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varan
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  • An Annually Updated And A Permanent Portfolio Of Dividend Growth Stocks 8 comments
    Feb 14, 2013 2:16 AM

    Since stocks whose dividends grow consistently over time are generally presumed to be good investments, we consider an annually updated portfolio of dividend growth stocks wherein the criterion for selection is the rate of growth of dividends over the prior five years. Based on the results of back testing, a permanent portfolio of dividend growth stocks may also be constructed as we describe below.

    The basket of stocks from which the selections were made at the end of each year for the following year consists of the 2013 dividend champions. Obviously our calculation suffers from survivor bias, but the results are nevertheless quite interesting. For a given year the portfolio consists of the ten stocks whose rate of growth of dividends during the prior five years was the highest.

    The main performance metrics based on the returns for the period 1997-2012 are:

    CAGR 14.1%

    Maximum Annual Drawdown: 23%

    Number of years of Losses: 3

    -23%[-2008], -8.5%[2002], -0.3%[2001]

    Sharpe Ratio .66

    Kelly Fraction .72

    2000-2012 CAGR 11.3%

    The portfolio growth curve is shown in the following figure:

    (click to enlarge)

    The following figure shows the allocation diagram for the years 1997-2013.

    (click to enlarge)

    For the current year 2013, the portfolio consists of NC, LANC, TMP, TGT, WEYS, TR, MCY, LOW, EV and MDT, and has returned 10.6% to date (2/12/2013).

    The Permanent Portfolio of Dividend Growth Stocks

    On the basis of these results, we can choose ten stocks which appeared most frequently in the annual selections, thus forming a permanent portfolio of dividend growth stocks. This portfolio consists of the following: TROW, MDT, EV, MCD, AFL, CTAS, NUE, WMT, SYY, MSA.

    The performance metrics of this portfolio for the period 1997-2012 are:

    CAGR: 14.7%

    Maximum Annual Drawdown 25%

    Number of years of losses 2

    -25% [2008], -10.5% [2002]

    Sharpe Ratio .65

    Kelly Fraction .78

    This portfolio has returned 8.2% YTD.

    Disclosure: I am long MCD.

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Comments (8)
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  • leebailey85
    , contributor
    Comments (77) | Send Message
     
    Is there any way to leverage this portfolio? With just using margin, you could get 14.7*2 = 29.4% - 8% margin rate = 21.4% CAGR or about 19% CAGR after inflation. Very solid for a very easy, no thinking/hassle buy and hold strategy, but is the extra 7% CAGR worth the margin risk?
    6 Mar 2013, 02:13 AM Reply Like
  • alesmith_
    , contributor
    Comments (45) | Send Message
     
    I think if you have to pay anywhere near 8% to borrow funds, you definitely should not do so for investing purposes. I'm paying 1.66% right now at Interactive Brokers and using it relatively conservatively, to hold a 2x leveraged position in Jeffrey Gundlach's Doubleline Total Return (DBLTX). I think that's a good use of cheap funds currently.
    7 Mar 2013, 04:38 PM Reply Like
  • leebailey85
    , contributor
    Comments (77) | Send Message
     
    After examining the charts of these stocks over the last 16 years, it seems like it is unlikely that the future CAGR of the permanent dividend growth portfolio will be 14.7%. Varan, do you believe that this portfolio will see returns close to that in the future?
    11 Mar 2013, 06:02 AM Reply Like
  • varan
    , contributor
    Comments (3346) | Send Message
     
    Author’s reply » I cannot claim to know the future. Based on the past data it can be surmised that they should do well, but one has to monitor the portfolio to avoid any events that would adversely impact its returns.
    11 Mar 2013, 10:01 AM Reply Like
  • varan
    , contributor
    Comments (3346) | Send Message
     
    Author’s reply » YTD Results: (7/22/2013)

     

    The equally weighted portfolio of 10 stocks for the yearly updated portfolio on the basis of the dividend growth during the prior five years: 28.0%. (15.7% since 2/15/2013, the date of publication of this post.)

     

    Decent, but probably anomalously too high, though it confirms the soundness of the basic idea.

     

    Permanent Portfolio of DG stocks: 19%. (9.38% since 2/15/2013, the date of publication of this post.)

     

    Quite satisfactory.

     

    I should have trusted my own analysis. Anyway, this year's performance serves as validation of the basic idea.
    21 Jul 2013, 09:18 PM Reply Like
  • Elran
    , contributor
    Comments (60) | Send Message
     
    "The basket of stocks from which the selections were made at the end of each year for the following year consists of the 2013 dividend champions"

     

    There is a problem with this strategy since you used forward looking strategy (looking into the future) , in the years before 2013 you could not have known who will be the dividend champion in 2013.
    24 Dec 2013, 09:03 AM Reply Like
  • varan
    , contributor
    Comments (3346) | Send Message
     
    Author’s reply » Thanks for catching the typo. The list was downloaded at around Dec 2012/Jan 2013 time frame. Obviously it could not have been 2013 Champions since the instablog was posted in mid-February 2013.
    5 Jan, 04:33 PM Reply Like
  • varan
    , contributor
    Comments (3346) | Send Message
     
    Author’s reply » This list generated 35% during 2013, and 20.5% if purchased on 2/16/2013, after the publication of this post.

     

    For 2014, the latest Dividend Champions List and the data on dividends from Yahoo Finance lead to the following basket for 2014:

     

    HP STR RLI WAG TGT GWW CLC DCI FDO LOW

     

    We will see how this portfolio performs in 2014.
    5 Jan, 04:38 PM Reply Like
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