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A self-taught investor focusing principally on stocks with growing dividends.
  • Dividend Champions During Recession 8 comments
    Sep 26, 2011 1:40 AM

    Robert Allan Schwartz published an article “Dividend Skeptics: Here’s How Dividend Champions Fared During the Last Recession”.  Robert graded the companies on their dividend performance since 2007.  Dividend Champions are companies with a proven history of paying increasing dividends from the list by David Fish.  See Robert’s article for his results and further background.
     
    In the comment stream I asked him to provide his data for each company’s dividend amounts so we could review the impact on someone’s overall income if they owned those stocks.  He obliged and you can obtain a copy of this spreadsheet data at the end of his article. 
     
    I had promised to help analyze the data if he provided it so this Instablog serves as that.  The table of data tells the story.  I describe my methodology following that.  I apologize for the rather crude presentation and limited analysis – my time is unusually constrained for awhile but I wanted to fulfill my promise. 
     
    Below are sample portfolios invested in selected Dividend Champions starting in 2007 and the amount of dividend income you would have received each year.  I show DVY, SDY and VIG for comparison – these are ETFs targeted at dividend investors.  The portfolios in the table had different total amounts invested in them at the start so the income amounts cannot be compared between them.  Only the initial yield and rates of change are useful for inter-portfolio comparison.  As an example, had you invested $10,000 in VIG in 2007 it would have paid you $160 in income that year (1.6% initial yield) and it would have grown to $192 for 2010 (+20% change from 2007 – 10).  If $10,000 had been used with a similar methodology to the “$1000 ea” portfolio it would have paid $270 in 2007 (2.7%) and $237 in 2010 (-12%).
     

     

    Portfolio

    2007 Init Yield

    2007 Income

    2008 Income

    2009 Income

    2010 Income

    2010 / 2007 Chg

    1 Share ea

    2.6%

    129.44

    137.71

    121.00

    119.34

    -7.8%

    YoY Chg

     

     

    6.4%

    -12.1%

    -1.4%

     

     

     

     

     

     

     

     

    $1000 ea

    2.7%

    3012.21

    3177.99

    2729.96

    2648.15

    -12.1%

     

     

     

    5.5%

    -14.1%

    -3.0%

     

     

     

     

     

     

     

     

    $1000 Ltd

    2.7%

    2370.49

    2517.44

    2217.99

    2176.51

    -8.2%

     

     

     

    6.2%

    -11.9%

    -1.9%

     

     

     

     

     

     

     

     

    DVY

    3.3%

    2.37

    2.42

    1.66

    1.70

    -28.0%

     

     

     

    2.2%

    -31.3%

    2.6%

     

     

     

     

     

     

     

     

    SDY

    3.2%

    1.97

    2.21

    1.73

    1.74

    -11.5%

     

     

     

    12.0%

    -21.5%

    0.6%

     

     

     

     

     

     

     

     

    VIG

    1.6%

    0.87

    1.03

    .98

    1.05

    +20.1%

     

     

     

    17.5%

    -4.6%

    7.1%

     



    Summary: Well, I’m not sure what you can conclude – it’s just some raw (and crude) data after all.  The biggest problem is the first three portfolios were individual selected stocks but no shares were traded after initial purchase – not even when they cut dividends.  This is not likely how any investor buying individual stocks would behave.  Had these portfolios been actively managed their incomes would have been higher as non-paying companies would have been replaced by paying ones.  Modeling this is not a trivial undertaking and would still be only a simulation. 
     
    As a practical matter, I think it shows that you need to have a flexible budget to deal with changes in income that can result.
      
    My methodology:  I took Robert’s spreadsheet of 139 companies and eliminated any that had a dividend yield less than 1% for 2007.  The 1% minimum is arbitrary and was meant to exclude low-yielding stocks that most dividend growth investors wouldn’t bother with.  This excluded 23 of the original 139 companies.  The yield was calculated by dividing the total amount paid in 2007 by the price shown in Yahoo! for Jan 3 2007 (the unadjusted close for the first trading day).  I had to eliminate another 5 companies as their tickers do not appear in Yahoo! due to mergers and what-not.  This left me with 111 companies.  I did no other scrubbing of Robert’s data and there may be minor problems with some companies due to splits, mergers, spinoffs and such.  
     
    Portfolio construction:  I created 3 model portfolios from my list of 111.  The first was simply to own 1 share of each company starting on Jan 3 2007.  The second was to buy $1,000 of each company at the start of 2007.  These are the first two shown in the table. 
     
