

15.23

*Dividends include accelerated 2013 (6.50) paid in December 2012

Conclusions

The 15.23% total return is easily above the 9.48% achieved for a Dow Dogs approach mentioned in the recent article by SA Contributor David Crosetti, which can be found here and much better than the familiar "10% over the past 75 years" that we've all read about for the overall market. (Note that I did not construct a hypothetical portfolio, say, of $1,000 investments in each company. I believe that exercise would have resulted in the same portfolio return and demonstrated that the $10,000 investment would have ended with a value of $11,523...but slightly more if the dividends had been reinvested, instead of simply received.)

In 2012, the S&P 500, which is often used as a benchmark, rose by 13.4% in price and had a total return of about 16% with reinvested dividends, so it would be all too easy to say that the Dogs approach was inferior. But that view suffers from a short-term focus, which may be inappropriate for a long-term investor. The Dogs of the Dow approach, as demonstrated by Mr. Crosetti's article and the Dogs website, has posted superior returns over the past several decades and, as recently as 2011, it outperformed the S&P 500 by 16.3% to just 2.1%. (The "Small Dogs" did even better.) Further, it seems intuitive to expect underperformance in years when the market as a whole does better than its traditional 10% return and to expect outperformance in years when it does worse. That's the nature of the Dogs strategy, which is a "value" approach.

Speaking of the "Small Dogs" variation, the five lowest priced Dividend Challenger Dogs averaged a 23.98% total return in 2012, despite a dividend reduction by Cheviot and dividend "freezes" by UCBS and American Greetings, which enjoyed the best return of all the Dogs. One final thought about comparing Dogs returns with those of the S&P 500: The former tends to offer a high degree of safety because of the positive element of dividends received, as well as lower volatility (and Beta), so investors can avoid the wilder ride and lower income stream that an index investor must endure. There's a lot to be said for the "Sleep well at night" (SWAN) element. I'll write more about the Dogs strategy in the coming days, when I spell out the composition of the 2013 Dividend Challenger Dogs.

Be sure to check the accompanying articles on the "Dogs" of the Dividend Champions and Contenders for more ideas.

Source: 2012 Dividend Challenger Dogs Retrospective