My 30 Stocks For 30 Years: 2015 Review

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Includes: ADP, AMGN, BDX, CHD, CL, CLX, CMCSA, COP, COST, CSX, CVS, DIS, FAST, GE, HSY, JNJ, LOW, MCO, MJN, MKC, MSFT, NKE, PEP, PG, SBUX, USB, VIG, VYM, VZ, WFC, XOM, YUM
by: Integrator

Summary

2015 was my first full year of accumulating 30 high quality dividend paying stocks on a quarterly basis.

Key feedback from the SA community centered around prices paid and quality of holdings.

I review major feedback from reviewers and my thoughts around those items.

I have started with a regular, consistent program of accumulating high quality dividend payers that have strong moats. 2015 was the first full year of my implementation of this program. One of the advantages of documenting progress on a crowd sourced, social platform, is that you invariably get a lot of interesting feedback from people, both good and bad. I want to share my perspective on some of the feedback that I have received over the course of 2015.

The Dividend Growth Accumulation Fund

I compiled a set of 30 names that I buy quarterly. These are dividend paying stocks that I've chosen with regard to moat strength, dividend yield, returns on invested capital, dividend history and growth prospects. In my opinion, I think the businesses I've chosen are amongst the pick of the leading dividend paying businesses globally. Of course, I realize that's entirely subjective!.

The positions that are in the fund are listed here:

Services - Moody's (NYSE:MCO), Lowe's (NYSE:LOW), Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA), Starbucks (NASDAQ:SBUX), CSX (NASDAQ:CSX), Costco (NASDAQ:COST), Yum Brands (NYSE:YUM), Fastenal (NASDAQ:FAST).

Consumer Goods - Mead Johnson (NYSE:MJN), Colgate (NYSE:CL), Hershey (NYSE:HSY), Pepsi (NYSE:PEP), Nike (NYSE:NKE), Clorox (NYSE:CLX), Procter & Gamble (NYSE:PG), Church & Dwight (NYSE:CHD), McCormick & Co (NYSE:MKC).

HealthCare - Becton Dickinson (NYSE:BDX), Johnson & Johnson (NYSE:JNJ), Amgen (NASDAQ:AMGN), CVS (NYSE:CVS)

Technology - Verizon (NYSE:VZ), ADP (NASDAQ:ADP), Microsoft (NASDAQ:MSFT)

Financial - US Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC)

Basic Materials - Exxon (NYSE:XOM), Conoco Philips (NYSE:COP)

Diversified Industrials - General Electric (NYSE:GE).

The fund has performed relatively well in terms of total return over 2015. I invested close to $2,500 every quarter over the course of 2015. That $2,500 investment is split more or less equally across all 30 positions. I expect dividend income of around $250 next year, which will progressively grow over time as I invest more.

I'm benchmarking myself against the S&P 500, which I'd like to outperform in terms of total return, as well as dividend return over the long term (10+ years). The reason for the S&P 500 as a benchmark was that was where I was alternatively considering to invest these funds (although I now realize that there are a variety of dividend index funds that may have also been worthy candidates)

I got some great thoughts and feedback from the Seeking Alpha community as my experiment has progressed, which I'd like to share and respond to.

"You're going to go broke buying stock in $100 tranches"

A common thread of concern seemed to be that executing so many trades across so many stocks would make this a foolhardy experiment. This is an understandable concern. I executed 120 separate trades over the 4 quarters in 2015. If this were done via a traditional brokerage it wouldn't be a viable activity. In actual fact, my 120 separate trades cost me $40 in total. My chosen platform is something called a Motif, but there are numerous other platforms that even offer free trades in select stocks. Thus the idea that buying small parcels of many different stocks isn't viable for cost reasons isn't a legitimate concern with a consistent accumulation strategy in my view.

"If you were investing more in a stock, I'd take you more seriously"

Given I'm investing around $2,500 a quarter across 30 stocks that equates to around $80 in a stock at any point time, a small amount certainly. I view the dollar investment in a stock as a proportional entitlement to cash flows, profits and dividends in a given business. Certainly, the larger the amount invested the greater the percentage ownership. However investing a smaller dollar amount doesn't diminish that level of ownership in the company. By buying in small tranches, I'm still enjoying a proportionate dividend entitlement, and the same capital growth on my holding.

"Wait for a market pullback, you are buying at the top!"

