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My 2 Cents On Market Benchmark For Dividend Investors

Many dividend investors (Dis) dislike stansdard performance comparisons to market indexes and ignore to some extend the market prices. While the primary goal of a Di portfolio may be to produce a stream of income from dividends, it should also perform respectively against stock market benchmarks. I propose for Dis (esp. for DGis) to compare investor's dividend growth rate (iDGR) with market's dividend growth rate (mDGR) using for example a typical benchmark for US stock market such as S&P 500 index.

Well knoww company's annual DGR = (D1-Do)/Do, where D1 is dividend per share company paid in year Y1, Do is dividend company paid per share in a previous year Yo. It is usually reported in % and calculated after D1 announced.

Using direct analogy market's annual mDGR = (Dm1-Dmo)/Dmo, where Dm1 is dividend per share ETF or index MF that represent the benchmark paid in year Y1, Do is dividend the ETF or the index MF that represent the benchmark paid per share in a previous year Yo. Dmo and Dm1 depend on dividends of each company included in the benchmark and weight of shares of different companies in the benchmark. It should be noted that the benchmark composition can be different if various years.

In analogy with cDGR we can consider investor's DGR from a company as iDGR = (d2-d1)/d1, where d1 is total dividends investor got in year 1, d2 is total dividends investor got in next year 2 from the same company. Because d1=D1*N1, d2=D2*N2 we have iDGR= (D2*N2-D1*N1)/(D1*N1). Note that without re-investing iDGR=cDGR and even for cDGR=0 a positive iDGR>0 is possible due to re-investing.

In analogy with mDGR investor's portfolio dividend growth rate can be calculated as a difference between sums of all dividends the investor collected from her holdings during 2 consecutive years. It should be noted that the portfolio composition can be different if various years.

IMO most of dividend strategies (like DG or HY) rely on long-term approach with holding period counted by several years, and in this case compound annual growth rate (OTCPK:CAGR) can be used (see http://en.wikipedia.org/wiki/Compound_annual_growth_rate). /Note that annual, quarterly and even monthly reports of some SA members about their dividend portfolio performance in comparison with any benchmark do NOT make any sense/. CAGR is applicable for dividends: CAGRD(Yo,Yn) = (Dn/Do)^[1/(Yn-Yo)]-1, where Yn-Yo is period between 2 arbitrary years when a company paid dividends Dn and Do.

Robert Allan Schwartz maintain database of dividends CAGRD for typical FG stocks (http://www.tessellation.com/dividends/years.html).

Amount of annual dividends paid by the ETF or the index MF that represent the benchmark is widely reported. Amount of annual dividends investor receives from her/his portfolio can be found in tax reports brokers send to investor.

23 June 2013