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varan
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  • Chasing Dividend Yields Works 11 comments
    Apr 10, 2012 2:26 PM

    As a group, the stocks of the companies that consistently pay increasing dividends have been shown to provide higher total returns. Since the number of such stocks is quite large, the process of selecting the dividend growth stocks in which to invest is generally somewhat subjective.

    A quick calculation shows that a simple approach, wherein the stocks with the highest dividend yields from a basket of pre-selected dividend growth stocks are selected for investing at the beginning of every year, may work quite well. The results, though, should not be taken as definitive due to a number of statistical biases inherent in such a calculation.

    If ones starts with the current list of dividend champions available at dripinvesting.org/tools/tools.asp, and at the beginning of each year starting in 1991 invests in an equally weighted portfolio of ten stocks whose yields in the prior year are the highest, the CAGR during the period 1991-2011 is actually a bit higher than the CAGR of the equally weighted portfolio of all the 103 current dividend champions. The growth of $1 invested in 1991 for both of these portfolios is shown below:

    (click to enlarge)Growth of $1 invested in highest yielding dividend champions vs. the performance of all dividend champios

    It is notable that both the portfolios perform better than the MP63 fund www.mp63fund.com/index.html which invests in a subset of dividend paying stocks.

    Though the overall performance of the yearly rebalanced portfolio is slightly better, the differences in the annual returns are not very significant as shown in the following figure. It appears, therefore, that it may be possible to reap the benefits of investing in dividend growth stocks just by investing in a handful of them by using the simplest possible strategy.

    (click to enlarge)

    The quantitative performance measures of the two portfolios are not very different as well, although selecting the highest yielding stocks has a slight advantage during this period. Note that the 3, 5 and 10 year performance of most mutual funds does not come close to the performance of these portfolios.

    Performance MeasureTop 10All
    Performance of the two portfolios during 1991-2011
    3 year CAGR14.5%16%
    5 Year CAGR6.5%6.7%
    10 Year CAGR13.3%10.2%
    15 Year CAGR14%12.5%
    21 Year CAGR16%15.2%
    Sharpe Ratio.78.72
    Three Factor Alpha7%5.7%
    Three Factor Beta.47.64

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (11)
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  • Technical Analysis is Voodo...
    , contributor
    Comments (159) | Send Message
     
    I think you have something there, but taking the current list and looking back 25 years is tainted by survivorship bias. Your numbers could be way off, and it might explain why your results are better than the MP63 fund. A proper analysis would start with the 25 year old list and use a new list every year.

     

    Also, a comparison to something like the total return of the S&P 500 would be helpful.
    30 Apr 2012, 01:26 PM Reply Like
  • varan
    , contributor
    Comments (3348) | Send Message
     
    Author’s reply » That is true (and I have acknowledged this at the end of the second paragraph), but these are dividend 'champions', and even in 1991 all of them had a robust history of dividend growth.

     

    SP500 has returned 6.6% CAGR during 1991-2011, and VFINX, which presumably includes dividends as well, 8.7%, both well below the returns of the top 10 and all of the 'champions'.
    30 Apr 2012, 01:34 PM Reply Like
  • Market Map
    , contributor
    Comments (172) | Send Message
     
    What are / were the top 10 at the beginning of 2012 ? I have the list of champions in front of me and I want to cross check ... thank you
    2 May 2012, 11:49 AM Reply Like
  • varan
    , contributor
    Comments (3348) | Send Message
     
    Author’s reply » RLI, MO, PBI, T, MCY, WRE, VVC, WGL, HCP, and ORI.

     

    To rank the div champs for 2012, I compute the ratio of total dividends paid out during 2011 to the opening price on the first trading day of 2011 .

     

    2012 has not been a good year so far for this list of top 10 DG stocks, the basket having returned only 2.1% so far in 2012.

     

    As a whole the dividend champs have returned 7.9% YTD, clearly lagging the market, but the year is not yet over.
    3 May 2012, 02:47 AM Reply Like
  • buildingyield4years
    , contributor
    Comments (293) | Send Message
     
    Thanks for posting this.

