Dividend Growth Stocks In 2015 - What Worked And What Didn't

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Includes: ACU, AMNF, ARTNA, AUBN, BHB, BWL.A, CATC, CCFN, CPKF, CZFS, DGAS, EBMT, EBTC, EFSI, FKYS, FMAO, FRFC, ISBA, LARK, LYBC, MDNB, MYBF, NIDB, NKSH, NWFL, ODC, PSBQ, RGCO, SPAN, UTMD
by: Kurtis Hemmerling
Summary

Dividend growth stock returns were tested against 3 factors in 2015: size, value and growth.

Dividend yield offered little forecasting ability.

Dividend growth led to superior returns -- but not in the way that you would guess.

The "fat tail" performance of size led to high risk-adjusted returns for 2015.

What worked and what didn't for dividend growth stocks in 2015? Let's have a look.

To rate performance of dividend growth stocks for 2015, we will include only those stocks that had at least 10 years of trailing consecutive annual dividend increases as of January 2016. The performance measured is total return -- dividends are included.

All testing will be carried out using the Portfolio123 stock screening and backtesting platform, which uses CapitalIQ data feeds. The chart below shows the equal-weight performance of all dividend growth stocks with a streak of 10 years or more.

All Dividend Growth Stocks 10 years and upwards

When taken as a whole, this group of dividend growth stocks had slightly better risk-adjusted returns than the market. This may come as a surprise to some due to the difficult year for dividend stocks.

This article will look at three areas: value, growth and size.

Dividend Value

We will use dividend yield as a proxy for value. The portfolio is sorted into 10 equal-sized groups according to the dividend yield. Every week the portfolios are re-examined to ensure the correct sorting. The bars represent annual performance for that particular portfolio.

Left is low-yield and right is high-yield.

Dividend Yield Performance

High yield was not a profitable strategy last year. The bar on the far right tells us that we would have had a negative return of 10% in 2015 by holding the highest yielding dividend growth stocks. The associated chart, which tracks performance of this portfolio, looks like this:

High Yield Portfolio

Dividend Growth

A popular screening method is to look at the trailing dividend growth. Some investors show a preference for a high trailing growth. In 2015, the winner was the low growth portfolio. The annual outperformance was 8% for this low-growth sub-set and the maximum portfolio loss was only half of the broad market.

Left (blue bar) is low-growth (trailing 5-year dividend annual growth rate) and right (green bar) is high dividend growth.

Dividend Growth 5 Years Trailing Annual Percent

Another interesting point is that the average dividend yield for this group of low growth stocks is 4%. If you focused your attention on high yielding dividend growth stocks, your total return for 2015 would have been 18% worse than this category. And the highest yielding decile had an average dividend yield of 6.6%. A hefty price to pay in total return for an extra 2.6% of income yield.

Size of Dividend Growth Stock

Now this next point I found to be of great interest. While I did not observe a correlation between market capitalization and performance in 2015 on average, the smallest-sized dividend growth stocks did vastly outperform.

Small Stocks and Dividend Growth Total Return

Digging a little deeper, I found that these stocks have been performing well since March 2009. Volatility is very low for such high returns. That being said, during the 2008/09 market crash, these stocks feel just as hard as their peers.

Small Dividend Growth Stocks Since 2009

I am eager to get some comments from dividend growth investors who are actually invested in these stocks. Please, please, please add your comments below. What are we missing? Have you really been enjoying a quiet upwards climb like the backtest suggests?

Ticker

Name

MktCap

SectorCode

Yield

(OTCPK:FRFC)

First Robinson Financial Corp

20.3

FINANCIAL

3.14

(OTCQB:NIDB)

Northeast Indiana Bancorp Inc

36

FINANCIAL

2.8

(NASDAQ:EBMT)

Eagle Bancorp Montana Inc

46.68

FINANCIAL

2.51

(OTCPK:MYBF)

Muncy Bank Financial Inc

47

FINANCIAL

3.17

(OTCPK:MDNB)

Minden Bancorp Inc

51.39

FINANCIAL

1.96

(NASDAQ:SPAN)

Span-America Medical Systems Inc

53.77

HEALTHCARE

3.26

(NYSEMKT:ACU)

Acme United Corp

58.62

INDUSTRIAL

2.3

(OTCPK:AMNF)

Armanino Foods of Distinction Inc

63.49

STAPLE

3.74

(OTCQB:CPKF)

