Past Performance Is No Indicator Of Future Dividend Growth Success ... Or Is It? (Part I)

Includes: DIA, QQQ, SPY
by: Bob Wells

I'm new at managing my own portfolio, a fact I chronicled in my first article for Seeking Alpha called "Confessions of a First Year Dividend Growth Investor."

One night I had the occasion to be watching Jim Cramer. On the night in question, Cramer was interviewing the CEO of Weyerhaeuser (NYSE:WY). When the interview began, the righthand corner of the screen caught my eye. It showed the stock ticker and its gains and losses for key periods. In the case of WY everything was in the red. The stock had lost money that day, that month, for 3 months, 1 year, 3 years, 5 years and even 10 years.

Now, I know that past performance is no indicator of future performance. How many times have I heard that? Suddenly I had a thought that just wouldn't go away: What if it is?

The last decade has been a tough one for the market, so why not set out to explore this idea and see if it has merit? Since I'm a dividend growth investor I set up a screen to look for all stocks paying dividends of at least 2% that had finished 2011 with gains. Just over 200 stocks made the cut. To my surprise the vast majority had registered gains not just for the year but for 3 year, 5 year and even 10 year periods. I didn't stop there. I next looked at individual performance for each of the ten years.

I looked first for the top performers in the down years of 2002 and 2008. I found stocks that had gains while the S&P was down over 32%. More importantly, I found a large number of stocks that suffered less than half the loss of the S&P and had offset those losses by the gains they made the following year. The process, as tedious as it was revealed information that will prove invaluable to me in the years ahead.

I found stocks that while they were in the green for 1,3,5 and 10 year periods, suffered 5 years of losses. Since I don't like a lot of swings in the stocks I own, I'd best stay away from these. As I continued my labors I began to find my Superstars, stocks that gained at least 6% including dividends in 2011. The Superstars had less than 50% the loss of the S&P 500 in 2002 and 2008 and made up for those losses the next year. Finally the Great 18 as I call them had a maxim of two years of losses rather than gain. Level Two Superstars had less than 50% the loss of the S&P 500 in either 2002 or 2008. Another 18 stocks had emerged as winners.

The stocks in these two lists were not diversified enough for a proper portfolio. No banks, drug or tech made levels one and two. I had to search the list again this time for "best of breed". In Part Two of this article I will be revealing my current portfolio largely comprised of stocks I found from my search.

As I continued my education by reading some of the great Dividend Growth articles here on SA I learned about the Dividend Champions, Challengers and Contenders. Not surprisingly almost all the stocks I had identified had long records of stable and growing dividends. Wow, maybe past performance is an indicator of future performance after all.

In Part Two, I'll discuss more about how I developed my current portfolio. I looking forward to hearing from each of you regarding your methods for constructing your portfolios. I'm particularly interested in hearing from others currently in retirement and drawing month income from their portfolios. In my research I found only one Dividend Growth stock that posted gains every year in the past ten year period. In your comments to this article see if you can identify this Superstar. In a day or so after all the comments are in, check back as I'll be revealing the stock in question.

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