Dan Caplinger of the Motley Fool comes up with an interesting filter for stock selection. In the current market, dividend growth is back in fashion over pure stock price increase. It is likely that profits will continue to benefit from a drive for efficiency and cost cutting as we navigate these choppy waters. Even technology companies, eternal holdouts from paying dividends, offer payouts to shareholders In addition, companies offering increased dividends see their stock rise after the announcement.
Based on this, Dan looked for large-cap companies that kept dividends constant for at least five years. In addition, he selected companies that earned at least twice as much as they're currently paying in dividends. Here are seven of the stocks that passed both tests:
|Global Payments (GPN)||0.2%||3.1%|
|Cooper Cos. (COO)||0.1%||1.6%|
|Southwest Airlines (LUV)||0.2%||2.6%|
|Tyson Foods (TSN)||0.9%||6.9%|
|Anadarko Petroleum (APC)||0.5%||21.3%|
Source: Capital IQ; Yahoo! Finance.
This is an interesting filter for those looking for long term strength mixed with dividends and we will compare this with our benchmark set of dividend bearing ETFs.
The benchmark ETFs are:
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors,|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond,|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF,|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index,|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF,|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx,|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd,|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond,|
- 7 Stocks Overdue for a Dividend Hike -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes,
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum,
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||9%||81%||11%||85%||10%||69%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||11%||76%||5%||22%||4%||16%|
|7 Stocks Overdue for a Dividend Hike||29%||119%||-0%||-2%||5%||12%|
In the short term, the returns have been good but, over the long term, both the returns and the Sharpe ratio are at the bottom of the pile. There is strong potential in these companies but that clearly isn't the whole story and there is too much volatility in this portfolio.
I like the theory. I like the fact that this introduces equities that are new and different. I don't like the returns. This is a filter that is worth watching to see if dividends are increased and the returns pop but I am not prepared to risk it.
For now, I'm sticking with the diversified set of ETFs
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.0 I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.