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KSAccountant
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I am following the example of several other Seeking Alpha contributors who publish their stock portfolio. I do so to give greater insight into some of the comments I write. For better understanding, I separate my portfolio into three categories: 1. Taxable, 2. Roth IRA, and 3. SIMPLE IRA. My... More
  • Dividend Growth Stock VS Index - ten year estimate (OH CRAP scenario) 4 comments
    Sep 7, 2011 3:17 PM | about stocks: XOM
    With all the conversations about index investing versus individual stocks, I decided to run two different scenarios. The first scenario I posted previously, this scenario covers an “oh crap” situation whereby XOM is forced to completely eliminate its dividend. I used the same facts as the previous post but will restate them here.
     
    I selected Vanguard Total Stock Market Index (VTSMX) and ExxonMobil (NYSE:XOM). I chose XOM because it is the largest holding of VTSMX. So here are the basic facts:
     
    VTSMX
    Expense Ratio: 0.18%
    Average Yield over last 5 years: 1.91%
    Price used for calculation: 29.18
    Average Div. Growth Rate over last 5 years: 0% (sporadic)
     
    XOM
    Expense Ratio: 0%
    Average Yield over last 5 years: 2.43%
    Average Div. Growth Rate over last 5 years: 5%
     
    I used 5 years before retirement and 5 years after retirement for a total of 10 years. I also used the stated fact that both investors need $125 a year. Also, since VTSMX is an index fund, I gave it a 5% bonus in down market years in comparison to XOM and a 5% penalty in up market years in comparison to XOM simply because it is an average.
     
    Investor A – puts $5,000 into VTSMX and reinvests dividends for 5 years and then stops reinvestment after that point.
    Investor B – puts $5,000 into XOM and reinvests dividends for 5 years and then stops reinvestment after that point.
     
    With those facts in mind, I randomly chose up and down market amounts (I could back test but as all prospectuses say “past results are not predictive of future results”.)
     
    Here are the results (I will show only account balances to save on space):
    Year 1
    Investor A – VTSMX 0%, Return Account balance – $5079.35
    Investor B – XOM 5% Return, Account balance – $5292.44
     
    Year 2
    Investor A – VTSMX 5%, Return Account balance – $5460.97
    Investor B – XOM 10% Return, Account balance – $5949.99
     
    Year 3
    Investor A – VTSMX -25%, Return Account balance – $4177.42
    Investor B – XOM -30% Return, Account balance – $4302.68
     
    Year 4
    Investor A – VTSMX 20%, Return Account balance – $5109.98
    Investor B – XOM 25% Return, Account balance – $5527.69
     
    Year 5
    Investor A – VTSMX 3%, Return Account balance – $5360.34
    Investor B – XOM 8% Return, Account balance – $6131.08
     
    Starting in years after this all dividends are taken in cash and shares are sold to get the $125 needed
     
    Year 6
    Investor A – VTSMX 5%, Return Account balance – $5598.54
    Investor B – XOM 10% Return, Account balance – $6743.97
     
    In Year 7 XOM is forced to cut its dividend and the stock drops 40% as a result. VTSMX is also effected since XOM is its largest holding but only by 1% over normal market returns. Investor B would be required to sell 2 shares a year of XOM to get the required $125. Now the scenario continues.
     
    Year 7
    Investor A – VTSMX -15%, Return Account balance – $4733.41
    Investor B – XOM -20% Return, Account balance – $3889.49
     
    Year 8
    Investor A – VTSMX 30%, Return Account balance – $6120.48
    Investor B – XOM 35% Return, Account balance – $3919.22
     
    Year 9
    Investor A – VTSMX 3%, Return Account balance – $6270.15
    Investor B – XOM -2% Return, Account balance – $3867.11
     
    Year 10
    Investor A – VTSMX 3%, Return Account balance – $5986.76
    Investor B – XOM -2% Return, Account balance – $3931.09
     
    Investor A had to start selling shares immediately in Year 6 to meet the $125 yearly demand.
    Investor B never sold any shares because the dividend growth covered the $125 yearly demand.
     
    End results:
    Investor A – 19.74% Return
    Investor B – (21.38)% Return
     
    This was not a scientific sketch, just an exercise to compare an index to a dividend growth stock. My post is not meant to be an “end all” of conversation nor an academic study, just posting my thought process for discussion and review (both good and bad).
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Comments (4)
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  • No Free Cake
    , contributor
    Comments (1211) | Send Message
     
    1) You say XOM shares were never sold. But, if the dividend was cut in year 7 they would have had to sell shares to provide their $125 income - or sell and buy something else.

     

    2) The 40% stock price drop for XOM would not have affected VTSMX by 5% - it only makes up 2.7% of its portfolio so maybe like a 1% affect.

     

    3) The 5% discount to the index return seems excessive.

     

    As a demonstration piece for relative newcomers to D-G, I think two tables showing the details would help. At least share counts and where the income derives. It seems to be a common confusion. I think the confusion comes from people thinking of their investments as a big pile of money - instead of a collection of cold, hard shares - the actual asset.
    7 Sep 2011, 03:52 PM Reply Like
  • KSAccountant
    , contributor
    Comments (769) | Send Message
     
    Author’s reply » No Free Cake, thank you for your comments. This was my first attempt at throwing out ideas via Instablog so I appreciate you taking the time to read my post. To answer your questions:

     

    1. You are correct, that was an oversight on my part.
    2. After I posted and thought about what I wrote, I was thinking 5% does seem excessive.
    3. I should clarify, by 5% discount (or premium) I am talking relative to XOM. I should have clarified that in both of my posts rather than saying "market return".

     

    I do have share counts but, being a newbie, I was unsure just how much information I could post and if the instablog would accept tables created in Excel or not. I will try to polish what I have written. Thank you.
    7 Sep 2011, 04:17 PM Reply Like
  • No Free Cake
    , contributor
    Comments (1211) | Send Message
     
    Kind of quiet here KSA. Here's a thought. Instead of a hypothetical case - how about a real one?

     

    BP might be one. Their dividend cut was hard to predict (well, before Macondo blew up anway). Same industry as XOM. They had a long track record of increasing dividends (in local currency) except a minor dip in 2003. BP, like other Euro companies, tend to pay a higher percentage of earnings and thus a higher amount but at the cost of some variability. Even with that in mind, BP was a terrific payer and grower until 2010.

     

    You could use actual VTSMX and BP returns starting whenever and through until now - call it a "case study". It's especially interesting because they've since resumed their dividend. You'd have multiple courses of action to model - selling right away, selling mid-way down, selling at bottom (bad luck!), or holding.

     

    It's just food for thought if you are so inclined - it's academic to me (now). I owned BP before the well blew up. I sold before the cut happened but still probably ended up a bit behind. I didn't evaluate it in detail - I took the sale proceeds and invested elsewhere. Stuff happens, adjust, move on.
    7 Sep 2011, 09:47 PM Reply Like
  • bergerboatman
    , contributor
    Comments (7) | Send Message
     
    thanx for your honesty and restatement, I too thought the percentages were skewed but then the metrics can be different for different classes, but one metric that usually doesnt falter is net income, after executive bonnuses are accounted for, which this year should be enormous
    31 Oct 2012, 03:27 PM Reply Like
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