     

    Good food for thought and despite the fact that it isn't scientific it helps confirm my belief in DG investing in that if I'm constantly putting $s into companies that provide me a consistent and growing streAm of income and that I can control how that income is used or reinvested I can do just as good if not better.

     

    Survivorship bias is not a concern for me and let me explain:

     

    If in fact someone actually went back and compiled a Champions lists each year that the data from this study looks at and the results were that it didn't provide a 16% CAGR but a 8-10-12% CAGR, im ok with this. I think we all can agree that if you're selecting companies that meet these stringent guidelines (25 YEARS!) even if you pick a few bad apples along the way, you're going to have more that carry the load.

     

    What's nice about investing is that you don't have to fit the strict guidelines of a scientific study and one is able to be nimble enough to eliminate the bad apples from the barrel before they cause their damage to your portfolio if reasonable attention is paid to the barrel. Out of the blue dividends cuts are EXTREMELY rare, and the results should be minimized by being diversified. Expected cuts should be planned for and avoided if possible.

     

    The ability to sell, buy, reinvest dividends, accumulate dividends and apply to a current best idea, trim seriously overvalued positions, and all the other portfolio management techniques one desires are in my arsenal. I recently started selling cash secured puts and im willing to investigate any other techniques that helps to squeeze out extra reinvestable income for my dividend machine that arent allowed by any scientific study. As long as im making these decisions using good valuation techniques and my interpretations of the various operating results and opportunities of the underlying company, reaching high annualized growth shouldn't be a problem. Interestingly enough, that's not the goal of my investing, it's just a function of my main focus, which is to grow the rights to a large and quickly/steadily growing stream of income.
    4 May 2012, 12:47 AM Reply Like
  • Bob Wells
    , contributor
    Comments (4915) | Send Message
     
    Varan

     

    Great work here. Have you thought about doing the same with Challengers and Contenders? Might make a sweet 30 stock portfolio.

     

    Bob
    5 May 2012, 08:48 AM Reply Like
  • dmetz
    , contributor
    Comments (3) | Send Message
     
    Have you tried this with 4 week, 6 week or 12 week numbers. What if you run two portfolios offset by 4 weeks but still using the 8 week numbers?

     

    Also, how do I run the numebrs myself using online resources?

     

    Thanks
    24 May 2012, 05:53 PM Reply Like
  • dmetz
    , contributor
    Comments (3) | Send Message
     
    please ignore - ment to post on your article on idelity select rotation.
    24 May 2012, 05:53 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12284) | Send Message
     
    "If ones starts with the current list of dividend champions available at dripinvesting.org/tool... and at the beginning of each year starting in 1991 invests in an equally weighted portfolio of ten stocks whose yields in the prior year are the highest"

     

    Sounds like "Dogs of the Dividend Champions". :-)

     

    "A quick calculation shows that a simple approach, wherein the stocks with the highest dividend yields from a basket of pre-selected dividend growth stocks are selected for investing at the beginning of every year, may work quite well."

     

    This "simple" approach seems to require selling some of the 10 each and every year, which is far more trading that I'm willing to do.

     

    "the CAGR during the period 1991-2011 is actually a bit higher than the CAGR of the equally weighted portfolio of all the 103 current dividend champions."

     

    Is the difference statistically significant?

     

    "the differences in the annual returns are not very significant as shown in the following figure."

     

    OK, that answers my question.

     

    "It appears, therefore, that it may be possible to reap the benefits of investing in dividend growth stocks just by investing in a handful of them by using the simplest possible strategy."

     

    A Dogs strategy is not the "simplest possible strategy".
    2 Jul 2012, 08:48 AM Reply Like
  • varan
    , contributor
    Comments (3348) | Send Message
     
    Author’s reply » Thanks for your comment. It is simplest inasmuch as it selects the stocks on the basis of a well defined quantitative criterion. It may not of course be the simplest if some other norm is used as the measure of simplicity.

     

    Obviously this is not meant for buy and hold investors.
    2 Jul 2012, 10:10 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12284) | Send Message
     
    "Obviously this is not meant for buy and hold investors."

     

    Thank you for this clarification.
    2 Jul 2012, 11:21 AM Reply Like
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