We can quickly forget the new normal of low interest rates and volatile stocks -- until we hit some turbulence. We continue to look for dividend stocks as potential candidates for a long-term portfolio with income. Dan Caplinger of the Motley Fool highlights four stocks that have recently seen big jumps in their dividend payouts.
We have noted that dividends are going to be key over the next few years and companies will be under pressure to maintain and increase dividend payouts. We have also noted that there can be a danger that sharp rises in dividend payments can be a step of desperation to prop up a troubled company. However, further analysis of payout ratios and profitability can usually uncover those kinds of worms.
Dan dug through hundreds of stocks to find those with 15% growth in dividends both in the past year as well as annually since 2007. The result was:
Wal-Mart (WMT): 21% dividend increase in the past year, 17% average annual dividend increase since 2007:
BHP Billiton (BHP): 21% one-year jump, 23% average since 2007:
Union Pacific (UNP): 47% one-year jump, 26% average since 2007:
Accenture (ACN): 64% one-year jump, 31% average since 2007:
My take on this is that going back to 2007 means that these dividends aren't a knee-jerk reaction to current circumstances and so are less likely to be hiding deep troubles. As I look at the companies, there is diversification and these are solid long-term companies.
It will be interesting to see how this selection performance against our dividend bearing ETF benchmark portfolio:
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | (ICF) iShares Cohen & Steers Realty Majors |
| CASH | CASH |
| 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 |
- 4 Stocks With Big Dividend Gains-- 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 | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | -1% | -3% | -23% | 9% | 74% | 7% | 55% |
| 4 Stocks With Big Dividend Gains | 4% | -12% | -38% | 23% | 79% | 11% | 29% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 3% | -1% | -6% | 16% | 105% | 2% | 8% |
I have not really dug into the detail of each of the companies but we can see that the last year has been torrid. However, year-to-date and the longer term returns have been better. Nevertheless, the Sharpe index indicates that there is a high degree of risk associated with these stocks. When I look at the mix of the different equities in the simulated portfolio, I see:
| Fund in this portfolio | Percentage |
|---|---|
| WMT (Wal-Mart) | 7.33% |
| BHP (BHP Billiton Ltd ADR) | 49.61% |
| UNP (Union Pacific Corp.) | 22.02% |
| ACN (Accenture Ltd.) | 21.04% |
This shows that BHP is by far the biggest contributor and Wal-Mart has really struggled. I expect that retail stocks are going to be under pressure but I think that Wal-Mart will come back.
Three Month Chart
One Year Chart
Three Year Chart
Five Year Chart
When I look a the charts, I can see the volatility that leads to the lower Sharpe ratios. This tells me that while each of these stocks may be a worthwhile investment, I don't like the mix and I would want to smooth out some of the ups and downs. For me, the growth in dividends does not offset the volatility. I will keep an eye on these stocks and see if there is a different combination that performs better.
Disclaimer: 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
