With all of my articles that I have written on Seeking Alpha, there is one major theme of in all of them: the strategies or screens for picking stocks/ ETFs are simple and easily repeatable for the most part. So I wanted to continue that theme in this article and make this stock picking strategy simple as well.
I seem to always here a recurring theme that dividends are better than share buybacks, so I looked at the charts for the Vanguard Dividend Appreciation ETF (VIG), and the PowerShares Buyback Achievers (PKW) to get some further info.
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.
The first chart below compares VIG and PKW to the SPDR S&P 500 (SPY). The chart begins on the week starting December 18th 2006, because that was the week that PKW began trading.
Chart 1 [click to enlarge all charts]
Blue Line SPY , Red Line VIG , and Green Line PKW
The above chart shows that since its inception PKW has slightly outperformed VIG, but for the majority of the chart, VIG has outperformed PKW.
For my second comparison I wanted to see if it was in most market conditions or more specific market conditions that VIG outperformed PKW. So for the chart below I compared VIG to PKW from the March 2009 bottom in the stock market until the current time.
Blue Line SPY, Tan Line VIG, and Green Line PKW
The above chart shows that since the stock market bottom in March 2009 that PKW has greatly outperformed VIG, and the SPY. That surprised me quite a bit but what really surprised me is that since the stock market bottom VIG has underperformed the SPY.
For my final comparison in the chart below I compared VIG to PKW from the October 2007 high in the stock market until the stock market bottom in March 2009.
Blue Line SPY, Tan Line VIG, and Green Line PKW
The above chart shows that from the stock market high in October 2007 to the March 2009 bottom that VIG has outperformed both PKW, and the SPY.
The basic theme I get from looking at the charts is that in bear markets VIG tends to outperform PKW, and in bull markets PKW tends to outperform VIG. So I wondered what would be the best way to have the best of both worlds. I came up with a simple strategy of selecting the companies that have increased their dividends over time, as well as companies that bought back large amount of stock, in other words, selecting stocks that were a holding in each of the ETFs.
First I went to the VIG's holdings page on Vanguard's website, and I copy and pasted the holdings into a spreadsheet. Next I went to PKW holdings page on the PowerShares website and repeated the same process of copy and pasting the holdings into the spreadsheet. I then sorted the company's and found any company's that were included in both funds. After sorting I found that nine companies were included in both funds. The whole process of going to each funds website, copying the holding into a spreadsheet, and sorting in the spreadsheet took about 10-15 minutes if that, which keeps to my theme of keeping things simple. Below are the companies that were included in both funds holdings, and are listed with a short business Summary from Yahoo Finance.
Becton, Dickinson and Company (BDX)
Becton, Dickinson and Company, a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide.
Chubb Corporation (CB)
The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals.
ConocoPhillips operates as an integrated energy company worldwide.
Family Dollar Stores, Inc. (FDO)
Family Dollar Stores, Inc. operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States.
General Dynamics Corporation (GD)
General Dynamics Corporation provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide.
International Business Machines (IBM)
International Business Machines Corporation provides information technology (IT) products and services worldwide.
Lowe's Companies, Inc (LOW)
Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer.
PPG Industries, Inc. (PPG)
PPG Industries, Inc. manufactures and supplies protective and decorative coatings.
Target Corporation (TGT)
Target Corporation operates general merchandise stores in the United States.
The companies that are included in both ETFs come from a variety of industries and sectors, which is good for diversification. I will be tracking this portfolio of stocks and comparing them to both VIG and PKW, as well as the SPY, and will provide an update to its performance at the end of the year.
Disclaimer: Read here