It's New! It's Nifty! It's The Dividend Growth 50!

Dec. 17, 2014 9:19 PM ETAAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, COP, CVX, D, DE, EMR, GE, GIS, GPC, PEAK, HSY, IBM, JNJ, KMB, KMI, KO, KHC, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, SBUX, SJM, SO, SPY, T, TGT, UTX, V, VDIGX, VIG, VOO, VZ, WEC, WFC, WMT, XOM, WBA1.03K Comments
Mike Nadel profile picture
Mike Nadel
15.06K Followers

Summary

  • The erstwhile New Nifty Fifty has a new name that is more meaningful and accurate.
  • A $25K, real-money, equal-weight DG50 portfolio has been established and will be tracked over time.
  • The plan is to reinvest all dividends, but otherwise do no buying or selling, so the overall portfolio's progress can be charted accurately.

First things first: I am no longer calling this collection of carefully selected Dividend Growth companies the "New Nifty Fifty." The more I thought about that name, the less I liked it. For one thing, I borrowed the moniker from a long-ago list that means little today. Mostly, though, the name told us little about this current group of quality income growers.

So, ladies and gentlemen, I present the Dividend Growth 50.

And along with the new name, I am introducing an exciting new project: a real portfolio with 50 real positions bought in real-time with real money.

Where It All Began

Before we get to the portfolio's particulars, let's quickly revisit the genesis of the DG50.

Back in September, I wrote an article about the original Nifty Fifty of the 1970s. Its thesis was that as flawed as the group of companies was, buy-and-hold investors would have become multi-millionaires. While dealing with the nearly 700 comments the article received, I grew intrigued by the idea of establishing a more modern version. And since I am a proponent of Dividend Growth Investing, I wanted a list with a DGI focus.

I didn't want the list to be purely my opinion, so I sought inputs from 10 respected Seeking Alpha voices: Chowder, David Crosetti, David Fish, Eli Inkrot, Eric Landis, Tim McAleenan, Miz Magic DiviDogs, Scott U, David Van Knapp and Bob Wells. Each provided his/her list of 50 companies, and once the votes were tallied, a consensus was formed.

The New Nifty Fifty debuted in an Oct. 15 article, which turned out to be the most popular piece I've written for this site. I followed with Part 2, featuring each panelist's top 10 picks. In Part 3, I revealed my own choices. The series has drawn more than 83,000 page views and 1,300 comments, and it has been the centerpiece of numerous other Seeking Alpha studies.

Debates Aplenty

Most recently, Chuck Carnevale and Minutemen used extensive back-testing in comparing the New Nifty Fifty to the Vanguard Dividend Growth Fund Inv (VDIGX), which fellow Seeking Alpha contributor Dale Roberts repeatedly claimed to be superior. The historic performance of the "Nifties" also has been compared to that of the S&P 500 (SPY). There have been many comment stream discussions, some rather heated, about the merits of DGI vs. indexing and individual stocks vs. funds.

Back-testing can be useful because history often provides clues about the future. For instance, a high-quality, deep-moat company that has been raising dividends for decades is likely - not guaranteed, but likely - to continue increasing dividends while flourishing as a business.

Still, only by "forward-testing" can we make true judgments and avoid charges of survivorship bias.

Which brings us to the Dividend Growth 50, and the roughly $25,000 I have invested in it:

COMPANY

SYMBOL

SH

PRICE

VALUE

DIV.

YLD.

INC.

3M

(MMM)

3

161.27

483.81

4.01

2.5

12.03

AFLAC

(AFL)

8

58.34

466.72

1.56

2.7

12.48

Altria

(MO)

10

50.28

502.80

2.08

4.1

20.80

Apple

(AAPL)

5

109.28

546.40

1.88

1.7

9.40

AT&T

(T)

15

32.60

489.00

1.84

5.6

27.60

Automatic Data Processing

(ADP)

6

83.25

499.50

1.96

2.4

11.76

Baxter International

(BAX)

7

71.73

502.11

2.08

2.9

14.56

Becton, Dickinson

(BDX)

4

135.42

541.68

2.40

1.8

9.60

Caterpillar

(CAT)

5

90.60

453.00

2.80

3.1

14.00

Chevron

(CVX)

5

103.23

516.15

4.28

4.1

21.40

Clorox

(CLX)

