BRIEF REPORT 4/4/2012 by SDS (Seductive Dividend Stocks)
The goal of this communication is to compare several mutual funds and ETFs (I'll use the word FUN-D for any of these) with passive and "blind" investment into David Fish list of Dividend Champions (dripinvesting.org/Tools/Tools.asp) during 12/31/2007-3/30/2012.
David Fish published the list at the first time in December 2007 and it is available from Robert Allan Schwartz WWW site (www.tessellation.com/dividends/). Initial list contained 139 companies with dividend growth history from 24 to 54 years.
I formed "blind" Dividend Champions portfolio from 1 stock of each company in the December's list. David Fish missed 3 companies (CTBI, BEN, BWL.A) that are now in his CCC list and I did not considered these stocks (1).
I used open prices on 12/31/2007 for stocks purchases (2) as well as open prices on 3/30/2012 for stocks sales (3) and ignored any fees related with these transactions. No other transactions were occurred between 12/31/2007 and 3/30/2012, dividends were just collected and not re-invested. The same approach I used for each FUN-D described below and for calculations I ignored load and annual fees.
For prices and dividends I mostly used Yahoo.com although some dividend information was taken form Morningstar.com. Both sources show ex-dividend date, I presumed that payday is in the same quarter as ex-date for simplicity.
The expense for set-up of "blind" Dividend Champions portfolio is $6401.27 and the same amount was invested in each FUN-D. Hence the calculations presented below show apple to apple comparisons before fees and taxes.
I downloaded all FUN-Ds with word "dividend" in the name from Morningstar and Lipper and selected FUN-Ds with the name that remind principles David Fish list of Dividend Champions, such as "Dividend Growth", "Dividend Achievers", "Rising Dividends", etc. Usually few mutual funds with different fees (which I ignored as mentioned already) co-exists in a "family". I compared holdings and results of two mutual funds from the same family: SIT Dividend Growth Fund Inst and SIT Dividend Growth S and they have very similar holdings and performance, so I just took the first fund from mostly alphabetical list in the fund family.
Symbols for FUN-Ds are in accordance with Morningstar.com and I used the symbol DFDC for "blind" Dividend Champions portfolio. Quarterly dividend data were calculated for DFDC and funds with monthly dividends, semiannual and annual dividends of some FUN-Ds were not recalculated for quarterly base used in this report.
Results and short analysis
Total profit of a DFDC investor during the holding period is about 6.6%. DFDC dividends 11.47% during 12/31/2007-3/30/2012 overcompensated 4.85% of capital losses.
DFDC is essentially passive market-weight portfolio and therefore I also compared it with famous (but active) market-weight index S&P 500 represented by SPY. More than half (72 of 139) DFDC companies were in S&P 500 in March 2012.
Comparison of regular DFDC dividends with total SPY dividends (fig. 1) shows that they were unstable and even decreased during considered holding period. In contrast with expectation of a dividend growth investing blind DFDC had rolling negative dividend change rates (DCR) calculated for 4 quarters and even negative annual DCR for regular dividends (4).
Fig. 1. Comparison of SPY dividends (per unit) and regular DFDC dividends during holding period (12/31/2007-3/30/2012).
Table 1. Dividend change rates for DFDC.
While both portfolio prices dropped (4.2% for SPY and 4.85% for DFDC) during the holding period a SPY investor collected only about 63% of total dividends a DFDC investor received (about 77% of regular DFDC dividends). Hence a SPY investor underperforms a DFDC investor. Nevertheless this result probably is not important because S&P500 index is not designed for dividend investing. Therefore I compared DFDC performance with FUN-Ds selected by name as described above.
Dividends from DFDC were $734.15 during the holding period including $ 130.96 special dividends. Analysis of dividends distributions shows that some FUN-Ds paid special dividends and payments of many FUN-Ds included Capital Gains Distributions (it seems Yahoo does not separate them from Income Distributions). Hence total Distributions for FUN-Ds and total DFDC dividends are considered in income streams.
Results are presented in table 2. The first column shows FUN-Ds symbols. The second column shows total dividends extracted from each investment vehicle after investment of $6401.27 in each of these 12/31/2007 till 03/30/2012. The third column compares amount of dividends from the second column for different FUN-Ds with income from DFDC. Red numbers in these columns show FUN-D income underperformance to compare with "blind" Dividend Champions portfolio DFDC. The forth column compares prices at the ends of holding period, numbers in red indicate losses. The last fifth column shows total gains (in black or green) or losses (in red).
