If you've been following me you know that I retired in late 2008 and started managing my own money in February of 2011. I needed to develop a safe, reliable stream of income from dividends that could help fund our retirement. It was certainly a 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 and 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 stocks that performed the best in 2008. I know that past performance is no indicator of future performance. But I had a thought that just wouldn't go away; what if it is an indicator of safe and steady performance?
I figured 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. 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 10 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 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 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 I 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, drugs, tech or telcom made levels one and two. I had to search the list again this time for the "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 discovered the CCCs - the 451 stocks that make up the Dividend Champions, Challengers and Contenders complied 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 10 years.
Next I set out to put together a portfolio and back test 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 from my portfolio of dividend growth stocks.
I showcased the 50 stocks that were the strongest performers during this period summarized in this article.
I started to reconstruct my portfolio around August of last year. I was moving away for the first time from moving in and out of positions. I made an average of 30 trades a month from February to August. I thought since they were free with Merrill Edge why not use them. Today I'm reminded of the great investing quote …" A Portfolio is like a bar of soap, the more you handle it the smaller it gets."
I moved to stability and quality. I started treating my portfolio like a business and started developing goals and objectives.
I made the decision to select stocks with dividends that continued to be paid and even grew during tough years like 2008. I decided to further reduce my risk by having 50 equally weighted positions. If there was a cut or even worse an elimination of the dividend it was a loss in income I could manage. The objective was safe and stable monthly income from dividends plus growth in the dividend at a rate at least that matching inflation.
In my last article I presented my core portfolio, stocks that I expect to "hold and monitor" for a good long time. Until the beginning of this month, my wife's portfolio was in cash. As a result I have invested in 10 stocks designed to boost the yield of my portfolio until my wife's portfolio could be converted to stocks. The net result has been to increase the yield of my portfolio to just over 5%. These 10 stocks do not have the history or margin of safety enjoyed by the 40 stocks in my core. They have performed well. So well in fact that I'm pleased to present the performance of my 50-stock portfolio recorded from Sig Fig portfolio tracker as of August 1st:
The 10 additional stocks are as follows. It should be noted that none of these stocks enjoys the status of being on the CCC lists:
American Capital Agency
Apollo Residential Mortgage
American Capital Mortgage
Energy Transfer Partners
A few other pieces of information about the 50-stock portfolio; first it has a beta of .6 and finally its average PE is right at 15.
Next time around I'll discuss how I plan to evaluate the performance of this portfolio moving forward and more formally answer some the questions I expect to be generated from this article.
I have an important favor to ask of each of you. Help me determine which Dividend Growth stocks represent the best value moving forward. I need to convert my wife's portfolio to dividend growth stocks. While it would be easy to simply purchase more shares of each of my 50 stocks I know that today a number of them are overvalued. Of the 50 stocks I hold, which do you feel present the best value? What other stocks with stable and growing dividends do you believe are most deserving of my consideration?
I thank all of you who have been along for the ride and assisted in so many ways. Thanks again to each of you.
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.