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Long only, value, portfolio strategy, dividend investing
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I retired in late 2008 and started managing my own money in February of 2011. Needless to say it was a pretty volatile year to start an education in how to manage your own money. Considering all the mistakes I made and all that I needed to learn, 2011 ended up great. I produced the 3.5% I needed from dividends for income in addition to an additional 3.1% in capital gains. One of the ways I survived the volatility of the summer and early fall was by gaining positions in dividend states that performed the best in 2008. Now I know that past performance is no indicator of future performance. How many times have I heard that? But suddenly I had a thought that just would not go away, what if it is?

The last decade has been a tough one for the market so why not set out to explore this idea and see if it has merit. Since I'm a dividend growth investor I set up a screen to look for all stocks paying dividends of at least 2% that had finished 2011 with 6% gains, gains equal to my returns for 2011. Just over 200 stocks made the cut and to my surprise the vast majority had registered gains not just for the year but for 3 year, 5 year and even 10 year periods. I did not stop there. I next looked at individual performance for each of the ten years.

Since mine was a search for safety, I looked first for the top performers in the down years of 2002 and 2008. I found stocks that had gains while the S&P was down over 23% in 2002 and over 38% in 2008. More importantly, I found a large number of stocks that suffered less than half the loss of the S&P and had offset those losses by the gains they made the following year. The process, as tedious as it was, revealed information that will prove invaluable to me in the years ahead.

I found stocks that while they were in the green for 1,3,5 and 10 year periods, suffered 5 years of losses. Since I don't like a lot of swings in the stocks I own, I felt it best stay away from these. As I continued my labors I began to find my Superstars, stocks that gained at least 6% including dividends in 2011. The Superstars had less than 50% the loss of the S&P 500 in 2002 and 2008 and made up for those losses the next year. Finally, the Great 18 as I call them had a maximum of two years of losses over the 10 year period. One stock in fact had a gain for each of the 10 years in question. Level two Superstars had less than 50% the loss of the S&P 500 in either 2002 or 2008. They too had no more than two down years and again produced 6% gains in 2011. Another 18 stocks had emerged as winners.

The stocks in these two lists were not diversified enough to construct what many would consider a proper portfolio. No banks, drug, tech or telecoms made levels one and two. I had to search the list again this time for "best of breed." Johnson and Johnson (NYSE:JNJ), Intel (NASDAQ:INTC) and AT&T (NYSE:T) came out on top.

While engaged in my search for safety I discovered the CCCs, the 451 stocks that make up the Dividend Champions, Challengers and Contenders compiled by David Fish. In so doing I discovered ironically that all but one of my safety Superstars were on these lists. This meant that each had a history of sustained dividend payment, 10 years or more and dividend growth. In exploring the CCCs I discovered an additional 11 stocks that made the grade established by my Level one and Level two Superstars, including a second stock with gain in each of the ten years.

Next I set out to put together a 30 stock portfolio and backtest its performance year by year from 2002 to 2011. Was there selection bias, damn right there was. I was looking for stocks with a track record of safety. If there were capital gains that was a bonus. I was more interested in capital preservation, a steady income stream and protection from inflation for my portfolio of dividend growth stocks. What follows is a chart of the first ten stocks I tested.

Stock

Ticker

Yield %

5-YearDGR

%

10 Year Ave Return

Notes

Johnson and Johnson

JNJ

3.5

10.3

3.6

Chevon

CVX

3.2

9.0

12.8

NStar

NST

3.8

7.0

12.4

Health Care Reit

HCN

5.5

2.2

15.9

Intel

INTC

3.1

14.4

-.7

Kinder Morgan Partners

KMP

5.7

7.2

15.9

Coke

KO

2.8

8.7

6.8

McDonalds

MCD

2.9

20.4

17.1

AT&T

T

5.8

5.3

2.5

Kimberly Clark

KMB

3.9

7.8

5.7

The above chart includes current yield, 5 year dividend growth rates and average annual return for the 10 years of review. The average yield for this group of 10 stocks is just over 4%. The 5 year DGR for the group was over 9% a year, clearly keeping up with inflation and then some. On top of that the group outperformed the S&P 500 every year in the period except 2004 where it earned an average of 6.3% vs. 9% for the S&P 500.

During the same period, the group reported an average annual gain in capital of 9.2% vs. an average annual gain of 0.9% for the S&P 500.

In my next article I will reveal my second 10 stock portfolio from my list of Safety Superstars.

Disclosure: I am long CVX, HCN, INTC, KMP, KO, MCD, T, KMB.

Source: Searching For A Safe, Growing Stream Of Income