Dividend Growth 50: Not Necessarily 'Safe,' But 35% Less 'Sorry'

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Includes: AMGN, JNJ, KO, MMM, VDIGX, VIG, VOO
by: Mike Nadel

Summary

The stock market "celebrated" the New Year with a record-breaking fall.

The DG50 experienced a far lower drawdown than any relevant benchmark.

"Safety" is relative in investing, as is "sorrow."

After the worst opening week in stock market history, this is no time for me to pretend that money invested in my pet project, the Dividend Growth 50, is "safe." I always cringe when I see an author or commenter on Seeking Alpha call any particular stock "safe."

You want "safety"? Put your money in FDIC-insured CDs or money-market accounts. Now, one could argue that losing money to inflation makes CDs "unsafe," too. Nevertheless, if I deposit $1,000 into a 1-year CD earning 1% today, I am quite confident that I will receive $1,010 in 52 weeks. I won't make much money, but I won't lose any - and to me, that is the definition of "safety."

I don't believe any of the thousands of publicly traded companies can make a similar safety guarantee. The same, of course, is true of the components of the DG50. Using the extremely small sample offered by the first week of 2016, however, I will suggest that blue-chip, dividend-growing stocks might be a "less sorry" alternative.

The Dow Jones Industrial Average and the S&P 500 each fell about 6% during the first week of 2016. For some investors, such a plunge is frightening. To others, it foreshadows a larger pullback that could present buying opportunities. For me, it's a little of both - and an occasion to put on my thinking cap.

In 2014, a panel of 10 Seeking Alpha contributors who practice some form of dividend growth investing helped me compile a 50-company list I called the New Nifty Fifty. A couple of months later, I changed the name to the Dividend Growth 50 and invested about $25,000, creating a real-time, real-money portfolio. At the same time, for comparison's sake, I bought small stakes in the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), the Vanguard S&P 500 Index ETF (NYSEARCA:VOO) and the Vanguard Dividend Growth Fund (MUTF:VDIGX).

Last month, I wrote a one-year anniversary article about the DG50, which performed quite well in a fairly volatile year for the market. It beat VIG in total return, nearly equaled VOO in that category, and blew away the "competition" in income created and dividend growth - which is the overarching goal of the DG50.

Good Times, Bad Times

Some say the true test of an investment is how it performs in difficult times. Not just in tough times for one or two sectors, such as Energy and Industrial, but an overall market slump.

So how did the DG50 do in Week 1 of 2016? Well, it wasn't "safe," but it was decidedly less sorry than various benchmarks.

FUND/ETF

VALUE 12/31/15

VALUE 1/8/16

DOLLAR LOSS

PERCENT LOSS

VIG

$480.25

$456.22

$24.03

5.00%

VDIGX

$5,319.59

$5,037.36

$282.23

5.49%

VOO

$575.74

$541.99

$33.75

5.86%

DG50

$26,057.33

$25,062.58

$994.75

3.82%

All of those are real valuations, lifted directly from my brokerage statements, at market close Dec. 31 and Jan. 8. (Some might call them "paper losses," because I have not sold anything.)

Significantly, on a percentage basis, the DG50 lost 23.6% less than VIG, 30.4% less than VDIGX and a whopping 34.8% less than the S&P 500 ETF.

(For further comparison, my personal portfolio, which includes some bond and "bond-like" investments as well as cash, lost about 2.4% during the first week of the year - far "better" than any of the above, including the DG50.)

Relative "Safety" In Income

Although I again acknowledge that this is an extremely small sampling, I do think it has some meaning. As a group, dividend-growing companies tend to be more conservative in nature. Their total return often lags the market in good times, but usually suffers less during bad times. Most DGI proponents are willing to make this trade-off, which also comes with a reasonable assurance that income will grow year over year.

Many DGI practitioners would say dividends paid by blue-chip companies such as Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO) and 3M (NYSE:MMM) are "safe." Each has grown dividends for more than 50 years - and made payouts to shareholders for decades longer than that. And yet... enough blue-chip companies have cut (or even eliminated) dividends after long streaks to make one realize that nothing in stock investing is totally safe.

I do believe it is reasonable to talk about this kind of "safety" in relative terms: The dividends of Aristocrats JNJ, KO and MMM appear considerably "safer" than the stock prices of those companies - or pretty much any others.

Conclusion

As I frequently remind readers, I am not recommending the Dividend Growth 50 as a portfolio an investor should build. It is a collection of interesting, mostly high-quality companies that welcomes further research. For that matter, the same can be said of the 163 companies "nominated" by the 10 panelists. In fact, on Monday, I just topped off my position in one of those non-DG50 stocks, Amgen (NASDAQ:AMGN).

The 3.8% paper loss the DG50 experienced last week doesn't represent investing greatness, but it sure beat the 6% decline of the S&P 500. And despite the market's woes, I continue to have every reason to believe that the vast, vast majority of DG50 components will raise dividends in 2016.

No, it's still not totally "safe," but it's a lot less to be "sorry" about.

Disclosure: I am/we are long AMGN, JNJ, MMM, KO, VOO, VIG, VDGIX.

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.