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  • An Annually Updated And A Permanent Portfolio Of Dividend Growth Stocks 33 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 (33)
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  • leebailey85
    , contributor
    Comments (85) | 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 (39) | 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 (85) | 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 (5773) | 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 (5773) | 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 (5773) | 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 (5773) | 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 (5773) | 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 2015, 10:35 AM Reply Like
  • Dale Roberts
    , contributor
    Comments (8144) | Send Message
     
    Great research and interesting premise, as always.

     

    Dale
    25 Mar 2015, 05:45 AM Reply Like
  • galicianova
    , contributor
    Comments (3696) | 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 2015, 12:18 PM Reply Like
  • varan
    , contributor
    Comments (5773) | 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 2015, 01:59 PM Reply Like
  • galicianova
    , contributor
    Comments (3696) | 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 2015, 02:58 PM Reply Like
  • varan
    , contributor
    Comments (5773) | 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 2015, 01:20 PM Reply Like
  • galicianova
    , contributor
    Comments (3696) | 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 2015, 03:50 PM Reply Like
  • Brian Auty
    , contributor
    Comments (5056) | Send Message
     
    This is an interesting idea. This would be a much lower risk than trying to pick the best stocks on your own acumen for determining business value. It would be interesting to compare to the strategy of simply buying the cheapest 10 dividend aristocrats and simply hold.

     

    The best dividend growers would speak to management quality and or business moat and so is a valid metric in business analysis.

     

    My only concern would be that performance could be skewed by the popularity of dividend growth generally.
    16 Aug 2015, 06:22 PM Reply Like
  • Placebo Investment Advice
    , contributor
    Comments (4088) | Send Message
     
    "The best dividend growers would speak to management quality and or business moat and so is a valid metric in business analysis."

     

    That's a bold assumption. Executive compensation is overwhelmingly provided by stock grants. Executives are influenced greatly by the fact that dividends are currently in huge demand by pensions and other institutions (because of low bond yields). Many slow- or no-growth companies have raised lots of cheap debt to boost dividends and get on the hot sheet of dividend-greedy institutions. Executives are keenly appreciative of the fact that stock prices benefit greatly from dividend raises. This crowd-pleasing, self-serving executive behavior will be unmasked only after a recession or persistent rise in interest rates.

     

    Dividend growth is a sloppy quality indicator. In this era of blazing computers and giant databases of financial metrics, focusing on dividend growth is like using a slide rule to solve a complex math problem.
    16 Aug 2015, 11:29 PM Reply Like
  • Brian Auty
    , contributor
    Comments (5056) | Send Message
     
    @Placebo - you can fudge numbers a few times, but ultimately dividends are paid from cash flow and a growing dividend built on a house of cards will stop growing and hence fall off this list eventually. Companies borrowing bases don't grow to infinity.

     

    In the meantime, they are dividend aristocrats which I still think is a good place for novice investors to start. I didn't recommend this for professionals, but feel it would be useful for beginners. I don't own any of these companies.

     

    Financial modelling with computers is pretty much garbage in - garbage out, so I don't know how you'd get a better result than actually knowing the company. What computer modelling can you do that actually picks which company to buy when the financials show similar value? Yes computers are useful for all kinds of things, but they too are run by human beings that programmed an idea in and they scan for things that meet their opinion of what's valuable to look for. Otherwise, it's just a bunch of numbers.
    17 Aug 2015, 08:26 AM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » Thanks TR.

     

    Sometime ago I did this calculation without the bias that is implicit in using the list of 2012 December that I used for the original back test. (Note that the 2013, 2014, and the 2015 selections noted in the comments were generated using the prior years' lists as described below).

     

    Every year starting in 2008, buy the stocks with the highest dividend growth from the list of Dividend champions published in the December of the prior year.

     

    2008 -24.76%
    2009 18.65%
    2010 15.09%
    2011 8.33%
    2012 14.93%
    2013 35.71%
    2014 12.61%
    2015 1.12%
    CAGR 2008-2015 9.3%

     

    For comparison:
    SDY 8.8%
    VYM 7.1%
    VIG 7%
    FDGFX 7.25%
    NOBL 2014 15.5% 2015 2.2%

     

    An interesting aspect of this strategy is that if you hold off buying the top 10 for a month (buy them on Feb. 1 of the year instead of on Jan 1) at least for 2008-2015 there is some improvement.