    In reviewing my list of 111 companies there were two sectors with an unusually large number of companies in relation to their sector sizes in the S&P 500 – financials (35) and utilities (16).  So, I created a third portfolio called “$1000 Ltd” to address this concentration.  Admittedly, choosing sector diversification is personal preference but for a better balance I limited these two sectors by buying $1,000 of everything except I bought $657 of each financial and $500 of each utility.  This left the financial sector at about 20% of initial portfolio value which about matches its S&P market cap in 2007.  The utilities were about 8% of initial portfolio value which is well above its S&P market cap, but, the utility sector today provides about 7% of total dividends in the S&P so that seems a reasonable compromise.  I made no other sector adjustments but will note that the technology sector was far underweight its S&P equivalent (not many pay dividends). 
      
    I made no adjustments to the portfolios once they were “bought”.  Each company was held throughout and whatever dividends they paid were included as income.  I made no attempt to sell dividend cutters and purchase a replacement. 
     
    Comparisons:  The table shows DVY, SDY, and VIG.  Each of these are ETFs targeted at dividend investors.  Each of their portfolios are distinctly different from each other and one indication is their yield in 2007 and today (especially VIG).  I listed them as interesting contrasts.
       
    Miscellaneous:  Of the 111, 7 cut their dividend in 2008, 21 in 2009 and just 2 in 2010.  Only 13 of the original 35 financials grew their dividend through 2010 and nearly half of the 13 were insurance companies.  So, of the 30 total companies that cut their dividend during this time, 22 came from the Financial sector.

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Comments (8)
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  • Norman Tweed
    , contributor
    Comments (7475) | Send Message
     
    Thanks No Free Cake for this exercise. As you say it is raw data, but I can get a feeling for the effect of dividend cuts, just by the percentage drops in the table. There are many other things that could be taken into account, high dividend yielders vs lower yielders, etc. However, this is a valuable start.
    26 Sep 2011, 04:36 AM Reply Like
  • No Free Cake
    , contributor
    Comments (1300) | Send Message
     
    Author’s reply » Thanks Norman. Robert commented in his article that he had a 6.9% drop from 2007 - 2010 with all 139 companies with 1 share each. After eliminating the low yielders I showed a 7.8% drop over that time. So, you could say that the very low yielders had better record of dividend increases during this time. This isn't earth-shattering news but always nice to have facts.

     

    This may also explain why VIG did so much better with their dividend growth - given they hold so many low yielders.

     

    The highest initial yield in the group was only 4.8% and that was a utility. So, I didn't feel it necessary to exclude any unusually high ones. About half of all the dividend cutters had initial yields greater than 3.5% and nearly all of those cuts were financials.

     

    I'd be happy to provide my spreadsheet data but don't have a website to host it on to link to in the Instablog. If someone wants it, please pm me your email address.
    26 Sep 2011, 09:17 AM Reply Like
  • Norman Tweed
    , contributor
    Comments (7475) | Send Message
     
    No Free Cake--Thanks for your additional commentary. As usual, you have analyzed this deeper than I have. The fact that low yielders did better than high yielders is good to know. In addition, your numbers are close to Robert's.
    26 Sep 2011, 09:26 AM Reply Like
  • mbkelly75
    , contributor
    Comments (4545) | Send Message
     
    Well done - thank you for the extra time you have put into this.
    26 Sep 2011, 10:33 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (18707) | Send Message
     
    Great job, Cake! You have really added more "meat" to my article. Thank you!

     

    Robert
    26 Sep 2011, 12:56 PM Reply Like
  • No Free Cake
    , contributor
    Comments (1300) | Send Message
     
    Author’s reply » Thanks MB and Robert.
    26 Sep 2011, 01:45 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4206) | Send Message
     
    No Free Cake,
    Thank you for the analysis.

     

    "I apologize for the rather crude presentation and limited analysis"
    I like it more than articles with 10,000 words for an obvious idea and without new facts.

     

    “$1000 Ltd” portfolio makes sense (I wish I had smaller expose to financials in 2007) but a bit artificial to compare with usually studied market (1 Share ea) and equally weighted ($1000 ea) portfolios.
    It seems that your conclusion coincides with Jeff Paul results (http://seekingalpha.co...).

     

    "I'd be happy to provide my spreadsheet data but don't have a website to host it on to link to in the Instablog."
    Should it be added to Robert Allan Schwartz site?

     

    Sincerely
    SDS
    26 Sep 2011, 01:51 PM Reply Like
  • No Free Cake
    , contributor
    Comments (1300) | Send Message
     
    Author’s reply » Your welcome.

     

    Any sample portfolio is a bit artificial. I don't think it's any more likely that a person would own equal shares of every stock on a large list than any other pattern. The idea was just to show what a portfolio that was sector weighted more like the S&P would have done in relation to the others. Sector weighting is pretty common (I do it myself - loosely). I could have tweaked all the other sectors too but Tech was the only other one badly out of whack and I would have had to hold very large positions in just 2 or 3 stocks to get the sector cap weight close. Didn't seem realistic.

     

    It's just food for thought. It's not meant as a rigorous academic study :)
    26 Sep 2011, 02:26 PM Reply Like
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