5

99.93

499.65

2.96

3.0

14.80

Coca-Cola

(KO)

12

40.98

491.76

1.22

3.0

14.64

Colgate-Palmolive

(CL)

7

68.30

478.10

1.44

2.1

10.08

ConocoPhillips

(COP)

8

64.47

515.76

2.92

4.5

23.36

Deere

(DE)

6

89.61

537.66

2.40

2.7

14.40

Dominion Resources

(D)

7

72.38

506.66

2.40

3.3

16.80

Emerson Electric

(EMR)

8

60.37

482.96

1.88

3.1

15.04

ExxonMobil

(XOM)

6

88.88

533.28

2.76

3.1

16.56

General Electric

(GE)

20

25.05

501.00

0.92

3.7

18.40

General Mills

(GIS)

10

52.00

520.00

1.64

3.2

16.40

Genuine Parts

(GPC)

5

103.49

517.45

2.30

2.2

11.50

HCP

(HCP)

11

44.93

494.23

2.18

4.9

23.98

Hershey

(HSY)

5

98.86

494.30

2.14

2.2

10.70

IBM

(IBM)

3

153.59

460.77

4.40

2.9

13.20

J.M. Smucker

(SJM)

5

99.59

497.95

2.56

2.6

12.80

Johnson & Johnson

(JNJ)

5

104.48

522.40

2.80

2.7

14.00

Kimberly-Clark

(KMB)

4

113.77

455.08

3.36

3.0

13.44

Kinder Morgan

(KMI)

13

38.87

505.31

1.76

4.5

22.88

Kraft Foods

(KRFT)

8

59.94

479.52

2.20

3.7

17.60

Lockheed Martin

(LMT)

3

186.59

559.77

6.00

3.2

18.00

McCormick

(MKC)

7

73.18

512.26

1.60

2.2

11.20

McDonald's

(MCD)

5

90.15

450.75

3.40

3.8

17.00

Microsoft

(MSFT)

11

46.06

506.66

1.24

2.7

13.64

NextEra Energy

(NEE)

5

102.36

511.80

2.90

2.8

14.50

Omega Healthcare

(OHI)

13

38.30

497.90

2.08

5.4

27.04

PepsiCo

(PEP)

5

94.79

473.95

2.62

2.8

13.10

Philip Morris

(PM)

6

82.68

496.08

4.00

4.8

24.00

Procter & Gamble

(PG)

6

90.41

542.46

2.57

2.8

15.42

Qualcomm

(QCOM)

7

71.11

497.77

1.68

2.4

11.76

Realty Income

(O)

11

46.50

511.50

2.20

4.7

24.20

Southern Company

(SO)

10

48.22

482.20

2.10

4.4

21.00

Starbucks

(SBUX)

6

81.04

486.24

1.28

1.6

7.68

Target

(TGT)

7

73.07

511.49

2.08

2.8

14.56

United Technologies Corp.

(UTX)

4

114.56

458.24

2.36

2.1

9.44

Verizon

(VZ)

11

46.39

510.29

2.20

4.7

24.20

Visa

(V)

2

257.83

515.66

1.92

0.7

3.84

Walgreen

(WAG)

7

73.40

513.80

1.35

1.8

9.45

Wal-Mart

(WMT)

6

84.53

507.18

1.92

2.3

11.52

Wells Fargo

(WFC)

9

53.67

483.03

1.40

2.6

12.60

Wisconsin Energy

(WEC)

10

50.59

505.90

1.69

3.3

16.90

TOTALS

25029.94

3.1

775.26

(KEY: SH is the number of shares bought; PRICE is the price paid per share; VALUE is the value of each position at time of purchase; DIV. is annual dividend in dollars; YLD. is dividend yield percentage; INC. is annual income at the current dividend rate. All data is as of purchase date: 12/16/14.)

As you see in the table, I bought about $500 worth of each DG50 company. I did not have to pay sales commissions, because I was given 50 free trades as an incentive to move the money to Fidelity. (Several major brokerages offer such inducements.)

Building The DG50 Portfolio

We all have seen sentences such as this one: "A $100 investment in Wal-Mart 40 years ago would be worth $829,600 today." While technically accurate, the reality is that nobody invested $100 in WMT or any other company in 1974. Back then, brokers required purchases in 100-share lots, and commissions alone could approach $100.

