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Welcome back to Part Four of what has proven to be an exciting series. We began by exploring ETFs as possible substitutes for Dividend Growth portfolios. This led to a discussion of the importance of advocating for the development of an ETF that would more closely model the elements preferred by most of the Dividend Growth investors that regularly comment here. During that discussion, most expressed a clear preference for investing in Dividend Champions, Challengers and Contenders (CCC). Many encouraged the use of the "chowder rule" as the chief metric for selecting positions within the ETF.

There appears considerable support for an ETF that contained CCC listed stocks that yielded at least 2% and followed the "chowder rule". As a continuation of this concept, I decided it might be helpful to back test how a portfolio following this concept might perform. I sought to conduct a study that lacked the survivor bias attached to so many others. I remembered that Seeking Alpha contributor Robert Allen Schwartz maintained a history of past lists of Dividend Champions on his web site beginning in 2008. I decided to go back to the earliest Dividend Champions list from early 2008 and set out to apply the metrics of 2% yield or better and the "chowder rule".

We started with the following scenario: It's the first of January 2008. Dave has just retired and has made the decision to rollover his 401K into a self directed IRA. His friend Bob has convinced him to invest in stocks with dividend yield and dividend growth greater than inflation. They decided to apply the "chowder rule" and to invest exclusively in a group of Dividend Champions with 2% dividend yield or greater. They want the portfolio to be well rounded with representation from each sector. Dave has made it clear that he plans to spend most of his retirement on the Two G's - Golf and Grandkids and plans to take a buy and hold approach to Dividend Growth investing.

Together Dave and Bob review the February 29th list of Champions containing 136 companies that had paid and raised their dividend every year for more than 25 years. Applying the restriction of 2% yield eliminated 38 companies reducing the number under consideration to 94. Next the "chowder rule" is applied. This rule requires that a combination of yield plus dividend growth must total 12 or more for most stocks and total 8 for higher yielding but slower dividend growers like utilities and REITs. The "chowder rule" brings the number of stocks for consideration down to 38. Of the remaining stocks, the largest sector representation was financial with 5 banks, 2 insurance companies and General Electric (NYSE:GE) with a large financial component qualifying under the "chowder rule". Dave agreed with Bob's recommendation to avoid Gannett Co. (NYSE:GCI) due to losses in 2007 of (- 33.1) % vs. gains of 5.49% for the S&P 500. Bob tried further to persuade Dave to pass on investing in banks again due to poor 2007 performance. Bob decided to reduce exposure to banks and selected Bank of America (NYSE:BAC) because of it's high yield. They decide the portfolio should be equal weight and $10,000 was invested in each of the 32 holdings.

Clearly there are few of us who would invest solely in the manner I just described. Most would consider additional metrics particularly value. More importantly a better decision for Dave would have been a "buy and monitor" approach rather than buy and hold.

Let's see how Dave did with Dividend Growth and the "chowder rule". Through the use of Fast-graphs I obtained figures on what our $10,000 investment would have earned verse the market between January 1st of 2008 and September 12th 2013. Perhaps the best news that was revealed is that most of the Dividend Champions Dave selected are still Champions today. That means income has continued through sustained dividends and dividend growth even through the market turmoil of 2008/9. The bad news was that two of Dave's positions lost big: Bank of America and General Electric. This research begs the question of whether by applying additional metrics at the time of purchase Dave could have avoided these losses. Two of the original selections using the "chowder rule" were Rohn and Haas (ROH) and Wrigley (WWY). Both would have resulted in sizeable gains which would have likely been re-invested in more Dividend Champions selected by application of the 'chowder rule". On 7/10/08, ROH was purchased by DOW at $78 a share, an increase from $45 the day before. Earlier, 4/28/08, Wrigley had been purchased in a transaction that saw share prices rise from $62.45 to $80. Returns include non-re-invested dividends. All but 6 stocks of the 30 stocks beat the market. On September 12th 2013, Dave's portfolio was valued at $464,734 vs. $366,960 if the portfolio had a return equal to the S&P 500.

Stock

Ticker

Yield %

DGR

%

Return

Eli Lilly

LLY

3.76

10.56

$12,050

Leggett & Platt

LEG

5.99

38.89

$21,209

Sysco

SYY

3.14

15.79

$12,345

Mine Safety Appl.

MSA

2.19

22.22

$10,883

Kimberly Clark

KMB

3.56

9.43

$16,109

Pepsi

PEP

2.16

25.00

$12,116

Hershey

HSY

3.21

10.19

$25,419

Auto Data Process

ADP

2.90

26.09

$18,376

General Electric

GE

3.74

10.71

$7,674

UDR Inc.

UDR

5.91

5.60

$14,378

Stock

Ticker

Yield %

DGR

%

Return

Proctor & Gamble

PG

2.12

12.90

$12,359

Emerson Electric

EMR

2.35

14.29

$12,760

Vectren Corp

VVC

5.04

3.17

$13,927

Cincinnati Financial

CINF

4.20

9.86

$14,133

Coca-Cola

KO

2.60

11.76

$14,287

Johnson & Johnson

JNJ

2.68

10.67

$15,116

Illinois Tool Works

ITW

2.28

33.33

$15,454

Chubb

CB

2.28

16.00

$17,761

Pfizer

PFE

5.75

10.34

$14,918

Federal Realty

FRT

3.40

6.09

$14,098

Stock

Ticker

Yield %

DGR

%

Return

Anheuser Busch

BUD

2.80

11.86

$26,504

McDonald's

MCD

2.77

50.00

$18,771

Pentair

PNR

2.08

13.33

$19,792

Rohm & Haas

ROH

2.76

12.12

Teleflex

TFX

2.26

12.28

$13,805

Clorox

CLX

2.75

29.03

$14,773

Sherwin Williams

SHW

2.70

11.11

$32,007

Piedmont Nat. Gas

PNY

4.07

4.17

$14,919

Wrigley

WWY

2.21

13.79

Sonoco Products

SON

3.69

8.33

$13,959

AT&T

T

4.59

12.68

$10,664

Bank of America

BAC

6.44

14.29

$4,108

S&P 500

$12,232

Additional questions that could be explored include: How would performance have been affected if Dave sold right at the time dividend cuts were announced? How would Dave's performance have been if in January of each year he sold stocks that fell below the parameters of the "chowder rule" and made exchanges for those now qualifying? How would Dave's performance have been affected if he had invested only in Champions yielding 3%? What would Dave's performance have been if he extended this process to include both Dividend Champions and Challengers?

While further research is important, the above study does seem to point to a connection between strong dividend growth and performance among the Dividend Champions.

It time once again to hear from you.

Source: Do Retirees Need A Dividend ETF Or A Portfolio Of Individual Stocks? - Part 4