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This is the third in a series of articles which chronicles my struggle to establish a safe and growing stream of income. Click here for part 1 and part 2.

In this series I present the results of the back testing I've done of the period between 2002-2011. This ten year period has it all, huge declines in 02 and 08 plus what ever you call 2011. Any stock that performed well against the market in 02,08 and 11 and has a yield of around 3% or more deserves our attention. If you haven't read them already, I strongly recommend you read each of the above articles before continuing.

It has proven important at least to me to look at each stocks performance year by year during this period. I look particularly at performance during severe bear markets. I prefer the stocks that perform the strongest in the worst of times. I also like those that a history of coming back quickly after a loss.

I started my own stock picking in 2011, certainly a year not for the faint of heart. I had been in index funds from 1988 - 2008. Since I was nearing retirement I moved into cash in 2007 when the market started sideways. It was a move that enabled me to retire on schedule just before the melt down in 2008. After retirement in August, I quickly learned it was a bad time to start as a training consultant. I made too much from this business to take Social Security and not enough to pay the bills. I need income from my 401K. In 2009 I started making monthly withdraws from my 401K still fully invested in cash. As necessary withdraws were greater than earnings generated from this account it wasn't long before I realized I needed to do something. I needed to get back in the market. I raised three daughters. I paid for three college educations and even three weddings. After the girls graduated from school I was able for the first time to maximize my 401K's. My only experience was index funds and I was comfortable making that kind of gamble alone. I looked for professional advice but found out quickly that with a portfolio under $500,000 I didn't qualify.

My friend had discovered dividend stocks and after my discussions I decided to join him starting in February 2011. I made all the textbook mistakes at first. I got particularly nervous that summer and moved everything to utilities and low beta consumer staples. It turned out to be the right move. Since it was starting to feel like the end of the world, I started acting like it was and began back testing in search of stocks that would let me sleep well at night.

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. I next 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 search 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 lost 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 continue to back test I found stocks that while they were in the green for 1,3,5 and 10 year periods but suffered 5 years of losses in ten years. I don't like f swings in the stocks I own, so I stay away from those. 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. One stock in fact 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.

During the same time frame I discovered the CCC's the 451 stocks that make up the Dividend Champions, Challengers and Contenders complied by David Fish. I have since reduced my CCC list to 197, eliminating banks, low yield and high beta equities. What remains are the stocks I will consider first when making new purchases. I believe that every Dividend Growth investor must download this free list regularly and make it one of their considerations when considering a stock for purchase.

I set out at the end of 2011 to put together a 30 stock portfolio and back test its performance year by year from 2002 to 2011. I was looking for specifically for stocks with a track record of safety. If there were capitol gains that was a bonus. I didn't care if a 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 capitol preservation, a steady income stream and protection from inflation from my portfolio. What follows is a chart of the third ten stocks for your review. This go round I added three stocks NVS,RDS.B and BCE for foreign exposure.

Stock

Ticker

Yield %

5-YearDGR

%

10 Year Ave Return

Notes

Sunoco Logistics Partners

SXL

4.5

9.8

26.4%

Clorox

CLX

3.5

14.8

8.1%

Rayonier

RYN

3.6

4.0

15.6%

Novartis

NVS

4.7

7.8

7.1%

Royal Dutch Shell

RDS.B

5.1

6.7

9.6%

V.F. Corp

VFC

2.1

6.2

15.7%

BCE Inc.

BCE

5.4%

12.8

11.6%

Southern Company

SO

4.3

4.0

9.9%

Honeywell

HON

2.6

8.7

7.5%

Altra

MO

5.2

15.0

17.1

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 8.88% 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. During the same period, the group reported an average annual gain of 12.86% vs. an average annual gain in capitol for the S&P 500 of 0.9%.

I am currently long: SXL, RDS.B, MO, BCE, SO.

Previously held: RYN,VFC,HON

Additional disclosure: 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.

Disclosure: I am long SXL, RDS.B, BCE, SO, MO.

Source: One Man's Search For A Safe And Growing Stream Of Income - Part 3