This is the second in a series of articles which chronicle my struggle to establish a safe and growing stream of income. The first is available here.
I'm retired and started to handle my own investments in February of 2011. One of the ways I survived the volatility of the summer and early fall was by gaining positions in dividend stocks that performed the best in 2008.
Since I had decided to become a dividend growth investor earlier, 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 didn't stop there, next I looked at individual performance for each of the ten years.
In a search for safety, I continued to examine the 200 plus stocks that made the cut. This time I searched 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 in the years ahead.
As I continued to back test I found stocks that-- while they were in the green for 1,3,5 and 10 year periods-- suffered 5 years of losses in ten years. I don't like a lot of swings in the stocks I own, so I stay away from these. As I continued my labor I began to identify my Superstars-- stocks that gained at least 6% including dividends in 2011, 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 maxim of two years of losses over the 10 year period. In fact, one stock had a gain for each of the 10 years in question.
Next I created a second level of Superstar. To qualify, a stock needed to have less than 50% the loss of the S&P 500 in either 2002 or 2008, had no more than two down years and again produced 6% gains in 2011. Another 18 stocks emerged.
The 36 stocks in these two lists lack enough diversification to construct what many would consider a proper portfolio. No banks, drug, tech or telecom companies made the cut. I searched the list again, this time for "best of breed". Johnson and Johnson (JNJ), Intel (INTC) and AT&T (T) came out on top.
While engaged in my search for safety, I continued my education at Seeking Alpha. There were many who helped and continue to help during my personal journey of discovery: The three Davids (Fish, VanKnapp, and Crosetti), Jeff Paul, Bob and Todd Johnson, Robert Schwartz, Norman Tweed, Chowder, Richjoy, Brad Thomas, Regarded Solution, Gapwedge, Global View, Tim McAleenan, and so many more.
During my search I discovered the CCCs-- the 451 stocks that make up the Dividend Champions, Challengers and Contenders complied by David Fish. In doing so, 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 of 10 years or more and dividend growth. By 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 gains in each of the ten years.
Armed with this information, next I set out to put together a 30 stock portfolio and back test its performance year by year from 2002 to 2011. Was there selection bias? Damn right, there was. I was looking specifically for stocks with a track record of safety. If there were capital gains, that was a bonus. I didn't care if I knocked the ball out of the park. I was more concerned about making sure the ball park didn't burn down. As a retiree, I was more interested in capital preservation, a steady income stream and protection from inflation from my portfolio. What follows is a chart of the second ten stocks for your review.
10 Year Ave Return
Procter & Gamble
National Retail Properties
Magellan Midstream Partners
Genuine Parts Co
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 8.6% 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 2003, where it earned an average of 22.5% vs. 9% for the S&P 500 and 2009, where it earned 19% vs. 23.5% 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 in capitol for the S&P 500 of 0.9%.
In my next article I reveal another 10 stocks from my list of Safety Superstars. My final portfolio remains a work in progress. Hope to have each of you along for the ride.
I am currently long: CAT, VZ, MO, GPC, MMP, NNN, PEP
Disclaimer: I am not a professional investment advisor or financial analyst. You need to do your own research and due diligence before you decide to trade any securities or other products.