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Robert Allan Schwartz wrote an interesting article titled: "How Did The Lost Decade Affect Dividend Champions?" This article received a great deal of discussion and comment. I believe the purpose of Robert’s article was to illustrate that dividend champions as a group would have performed reasonably well, thanks to their steady growth of dividends, during this very challenging investment period calendar year 2000 – 2009, a.k.a., the so-called Lost Decade. The following excerpts from Robert’s article talked about buying one share of each of the Dividend Champions on the first day of the period and holding it until the last day:

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 (KMB) lost $0.41, AFLAC (AFL) lost $0.69, Coca-Cola (KO) lost $1.00, Altria (MO) lost $3.93), but some losses were large (AT&T (T) lost $20.53, Target (TGT) lost $23.88, Johnson & Johnson (JNJ) lost $28.71, Lowe's (LOW) lost $35.42, Procter & Gamble (PG) lost $47.18, TDS lost $92.06, and SJW lost $97.18).

Since this article created a great deal of discussion and debate, we thought it would be interesting to look at the 101 Dividend Champions during calendar year 2000 – 2009 through the lens of our F.A.S.T. Graphs™ research tool. There will be a slight difference in the calculations that we use, compared with the numbers that Robert’s thesis stated above used. To be clear, our graphs measure performance based on a $100,000 investment since this was originally an institutional tool. However, it can be looked at as 100%, or move the decimal points to a $1000 or $100 or even $1.00 investment if those numbers are more comfortable. Also, capital gains are reported separately from dividends. So even though we are using a different set of beginning numbers (we invest $100,000 in each, Robert bought one share in each), the basic concept is congruent with Robert’s thesis: How Did The Lost Decade Affect Dividend Champions?

The following portfolio review lists each of the Dividend Champions based on their total return. The annualized performance figure in the table represents the total annualized rate of return, which includes both capital appreciation and dividends as previously stated. Unfortunately, our research tool, under its current configuration, only creates a portfolio review for historical periods like 2000-2009 in order of future expected total return based on analysts’ estimates. (Note: These future calculations are not shown in the tables below.)

A review of the annualized performance numbers on the following “portfolio review” tables below shows that there was no “Lost Decade” for many of the Dividend Champions as Robert Schwartz suggested in his article. (We apologize for the order that the names are presented in, but it is the best that we can currently offer.) However, by scanning each of the 101 Dividend Champions, you will discover that many produced better than acceptable total return results.

Admittedly, many also produced rather anemic results, however, since each of these names increased their dividends each year, the reader can assume that dividend income was consistent and grew regardless of capital appreciation or loss. On the other hand, the reader should also note that many of the companies on this elite list that showed the modest capital losses that Robert alluded to did so because of excessive overvaluation during calendar year 2000. In other words, most of these Dividend Champions performed reasonably well on an operating basis, but Mr. Market was overvaluing many of their shares in calendar year 2000, the last year of the infamous “irrational exuberant” period.

(Click charts to expand)

Robert Schwartz’ 10 Examples

Let’s take a closer look at the 10 companies that Robert Schwartz cited in the above paragraph excerpt from his article found at the beginning of this article. These companies are listed in the order that Robert cited. There are a couple of important points that we suggest noting as you review the following 10 examples: First of all, take note of the beginning valuation on each to determine if the companies started the period overvalued or not. Also, look to the right of each historical graph and notice the average earnings growth rate that each company achieved during this period. Doing this will give you a sense of where and how performance was generated, and the effects that valuation had relative to the companies’ business results (earnings growth). In other words, you will discover that overvaluation was the primary culprit that diminished capital appreciation. On the other hand, you should also notice the benefit, stability and contribution that a growing stream of dividend income made.

Note that the Altria (MO) chart shows the spin-offs of Kraft (KFT) and Philip Morris (PM), however, their specific returns are not included in the performance calculation. Furthermore, although we cannot illustrate the exact values of those spin-offs when they occurred, we thought it would be interesting to show them as an adjunct since the spin-offs occurred. Keeping in mind, that these graphs are drawn and calculated as if an original $100,000 investment was made, and note that these graphs are shown from the date of the spin-off to current time, (11-02-2011). Recognizing that this is not a completely accurate illustration, it should at least offer the reader an opportunity to see how KFT and PM performed on a stand-alone basis since the spin-off.

The Three Best Performing Dividend Champions During the Lost Decade (2000 – 2009)

For additional insight into performance and where it comes from we are offering the following deeper look at the three best performing Dividend Champions during the Lost Decade. The most important points to be gleaned from this study is how undervalued each of these stocks were at the beginning of calendar year 2000, followed by the earnings growth rates the achieved over this time frame.

Conclusions

Robert Allan Schwartz is a self-proclaimed dividend growth investor, a.k.a. a “dividend zealot.” And rightfully so, because investing in dividend growth stocks is a proven successful strategy. It may not suit everyone, but there are many investors who agree with Robert and follow this strategy almost exclusively. One of the most misunderstood attributes of the “dividend zealot” is the false belief that they care little, if not at all, about capital appreciation. The real truth is that they are willing to ignore periods of volatility, to include falling stock prices, as long as their dividend growth continues.

The primary objective of this group of conservative investors is to build and achieve an income stream that increases each year. Obviously, they do not want to lose their principal, but since they are not planning to sell in the short run, they can withstand temporary drops in stock price. Furthermore, it should be understood that companies that grow their dividend every year and have done so for 25 consecutive years or more, as the Dividend Champions have, will also possess strong records of earnings growth. Since dividends come from earnings, it is only logical that increasing dividends must come from increasing earnings. A company that experiences a short-term drop in earnings may continue to raise the dividend, for example, out of retained earnings, as long as management is confident that earnings growth will resume.

Robert’s article achieved accolades and criticisms alike. Some of the biggest complaints dealt with concerns about survivor bias, spin-offs and other factors that challenged the precise accuracy of his study. However, we don’t believe that Robert’s study required absolute precision. Instead, we believe he was merely attempting to demonstrate the benefit and stability that the rising income stream from Dividend Champions offered. With this offering, we have attempted to expand on the importance of valuation, or more precisely, the effects that overvaluation can have on long-term performance. We believe that all investors should be cognizant of and carefully consider valuation when buying or selling common stocks. This would apply equally to growth stocks and dividend paying stocks.

Robert hit the highlights in his offering, and we have attempted to add additional depth thanks to the efficiency of our research tool. It should also be understood that he chose the absolute worst period in history for equities to write about. Moreover, he simultaneously chose the best time in history to own bonds thanks to steadily falling interest rates. We believe that investing is best done when it is applied most intelligently. To accomplish this, all factors need to be considered fairly and factually. It is true that many common stocks did perform poorly during the so-called Lost Decade. However, we have constantly offered proof and evidence that it was not common stocks themselves that were poor investments, instead, it was the ridiculous values that Mr. Market was placing on them during those irrationally exuberant times.

Disclosure: I am long SYY, VFC, WAG, ABT, AFL, MO, T, ADP, CLX, KO, CL, XOM, GPC, ITW, JNJ, KMB, MKC, MCD, MDT, PEP, PG.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: How The Dividend Champions' Dividends Hedged Investors From The Ravages Of The Lost Decade