2012 - The Year Of The Cats In Dividend Portfolios? The Scaredy Cat SCVIG Review

by: Dale Roberts

It's time to check in on the 2012 performance of the Scaredy Cat Vanguard Dividend Appreciation Portfolio SCVIG. Click these articles, here for the total returns and here for the dividend growth history of the SCVIG and how it was given its feline moniker.

The Scaredy Cat Vanguard Dividend Appreciation Portfolio is comprised of the top ten holdings in Vanguard's Dividend Appreciation Portfolio (NYSEARCA:VIG). As you many know, VIG is one of the staples in Dividend Growth investors' portfolios. Or more accurately, VIG is likely the Dividend Growth component within many diversified portfolios - for those who diversify across styles of equity investing, and those who practice asset allocation to reduce portfolio volatility.

The criteria for inclusion in VIG and hence within SCVIG is that a company must have a history of increasing its dividend for ten straight years. The original index creator also monitors the companies on a few "quality" measures. More to come on those quality metrics in another article. "Coming Soon!" as they say in the theaters.

As you'll note from the articles listed above, the SCVIG has had an incredible run from its inception in May of 2006. SCVIG has delivered an 85% total return to October 2012 (when I posted the first SCVIG article) compared to a 23% return for the S&P 500 (NYSEARCA:SPY) and a 35% return for the total holdings of VIG. That's a very significant outperformance due largely from SCVIG's large cap bias that allowed it to stand quite well during the roller-coaster ride of 2008 to 2009.

And here are those 10 lovely cats with their yield.

Company Yield
Wal-Mart (NYSE:WMT) 2.10%
Coca-Cola (NYSE:KO) 2.75%
IBM (NYSE:IBM) 1.77%
Chevron (NYSE:CVX) 3.24%
PepsiCo (NYSE:PEP) 3.12%
Procter & Gamble (NYSE:PG) 3.20%
Exxon Mobil (NYSE:XOM) 2.52%
United Tech (NYSE:UTX) 2.77%
McDonald's (NYSE:MCD) 3.52%
3M (NYSE:MMM) 2.69%
Average Yield 2.77

And here are the total returns for SCVIG for 2012 - thanks to the incredible portfolio building tool at low-risk-investing.com (you simply punch in up to 10 tickers and you get instant total return numbers plus a few other metrics).

Cats playing on drums (roll) please.

SCVIG Performance, Jan. 2012 to Dec. 2012, Total Return 7.3%

Symbol Name Annual Return Volatility Avg Correl Period Price Change
WMT Wal-Mart Stores 15.9% 18.8% 0.34 12/31/11 - 12/31/12 $58.32 to $67.61
MMM 3M Company 15.3% 12.5% 0.47 12/31/11 - 12/31/12 $79.59 to $91.78
UTX United Tech 13.4% 16.8% 0.22 12/31/11 - 12/31/12 $71.22 to $80.81
PEP Pepsico 5.7% 10.1% 0.31 12/31/11 - 12/31/12 $64.32 to $68.02
KO Coca-Cola Company 5.7% 15.4% 0.29 12/31/11 - 12/31/12 $34.03 to $35.97
IBM International Bus 5.0% 14.4% 0.28 12/31/11 - 12/31/12 $180.84 to $189.83
PG Procter & Gamble 4.0% 14.2% 0.36 12/31/11 - 12/31/12 $64.53 to $67.15
CVX Chevron Corp 3.4% 16.1% 0.48 12/31/11 - 12/31/12 $102.93 to $106.45
XOM Exxon Mobil Corp 2.9% 15.0% 0.48 12/31/11 - 12/31/12 $82.66 to $85.1
MCD McDonald's Corp -9.9% 10.1% -0.39 12/31/11 - 12/31/12 $97.21 to $87.58

Very average returns. For 2012, SCVIG scratched out a 7.3% total return while the S&P Dividend ETF (NYSEARCA:SDY) delivered 11.6%, the S&P 500 delivered 16%, and the Dow Jones Industrial Average (NYSEARCA:DIA) delivered a 9.9% total return. The total holdings for VIG delivered 11.1% total return. Bad Kitties. Everyone's beating up on you.