This is something that I have thought long and hard about myself. When I take one look at the P/E column of many of my positions they show trailing (and in many cases, forward PE's) in excess of 20 times earnings, and occasionally 30 times earnings. Starbucks and Nike are trading on forward P/E ratios in excess of 30x earnings. ADP (NASDAQ:ADP), Clorox (NYSE:CLX) and CostCo (NASDAQ:COST) trade at P/E ratios in the high 20's. In spite of some of the elevated PE's, when I've run my Dividend Growth Accumulation Fund through the Morningstar Portfolio tool, it suggests a blended star rating of 3.2 stars, which indicates a portfolio that is close to fair value, and not excessively valued.

While I could just sit around and wait for things to drop to bargain prices before making investments, to do so would mean making assumptions about the availability of my capital at some future undefined time to invest into the market, and would assume that I could accurately determine just where the markets represented some ideal value point. It would also assume that when I saw that point which represented ideal market value, I didn't freeze up or wait around for the market to fall even further.

Rather, I feel like a commitment to a regular, consistent investment in the markets is easier from a budgetary perspective, and doesn't require any market timing. Providing I'm invested in creators of long term value, the intrinsic value of the businesses that I hold will just keep increasing over time.

"You are just practicing rear view mirror investing"

This could be a valid criticism if you look at some of the stocks I hold, what their long term returns have been, and contrast that with the poor performance that they have put up in recent times.

GE (NYSE:GE), P&G (NYSE:PG), Johnson & Johnson (NYSE:JNJ) and Exxon (NYSE:XOM) have all either underperformed or just met the performance of the S&P 500 over the last 10 years. However their long term returns are quite extraordinary, in all cases hitting double digit rates of annual growth (with dividends reinvested) back to the 1970's. The question that has come up on these names is whether their best days may be over.

The counterargument here is that these businesses are still earning double digit returns on equity and invested capital (with the exception of GE).

I am also reminded of something that Jeremy Siegel posited in his book, "The Future For Investors", where he suggests that it is not the actual growth of businesses that is the driver of long term returns, but the level of growth relative to investor expectations that is the true driver of long term performance.

He cites Exxon as an example of a business that has had modest investor expectations, but has consistently managed to exceed them resulting in annual returns of over 14% from 1950-2003. Time will be the judge of whether these businesses are continually able to outperform investor expectations.

"You will get lower cost and better performance with a dividend ETF"

In general, I haven't been enamored with the idea of an ETF. I have a fairly large investment in an S&P500 index fund. While it's true that these funds have relatively low cost, they also suffer from a large list of component businesses in the index (which arguably dilutes quality) and relatively frequent trading.

What they do offer is a market based approach to performance. The drawback with accumulating 30 businesses for an extended period of time is the risk of market irrelevancy. Disruption to core value propositions could damage moats and render some businesses worthless, in the extreme case, if an investor just keeps blindly accumulating. An index on the other hand will eventually replace these businesses.

I have tried to carefully select the businesses that I hold such that the risk of disruption to the business is a relatively low threat. Colgate (NYSE:CL), P&G , Church & Dwight (NYSE:CHD) and Clorox have been making products that consumers have been using for many years, and which don't appear on track to be disrupted any time soon.

This argument also seems to assume that businesses are incapable of adapting themselves to changing times. Verizon, a core holding in the Dividend Growth Accumulation Fund, is increasingly a mobile telephony business rather than a core landline company. Pepsi (NYSE:PEP) is removing artificial sweeteners and investing in a range of organic formulations for select beverages. Even Hershey (NYSE:HSY) is removing artificial flavoring in selected items. I think with careful monitoring I'll be able to eliminate major capital losses that occur as a result of business disruption or business irrelevancy.

Also, by owning these businesses outright, and only paying relatively modest trading costs to acquire them, I avoid the ongoing annual fees charges by an index fund on my asset base.

The above notwithstanding, I agree that there may be merits to having a complementary dividend index fund to help derisk any market irrelevancy of my core accumulation. While I will be tracking my core businesses closely, there is always a risk that if you make a long term commitment to accumulation, you lose some objectivity about when a business's best days may be behind them.

Frankly, I find it pretty hard to conceive that any of the businesses that I'm accumulating could be rendered irrelevant in my lifetime, however it may just be smarter to hedge the future as well as try to confidently predict it by having a market based index that stands alongside my own effort.

Accordingly, I've added several dividend index funds (Vanguard Dividend Appreciation (NYSEARCA:VIG) and Vanguard High Yield Dividend Fund (NYSEARCA:VYM)) to my list for further diligence and investigation to determine if any of them may warrant an investment at some point down the line.

Disclosure: I am/we are long ADP, CHD, CLX, CL, DIS, NKE, PG, SBUX, PEP, JNJ, ADP, YUM, XOM, FAST, GE, VZ, MJN, AMGN, CMCSA, CHD, COST, MCO, COP, CVS, MKC, USB, WFC.

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.