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The “Lost” Decade began on January 1, 2000 and ended on December 31, 2009. It encompassed the Great Recession of 2008. DSeveral articles appeared in 2010 concerning the “Lost Decade” [“For Savers, It Was Hardly a Lost Decade”, New York Times, 1/2/10; “How to Erase the Lost Decade?”, New York Times, 10/16/10]. How did the Lost Decade affect the Dividend Champions?

The Dividend Champions is a list of dividend growth companies maintained by David Fish. It is downloadable in both Excel and PDF formats from here.

I can’t go back to the Dividend Champions list of January 1, 2000, because David did not begin the list until late 2007. The best I could do was to use the 101 members of the list as of September 30, 2011. I am aware that this introduces a survivorship bias [see here]. I am aware that the data I show you depend on which companies I started with. I am aware that the data I show you may or may not be statistically significant. I will ignore the time value of money, and the effects of inflation, for this article. I will show you some data, and you can draw your own conclusions.

I’ll begin with a completely unrealistic scenario – that you began the “Lost” Decade with a crystal ball, and that you bought one share of each of the 101 Dividend Champions at the lowest possible price during the entire decade, and that you sold that share at the highest possible price during the entire decade. [All price data came from Yahoo! Finance.]

Your investment was $2017.77. Your gains ranged from a low of $10.43/share for Bowl America (NYSEMKT:BWL.A), to over $100/share for J.M. Smucker (NYSE:SJW), 3M (NYSE:MMM), Telephone and Data Systems (NYSE:TDS), Franklin Resources (NYSE:BEN), and NACCO Industries (NYSE:NC). Your proceeds from sales was $7076.60. You would have enjoyed a capital gain of $5058.83, or a 250.7% return on your investment. [I did not attempt to track any dividends you would have received, because (a) the buy dates were all different, (b) the sell dates were all different, (c) the holding periods were all different, and (d) sometimes the sell date preceded the buy date, so it was a short sale.] Anyone who possessed such a crystal ball would not have termed that period a “Lost” Decade.

Now let’s get real.

Suppose you care only about capital gain. Suppose you bought one share of each of the 101 Dividend Champions at the opening price on the morning of January 1, 2000, and sold it at the closing price on the afternoon of December 31, 2009. Your investment was $3974.35. What was your return?

Your proceeds from sales was $4254.50. You enjoyed a capital gain of $280.15, or a 7.05% return on your investment. This might sound like a good return, until you realize (a) that it took you 10 years to earn this return, so the average annual return was 0.705%, and (b) that 48 out of 101 companies ended the decade at a lower price than they began, so almost half of the companies “enjoyed” a capital loss. Some losses were small (e.g. Kimberly-Clark (NYSE:KMB) lost $0.41, AFLAC (NYSE:AFL) lost $0.69, Coca-Cola (NYSE:KO) lost $1.00, Altria (NYSE:MO) lost $3.93), but some losses were large (AT&T (NYSE:T) lost $20.53, Target (NYSE:TGT) lost $23.88, Johnson & Johnson (NYSE:JNJ) lost $28.71, Lowe's (NYSE:LOW) lost $35.42, Procter & Gamble (NYSE:PG) lost $47.18, TDS lost $92.06, and SJW lost $97.18).

I’m guessing that this is why so many people label the Aughts as a “Lost” Decade.

Suppose you care only about income. Suppose you bought one share of each of the 101 Dividend Champions at the opening price on the morning of January 1, 2000, and you held all those shares. Your investment was $3974.35. What was your return?

Your 101 Dividend Champions paid you a total of $840.51 worth of dividends over the decade. Now, $84.05 in dividends each year is nothing to write home about (it barely pays for the stamps), but it does represent a 21.15% yield on cost (i.e. your original investment of $3974.35), which is TRIPLE the capital gain of 7.05% on cost.

But wait, there’s more, as they say on late night TV infomercials. You held all those shares, you did not sell, therefore you did not realize any capital losses from the 48 companies whose price declined. Furthermore, you will continue to receive more and more dividends in the future, as the Dividend Champions raise their dividends every year. Even better, you have “built-in” protection from inflation, as many Dividend Champions raise their dividends each year by more than the rate of inflation.

Suppose you care about capital gain plus income (i.e. “total return”). Suppose you bought one share of each of the 101 Dividend Champions at the opening price on the morning of January 1, 2000, and sold it at the closing price on the afternoon of December 31, 2009. Your investment was $3974.35. What was your return?

Your proceeds from sales was $4254.50. You enjoyed a capital gain of $280.15, or a 7.05% return on your investment. Your 101 Dividend Champions paid you a total of $840.51 worth of dividends over the decade, or a 21.15% yield on your cost. Your total return is $280.15 + $840.51, or $1120.66, for a total return of 28.20% on investment.

Although 48 companies suffered a price decline over the decade, once you add in the dividends, only 25 companies suffered a “total” decline, therefore dividends helped 23 companies swing from red to black. For example, $5.30 worth of dividends did not do much to help SJW’s capital loss of $97.18, but $11.74 worth of dividends changed Exxon's (NYSE:XOM) capital loss of $11.31 into a total gain of $0.43, $15.84 worth of dividends changed MMM’s capital loss of $13.39 into a total gain of $2.45, and $24.71 worth of dividends changed MO’s capital loss of $3.93 into a total gain of $20.78.

Conclusion

Many folks who invest for income are aware of, and already own several of, the Dividend Champions.

Folks who invest for capital gain plus income (i.e. “total return”), might want to consider owning some Dividend Champions. The “Lost Decade” shows (a) that there can be long periods of time during which the income return exceeds the capital gain return, and (b) that there can be many companies whose capital loss might be “rescued” by an income return.

For more information about dividend growth companies, please check here.

You can download a spreadsheet containing all of my data (so that you can sort it any way you wish) from here.

Disclosure: I am long ABT, AFL, CINF, INTC, JNJ, KMB, KO, LEG, MCD, MDT, MGRC, MO, PAYX, PEP, PG, RPM, UL, WMT.

Source: How Did The Lost Decade Affect Dividend Champions?