On the first glance some FUN-Ds outperform DFDC but with average annual fee 1.25% (and unfortunately most of outperformed FUN-Ds have also ~ 4% load) we need to deduct ~ 5% from FUN-Ds results. Total investment returns in the last column in green indicate that FUN-D outperformed DFDC at least 6% (I choose this number here to compensate FUN-Ds charges).
Table 2. FUN-Ds and DFDC performances.
Analysis and Conclusions
Although only 88 companies from original 2007 list of Dividend Champions keep status of Dividend Champions now according to very restrictive David Fish rules, DFDC outperformed S&P500 and many dividend FUN-Ds. Total return oriented DG investor might consider SunAmerica Focused Dividend Strategy A Fund and Franklin Rising Dividends A Fund (FDSAX and FRDPX) instead of self-made portfolio. Both FDSAX and FRDPX had positive capital gains and delivered more dividends than DFDC during the holding period before fees and other charges. Comparison of these FUN-Ds dividends per unit (right scale) and total DFDC dividends (left scale) is shown in figs. 2 on quarterly and annual bases (FRDPX paid only annual dividends).
Fig. 2A: DFDC vs. FDSAX: Quarterly dividends.
Fig. 2B: DFDC vs. the best FUN-Ds: Annual dividends.
Unfortunately, both these FUN-Ds both as well as similar mutual funds in their families are quite expensive, so I doubt that they are really better choice than DFDC for a DG investor.
As already stated DFDC is the passive portfolio. In reality a DG investor was able to detect some (but not all) possible dividend omissions and cuts, sell stocks of such companies and invest for example in Dividend Champions missed in original 2007 list.
On another hand, most of DG investors probably prefer some selection (e.g. stocks with high yield or strong positive DCR) from David Fish list of Dividend Champions instead of blind market-weighted equal number of stocks DFDC portfolio (5).
Last 4+ years probably were one of most difficult for dividend growth investing because of multiple dividend omissions, cuts and freezes. Also market weighted portfolio is probably not optimal for a dividend -oriented investing (6). Nevertheless DFDC provided reasonable good return for investors (total gain about 6%).
I'm grateful David Fish for discussion.
(1) Inclusion of these companies improves slightly performance of Dividend Champions portfolio in terms of dividends and price appreciation.
(2) Yahoo doesn't provide prices for BUD, ENSI, FPU, HNBC, ROH, WWY, HB on 12/31/2007 because mergers and acquisitions (see footnote 3). I took prices for these stocks as they listed on 01/15/2008 from David Fish list of Dividend Champions for January 2008.
(3) Hillenbrand Industries (HB) was separated into 2 companies Hillenbrand and Hill-Rom (HRC & HI). I presume that one HB stock was converted into one HI and one HRC stocks and use their prices on 3/30/2012 and dividends from these companies from split in 2008 till 3/30/2012.
Anheuser-Busch (NYSE:BUD) was acquired in 2008 by InBev and became ADR IPO. I presume that one Anheuser-Busch stock was converted into one Anheuser-Busch InBev SA stock, both with the same symbol BUD. David fish (personal communication) noted that "original BUD I believe was bought out for cash and new ADR BUD may not be a 1-for-1."
Under the merger agreement each common share of Florida Public Utilities (NYSE:FUN) converted into 0.405 shares of Chesapeake Utilities (NYSE:CPK) common stock on 29 October 2009 (open price $30.68). I assume that DFDC investor immediately sold CPK.
ENSI was acquired for $61.50/share cash by Sempra Energy (NYSE:SRE).
First Niagara Financial Group Inc. (NASDAQ:FNFG) exchanged 0.474 share of their common stock for each outstanding common share of Harleysville National Corp. (HNBC) on 4/9/2010 (open price $14.66). I assume that DFDC investor immediately sold FNFG.
(4) IMO special dividends should not be counted in dividend change rates DCRs. See http://seekingalpha.com/instablog/725729-sds-seductive-dividend-stocks/439261-single-factor-dividend-income-model-part-1-25-march-2012 for DCR role in DG investing.
(5) Of course "1 stock each" portfolio is not rational because trading cost of 4+ years round trip is about 30% of investment.
(6) I'd cover this topic in another SA post.