The Dow Jones Industrial Average As Dividend Growth Proxy?

Includes: DIA, VIG
by: Dale Roberts

The Dividend Growth model of investing has certainly increased like a high flying dividend over the last few years. For good reasons.

Dividend Growth Investing means creating a portfolio of stocks/companies (through funds or individual selection) that delivers an ever-increasing income stream. That is, you own companies that have a history of increasing their dividends over a few years, to several years to decades. The parameters are up to you. And many Dividend Growth investors certainly monitor those companies for other measures of "quality".

On the psychological and emotional side of the ledger, DG investing allows the opportunity for investors to pay attention to the dividend growth and not the price fluctuations of the underlying companies. As I stated in my first article, Confessions of a Scaredy Cat Investor, the do-it-yourself retail investor has a hard time sticking to the plan. OK, it's worse than that, they're horrible at it. The majority of retail investors practice buying high and selling low. That is not the road to retirement. That is the road to repeating "Welcome to WalMart" well into your 70's.

The DG model has helped many investors ignore the price volatility, concentrate on the dividend stream, and avoid the costly mistakes. But every investor should always ask themself - how much price volatility can I handle? Can I truly just concentrate on those dividends, or am I going to still open my online account statement and go directly to the portfolio total? Dividend growth means equities. Equities means price volatility. Even the dividend stalwarts fell hard in 2008-2009, but certainly the quality of the companies that paid regular dividends helped them stand up a little straighter - somewhat.

Net, net; apply the level of equities that you think you can handle and balance your portfolio with long and short-dated bonds, precious metals and MLPs and Reits and whatever else turns your investor crank. Dividend Growth investing is a great practice, but it certainly doesn't have to be all or nothing.

For me, I'm using the Dow Jones Industrial Average (NYSEARCA:DIA) for my U.S. equity component. Does the DIA also qualify as a Dividend Growth proxy?

In 2002 the Dow Jones Industrial Average paid $1.76 in dividends. In 2012 DIA paid $3.32 in dividends, an increase of 90% over the decade. Averaged out, we have a dividend compound average growth rate (OTCPK:CAGR) of 6.55%. That's not too bad, but on dividata it is listed as poor on the Dividend Growth Rating.

That's a fair assessment, considering that when I looked at the top ten of the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) in this article or as I renamed the VIG Top Ten - The Scaredy Cat Vanguard Dividend Appreciation Portfolio (SCVIG) - the top ten had a dividend CAGR of 11.4% from VIG inception in May of 2006.

Also of note, on the total return front (there I go again), the SCVIG offered a total return of 85% from May 2006. You can find the total return comparisons in my first article on SCVIG. VIG is an ETF that holds Dividend Growth companies with a 10-year history of increasing dividends. It's cap weighted meaning the top ten are the largest companies that meet that criteria, giving VIG and SCVIG a large cap bias. The rush to large, quality dividend payers means that SCVIG has outperformed against the markets, and against the Dividend Appreciation indexes.

So you may be wondering why Cranky doesn't just go out and buy the SCVIG that he "created" and loves so much. Well, I would but ya see my house is above the 49th parallel, I'm a Canuck - and yes I'm currently staring out the window at a foot of snow, and my Husky who wants to go out and play in said snow.

Given the current U.S. hobby of printing trillions of dollars, and no plan to eliminate its deficit - see this article - I'm am (very) afraid of U.S. dollar depreciation. So I use a DIA ETF hedged to Canadian dollars. For now, that will have to do.

That said, I know that over the longer term, it's possible or likely that I would be better off with direct exposure to the Scaredy Cat Top Ten, and the U.S. dollar. I am considering adding the SCVIG in concert with my hedged U.S. holdings.

I'm open for suggestions, and learning. If there are some SA writers who could make me feel more comfortable with U.S. dollar exposure, I would certainly like to hear it. Perhaps I'm thinking too much?

Thinking (aka emotions) usually make investors do the wrong thing.

I seek currency counselling. But I can only pay you in good Karma - though that's in Canadian denomination.

Disclosure: I am long DIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that Dale Roberts aka cranky, the crankywriter, the scaredy cat investor is not a licenced investor advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licenced investment advisor before making any investment decisions. Pretty please.

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