Besides, a precise $100 investment would have required that a stock trade in multiples of $10. That rarely happened in 1974... and it still rarely happens, which is why not a single DG50 position cost exactly $500 to buy.

Most of the positions filled within $20 of $500. The largest outlay was $559.77 for three shares of Lockheed Martin; the smallest was $450.75 for five shares of McDonald's.

While the primary purpose of this project is to see how the overall income stream grows over time, many readers love to make total-return comparisons. So I also spent $552.57 for three shares of Vanguard S&P 500 ETF (VOO) and $477.18 for six shares of Vanguard Dividend Appreciation ETF (VIG). Finally, I bought $5,006 worth of VDIGX, representing one-fifth of the DG50 portfolio's cost. That should allow for easy comparisons over the years.

And yes, I said "over the years." Not weeks or months or even quarters, but years.

Add it all up, and I have committed more than $31,000 toward this project. Although some might use that as proof that I should be committed, I consider it a great investment. In addition to the dividends and capital gains I will receive over time, I will benefit from the lessons this study will teach all of us.

Portfolio Rules

  • All income will be reinvested into the companies that paid the dividends. Otherwise, there will be absolutely no buying or selling. This will be a passive portfolio - classic buy-and-hold. (Dividends and capital gains also will be reinvested into VOO, VIG and VDIGX.)
  • While the portfolio starts out as close to equally weighted as possible, it will not remain that way over time, because I will not rebalance. I will let the winners run and losers languish.
  • In the event of a spin-off, the new company will join the DG50 as kind of a plus-1. Will I change the name if the portfolio grows to 51 or 52 companies? I doubt it; the Big Ten didn't change its name when it grew to 11 and then 12 and now 14 schools. Mergers will be handled on a case-by-case basis.
  • Should any companies go out of business, the value of those positions presumably would go to zero. The idea is to truly reflect the progress of these 50 companies, which the panelists deemed very high-quality.
  • If a company reduces or eliminates its dividend, or if its fundamentals erode, it will continue to be held. I want to see how the overall portfolio is affected by all manner of events, good and bad.
  • Because this portfolio is in an IRA, taxes will not be an issue until I am subject to required minimum distributions in 2031. By then, I will either have converted the portfolio to a Roth IRA to avoid RMDs or, more likely, I will have decided that 17 years was a long enough life span for this project.

Some Dividend Growth investors might say: "But this doesn't really represent how we invest. If the dividend is cut, we sell. If fundamentals change, we bail. DGI is not really buy-and-hold, but buy-and-monitor."

That would be a fair point, but every DG investor has different rules. For example, one frequent Seeking Alpha commenter who goes by the handle Buy & Hold 2012 says he has never sold one share of stock in 44 years - and his methods have helped him become wealthy. Some sell if a dividend raise doesn't meet a certain threshold. Some sell immediately if there is a cut. Some buy only companies with yields of 3% or higher. Some rebalance regularly to maintain equal-weight positions; others overweight their core holdings. Many investors would avoid buying several DG50 components now, due to overvaluation.

One of the interesting things about compiling the DG50 was seeing the panelists' various approaches. The 10 of them combined to choose 160 different companies, including several that pay no dividends at all.

So I believe it would be imprudent to establish rules that supposedly cover the way all Dividend Growth investors operate, because, in fact, there is no DGI Creed.

Conclusion

One could argue quite convincingly that this project is as much about a buy-and-hold strategy as it is about DGI - and I wouldn't argue with that argument at all. No matter how one looks at it, this multiple-year study should be fun and instructive.

Welcome to the Dividend Growth 50, folks. Let the "forward-testing" begin!

This article was written by

Mike Nadel profile picture
15.06K Followers
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. RockefellerWell, a FEW other things give me pleasure, but I get where he was coming from.+++I manage two real-money portfolios at DividendsAndIncome.com:++ Income Builder Portfolio: https://dividendsandincome.com/income-builder-portfolio/++ Growth & Income Portfolio: https://dividendsandincome.com/mike-nadels-grand-twins-college-fund/

Disclosure: The author is long AAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, CVX, COP, D, DE, EMR, GE, GIS, GPC, HCP, HSY, IBM, JNJ, KMB, KMI, KO, KRFT, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, SBUX, SJM, SO, T, TGT, UTX, V, VDIGX, VIG, VOO, VZ, WAG, WEC, WFC, WMT, XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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