     

    2008 -22.82%
    2009 36.70%
    2010 20.81%
    2011 9.19%
    2012 12.08%
    2013 24.43%
    2014 19.44%
    2015 5.39%
    CAGR 12.3%
    16 Aug 2015, 06:44 PM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » This strategy seems to be quite competitive with more elaborate method for investing in dividend growth stocks.

     

    Here are some out of sample (after the publication of the article) results.

     

    1. The first result (after publication of this article in Feb 2013) available for this portfolio http://bit.ly/1AgJdrl is here http://bit.ly/1GZcFfC. Its value has increased from 145% of original investment to 176%, leading to a return of 20.1% during this period (June 2013 thru Oct. 2015).

     

    The annually updated portfolio of maximum dividend growth rate stocks (this blog) has returned 24.9% during the same period.

     

    2. At the end of Feb. 2013, this portfolio (http://bit.ly/1GZcEIt ) was valued at $92362. With about $620 invested per month its value has increased to $144425 at the end of Oct. 2015 (http://bit.ly/rBJkXG) .

     

    With the same deposit schedule and the starting portfolio value, the maximum dividend growth rate portfolio would have grown to $149764.
    12 Nov 2015, 03:52 PM Reply Like
  • lintervvv
    , contributor
    Comments (156) | Send Message
     
    I see no reason not to go with this strategy with a few dollars this year. When will you be updating it, hopefully in time for me to do DD on its component stocks? And what's you're current feeling re jan 1 start vs feb 1?
    24 Nov 2015, 06:27 AM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » I will update the list in the last week of December.

     

    I will be going in on Feb 1.

     

    Thanks.
    24 Nov 2015, 10:15 AM Reply Like
  • lintervvv
    , contributor
    Comments (156) | Send Message
     
    Thanks. I'll be joining you. What's the worst that can happen?
    24 Nov 2015, 11:16 AM Reply Like
  • Martin Schwoerer
    , contributor
    Comments (273) | Send Message
     
    Same here. Much looking forward to this experiment starting Feb 1. Thank you, Varan!
    10 Dec 2015, 11:55 AM Reply Like
  • yawkey5
    , contributor
    Comments (423) | Send Message
     
    Hi Varan,
    Are there any performance updates to this portfolio?

     

    Thanks,
    Yawkey
    14 Dec 2015, 06:04 PM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » The YTD return has been dismal: -5%.
    14 Dec 2015, 10:09 PM Reply Like
  • Martin Schwoerer
    , contributor
    Comments (273) | Send Message
     
    Based on buying on Jan 1, or Feb 1?
    15 Dec 2015, 03:55 AM Reply Like
  • yawkey5
    , contributor
    Comments (423) | Send Message
     
    Varan,
    Thanks for the quick response.

     

    Yawkey
    16 Dec 2015, 01:08 PM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » Jan 1.

     

    Feb 1 based loss is slightly less.
    15 Dec 2015, 10:03 AM Reply Like
  • lintervvv
    , contributor
    Comments (156) | Send Message
     
    Ouch. Not a happy number :-(.
    15 Dec 2015, 10:11 AM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » Yeah.
    15 Dec 2015, 10:17 AM Reply Like
  • Martin Schwoerer
    , contributor
    Comments (273) | Send Message
     
    Yeah, but who's made a lotta dough this year? Not many people.
    15 Dec 2015, 12:10 PM Reply Like
  • varan
    , contributor
    Comments (5773) | Send Message
     
    Author’s reply » 2015 return -2.4%

     

    Not too much worse than the other popular DG funds:

     

    VIG -1.94%
    VYM 0.28%
    NOBL 0.44%
    SDY -0.80%
    SCHD -0.30%
    VDIGX 2.71%

     

    If funded on Feb. 1, 2015, the portfolio would have returned -0.4%.

     

    For 2016, I have selected the Champions with the highest five year DGR, but have made the following modification: select the top ten large caps (with capitalization larger than $15B), as this constraint would have eliminated some of the poor performers of 2015.

     

    These ten make the list for 2016:

     

    TGT, LOW, HRL, WBA, VFC, BEN, MMM, TROW, ADM, SHW,

     

    Here is to better returns for 2016.

     

    Thanks.
    4 Jan, 03:24 AM Reply Like
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