I had questioned in my articles how long the large cap bias might hold up, or would it be a noose (a very, very heavy cat collar?) that slows down the Scaredy Cat Portfolio.

But largely, what slowed down SCVIG is too much fast food. Human food and cats did not go together well in 2012 as McDonald's had an off year. Take out McDonald's from the mix and SCVIG would have delivered a 9.2% total return, somewhat in line with the markets and total VIG; but still an underperform.

That demonstrates how a small portfolio of 10 companies can experience short-term volatility due to one company's poor performance. And certainly McD's has served SCVIG very well over the "longer term." McDonald's shows a 210% total return from 2006, and McD's has been a Cat almost for the duration.

So here's an interesting little exercise; how many companies do we need to add from VIG to dampen the effects of McDonald's spilling some profits? What if we add the next 5 biggest dividend payers from VIG? And they are Colgate-Palmolive (NYSE:CL), Caterpillar (NYSE:CAT), Medtronic (NYSE:MDT), Target (NYSE:TGT) and Monsanto Co. (NYSE:MON).

Performance Details, Jan. 2012 to Nov. 2012, Total Return 16.7%

Symbol Name Annual Return Volatility Avg Correl Period Price Change
CL Colgate-Palmolive 20.3% 9.1% 0.45 12/31/11 - 11/30/12 $90.17 to $108.5
CAT Caterpillar -3.9% 29.9% -0.56 12/31/11 - 11/30/12 $88.2 to $84.75
MDT Medtronic Inc. Co 12.9% 11.1% 0.49 12/31/11 - 11/30/12 $37.07 to $41.85
TGT Target Corp 26.1% 14.0% 0.48 12/31/11 - 11/30/12 $50.07 to $63.13
MON Monsanto Company 32.8% 23.0% 0.51 12/31/11 - 11/30/12 $68.99 to $91.59

Ah, and like magic, the Top 15 from VIG take us to 10.3% total return for 2012. Did I previously say the top ten from VIG make a great portfolio? No, no you must have misread, I meant the Top 15 from VIG are a great dividend skimming scheme.

And while we're at it, and just for kicks, let's look at the next five largest dividend payers from VIG. They are Lowe's (NYSE:LOW), Nike (NYSE:NKE), Emerson Electric Co. (NYSE:EMR), TJX Companies (NYSE:TJX) and Walgreen (WAG). Here's how they delivered in 2012.

Performance Details, Jan. 2012 to Dec. 2012, Total Return 23.4%

Symbol Name Annual Return Volatility Avg Correl Period Price Change
LOW Lowe's Companies 42.7% 29.6% 0.42 12/31/11 - 12/31/12 $24.86 to $35.52
NKE Nike 8.6% 25.7% 0.09 12/31/11 - 12/31/12 $47.49 to $51.6
EMR Emerson Electric 17.3% 19.0% 0.49 12/31/11 - 12/31/12 $45.13 to $52.96
TJX TJX Companies 32.8% 16.8% 0.19 12/31/11 - 12/31/12 $31.93 to $42.45
WAG Walgreen Co. 15.2% 29.4% 0.34 12/31/11 - 12/31/12 $32.11 to $37.01

Yikes, include the Top 20 of VIG for 2012 and one would have a portfolio total return of 13.9%. And this certainly can't be explained away as a large cap bias between the top ten and next ten. These are all very large companies with market value of $250,000,000 or more. It's just the luck of the draw. Add ten more quality companies with a history of increasing dividends for 10 years or more, and you're likely to get some more winners, and some more losers. The VIG 10-20 group adds more portfolio protection and diversification. VIG's 10-20 delivered a total return above 20% in 2012, while the original SCVIG delivered 7.3%. Chalk one up for diversification - or is that "more is better."

Check back for more on the SCVIG and the 10-20 VIG companies, as I will have a look at their recent dividend history.

Same Cat channel. Same Cat time.

Disclosure: I am long DIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Please note that Dale Roberts aka cranky, the crankywriter, the scaredy cat investor is not a licensed investor advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licensed investment advisor before making any investment decisions. Pretty please.