Chesapeake Financial Shares Inc

69.56

FINANCIAL

2.77

(OTCPK:PSBQ)

PSB Holdings Inc/WI

72.17

FINANCIAL

1.9

(NYSEMKT:BWL.A)

Bowl America Inc

73.49

DISCRETIONARY

4.78

(OTCQX:EFSI)

Eagle Financial Services Inc

80.71

FINANCIAL

3.48

(OTCPK:CCFN)

CCFNB Bancorp Inc

85.56

FINANCIAL

3.58

(NASDAQ:LARK)

Landmark Bancorp Inc

92.16

FINANCIAL

2.89

(OTCPK:LYBC)

Lyons Bancorp Inc

92.38

FINANCIAL

2.58

(NASDAQ:RGCO)

RGC Resources Inc

101.03

UTIL

3.8

(NASDAQ:NWFL)

Norwood Financial Corp.

105.94

FINANCIAL

4.31

(NASDAQ:AUBN)

Auburn National BanCorp Inc

107.91

FINANCIAL

2.97

(OTCQX:FMAO)

Farmers & Merchants Bancorp Inc

124.39

FINANCIAL

3.27

(OTCPK:FKYS)

First Keystone Corp

142.92

FINANCIAL

4.24

(OTCPK:CZFS)

Citizens Financial Services Inc

147.05

FINANCIAL

3.35

(NASDAQ:DGAS)

Delta Natural Gas Co Inc

148.29

UTIL

3.91

(OTCQB:CATC)

Cambridge Bancorp

189.51

FINANCIAL

3.8

(NYSEMKT:BHB)

Bar Harbor Bankshares

206.35

FINANCIAL

3.02

(NASDAQ:UTMD)

Utah Medical Products Inc

219.53

HEALTHCARE

1.78

(OTCQX:ISBA)

Isabella Bank Corp

232.17

FINANCIAL

3.21

(NASDAQ:EBTC)

Enterprise Bancorp Inc/MA

236.7

FINANCIAL

2.19

(NASDAQ:NKSH)

National Bankshares Inc

247.22

FINANCIAL

3.43

(NASDAQ:ARTNA)

Artesian Resources Corp

249.33

UTIL

3.2

(NYSE:ODC)

Oil-Dri Corp of America

266.8

STAPLE

2.28

You might notice that there are a lot of financial stocks in the list. I ran an additional test, which excluded any financial stock while holding only pint-sized stocks and the risk-adjusted returns held. The excess return in bull markets is not based on the financial sector.

Dividend Growth Investing in 2016

What worked in 2015? Small market capitalization, low dividend growth and the removal of high dividend yield stocks.

Are these the same factors you should consider for 2016? While you might consider all three, the one factor I would focus on is size, and this is why...

I strongly believe in what is called the "liquidity premium." This means that gross returns are higher in less liquid stocks. Gross returns are not net returns. You may receive a higher or lower risk-adjusted return depending on how much you wish to invest and how quickly you attempt to do it. Liquidity is relative because what is liquid for someone with $5,000 could be very illiquid for someone with $5,000,000. As a general rule, the smaller the market cap, the less liquid a stock is. This could account for much of the gross risk-adjusted returns surrounding small dividend growth stocks. The message is that small, illiquid stocks can be a huge benefit to your portfolio under certain circumstances.

1. You take your time to get into these stocks

2. You are a buy and hold investor who does not plan to sell these stocks without a very good reason. And rarely at that.

In this regard, I ran a separate screen where I only kept dividend growth stocks which had less than $150,000 of average daily turnover. This was the only rule. The chart below tracks performance since 2010. The screen will, by default, sell when turnover goes above $150K, but you will no doubt continue to hold.

Again, focusing on illiquid stocks is not a strategy for active investors. You need patience, patience and patience. Everyday you may need to place a limit order at, or below, the bid and wait it out. Nibble a bit every day. Slowly build your positions over time. It may take weeks to months to accumulate enough shares without being eaten alive in slippage.

Which stocks make this small and low-liquid list? Start with the names listed under the subheading, Size Of Dividend Growth Stock. Go beyond just size, but I believe that this should be one of the major considerations for the coming year.

If you decide to invest in these stocks -- don't chase the price. The benefit of these dividend growth stocks lies in the inability of the "big guys" to get in and out. You, the little guy, can be a winner in 2016 if you have the patience to build your empire.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.