At the beginning of Last year, I wrote an article on a strategy I created to pick stocks by using the holdings of two ETFs based on two popular investment themes: Dividends and Buybacks. This article is a review of the performance of the stock picks from the article, as well as my 2014 stock picks using the same strategy I used in my article last year.
Instead of trying to decide which of the two themes was better, I decided to combine them into a single strategy. I built my screen by using the holdings of a dividend ETF and the holdings of a buyback ETF, and seeing which companies were in both ETFs. By doing this, the process "screened" companies that pay increasing dividends and are buying back shares at the same time, therefore capturing the best of both themes. The two ETFs I used were the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), and the PowerShares Buyback Achievers (NYSEARCA:PKW).
First, I went to the holdings page for VIG on Vanguard's website, and I copied and pasted the holdings into a spreadsheet. Next, I went to the holdings page for PKW on the PowerShares website and repeated the same process of copying and pasting the holdings into the spreadsheet. I then combined the holdings on one page of the spreadsheet and sorted them alphabetically. After sorting, I found that 13 companies were included in both the dividend ETF and the buyback ETF.
From Vanguard's, fund description page: "The Vanguard Dividend Appreciation ETF seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time."
From PowerShares fund description page: "The Index is designed to track the performance of companies that meet the requirements to be classified as Buyback Achievers™. To become eligible for inclusion in the Index, a company must be incorporated in the U.S., trade on a U.S. exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months."
Using the dividendchannel.com DRIP calculator, I calculated the total return for all the picks from 2013, the returns for the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), as well as for the two ETFs I used to screen: VIG and PKW.
Becton Dickinson & Co
Family Dollar Stores Inc
General Dynamics Corp
HCC Insurance Holdings Inc
International Business Machines Corp
Norfolk Southern Corp
Parker Hannifin Corp
PPG Industries Inc
SPDR S&P 500
Vanguard Dividend Appreciation ETF
PowerShares Buyback Achievers
The above table shows my strategy of combining dividends and buybacks worked out very well this year, but did not outperform a 50/50 portfolio of PKW and VIG because of the significant outperformance of PKW. The year 2012 was the year of the dividend, and in 2013 buybacks were the name of the game. Overall, I was pleased with the results because even though my portfolio did not outperform PKW, and a 50/50 portfolio, it did however outperform the S&P 500 by a slight margin, and outperformed VIG by just over 5%.
2014 Strategy Picks
I am looking forward to seeing if my strategy will outperform once again in 2014, as well as how the strategy will perform if the market is a down market rather than a rising market. In the table below is the list of companies that were included in both funds holdings, and thus my picks using this strategy for 2014.
Badger Meter Inc
Becton Dickinson and Co
Lowe's Cos Inc
McGraw Hill Financial Inc
Norfolk Southern Corp
Nu Skin Enterprises Inc
RenaissanceRe Holdings Ltd
This year there was 8 stocks that were in the holdings of both ETFs, which is down from thirteen last year. Interestingly, of the thirteen stocks that made the list last year, only 4 made the list again this year. This was extremely surprising to me, so I dug a little deeper and found that the nine companies that were on my list last year but did not make it this year all had one thing in common. The common trait was that none of the nine stocks were included in PKW, meaning that those companies bought back less than 5% of shares outstanding for the last 12 months. There are two potential reasons for this, the first is the possibility those companies allocated more to dividend increases than buybacks. The second possible reason is that companies feel their shares are not undervalued at current levels and have slowed the pace of the buyback plans that they do have. I am looking forward to another exciting year and to seeing how this strategy will perform again against the SPY, as well as the VIG and PKW.