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  • An Annually Updated And A Permanent Portfolio Of Dividend Growth Stocks 15 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 (15)
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  • leebailey85
    , contributor
    Comments (78) | 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 (78) | 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 (4469) | 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 (4469) | 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 (63) | 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 (4469) | 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 2014, 04:33 PM Reply Like
  • varan
    , contributor
    Comments (4469) | 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 2014, 04:38 PM Reply Like
  • varan
    , contributor
    Comments (4469) | Send Message
     
    Author’s reply » The 2014 selections returned 12.6%. With the 35% return in 2013, the total two year return is a bit better than that of a portfolio of over sixty DG stocks selected using multiple filters (http://bit.ly/1Am3o9Q ). The two year total return also compares well with the returns of some dividend funds, e.g. SDY, VIG, VYM, and VDIGX.

     

    For 2015, the DG portfolio based on our methodology contains the following:
    HP RLI STR CTAS TGT DCI WAG LOW GWW NDSN.

     

    We will come back to this in a year.
    3 Jan, 10:35 AM Reply Like
  • Dale Roberts
    , contributor
    Comments (5805) | Send Message
     
    Great research and interesting premise, as always.

     

    Dale
    25 Mar, 05:45 AM Reply Like
  • galicianova
    , contributor
    Comments (2486) | Send Message
     
    VARAN, pardon my ignorance but 1) where from you pick the list of highest dividend growers? - 2) is the # of 10 stocks optimal or sensitive to the # of stocks? what would have changed if instead of 10 i would have picked 8 or 12 stocks?
    thanks!
    25 Apr, 12:18 PM Reply Like
  • varan
    , contributor
    Comments (4469) | Send Message
     
    Author’s reply » To explain by example:

     

    1. At the end of 2014, I downloaded the latest list of dividend champions that was available,

     

    2. For each dividend champion I downloaded the yearly dividends for 2009 and 2014 from Yahoo finance, and computed the five year growth rate. This was used to rank the stocks and the top ten were chosen. I do all this programmatically, and so this is not as much of an effort as it appears.

     

    You question on the change in the performance with the change in the number of stocks selected is very interesting. I have, unfortunately, not investigated that aspect of the strategy.

     

    Thanks.
    25 Apr, 01:59 PM Reply Like
  • galicianova
    , contributor
    Comments (2486) | Send Message
     
    thanks for the quick reply! but since you have programmed the stuff it should not be that difficult to draw annual performance graph vs # of stocks. you may discover a sweet domain which balances simplicity vs performance! in addition, perhaps one should prepare a bit larger list and do a sub-selection to assure that no sector will be over,say, 1/3 of the portfolio?
    25 Apr, 02:58 PM Reply Like
  • varan
    , contributor
    Comments (4469) | Send Message
     
    Author’s reply » It can be done, but I am skeptical of the value of such an exercise.

     

    One of my rules for developing investment strategies is to avoid looking for optimal values of the parameters, which in your suggestion amounts to finding the number of stocks that will lead to highest returns on the basis of historical data.

     

    This might give you an idea of the basis of my thinking: http://bit.ly/1b3READ
    26 Apr, 01:20 PM Reply Like
  • galicianova
    , contributor
    Comments (2486) | Send Message
     
    whereas the shortcomings of "over optimization" are clear, or even may be not practical due coarseness of the available data, throwing the towel is the other extreme: the question is then how do you estimate that 10 stocks is in the right ball park? if 20 stocks systematically does better, wouldn't you be interested to know it, or use it? differently stated, whereas my quest for optimization may in principle be not doable, some rough estimate, corresponding the the roughness of the data, should be possible and provide us with the domain where each of us may make his choice.
    26 Apr, 03:50 PM Reply Like
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