Dividend Growth 50: Nothing Terrible About This Precocious 2-Year Old - Part 1

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Includes: AAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, COP, CVX, D, DE, EMR, GE, GIS, GPC, HCP, HSY, IBM, JNJ, KHC, KMB, KMI, KO, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, QCP, SBUX, SHPG, SJM, SO, T, TGT, UTX, V, VDIGX, VIG, VOO, VZ, WBA, WEC, WFC, WMT, XOM
by: Mike Nadel

Summary

Two years in, the DG50 continues its outstanding performance.

Here in Part 1, we look at the total return of the overall portfolio and of each of its components.

Many companies that were down substantially in 2015 experienced significant turnarounds in 2016.

Big winners included Qualcomm, Caterpillar, Kinder Morgan, and Deere.

If I could talk to the Dividend Growth 50, here's what I'd say: "Way to go, kid!"

The real-time, buy-and-hold portfolio - funded with $25,000 of my own money - turned two years old on Dec. 16. And this precocious toddler has every reason to celebrate. Its 12% total return these last 12 months beat the S&P 500 Index, beat benchmark funds and, frankly, beat my expectations for it.

Most winners kept right on winning. Meanwhile, several previous laggards - most notably, Industrial and Big Oil behemoths - turned things around sharply in Year 2. As a result, the DG50 experienced thousands of dollars in paper gains - nearly triple its gain of Year 1.

Here is how it did compared with the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), Vanguard Dividend Growth Fund (MUTF:VDIGX) and Vanguard S&P 500 ETF (NYSEARCA:VOO) - three investments I also made on Dec. 16, 2014:

ETF OR FUND

ORIG SHR

COST 12/16/14

VALUE 12/16/15

INC

CURR SHRS

VALUE 12/16/16

1-YR INC

2-YR INC

VIG

6.00

$477.18

$485.10

1.7%

6.271

$542.00

11.7%

13.6%

VOO

3.00

$552.57

$583.83

5.7%

3.127

$650.01

11.3%

17.6%

VDIGX

219.348

$5,005.53

$5,400.22

7.9%

239.855

$5,773.31

6.9%

15.3%

DG50

$25,029.94

$26,272.65

5.0%

$29,487.39

12.2%

17.8%

You can see that after lagging slightly behind VOO and VDIGX in Year 1, the DG50 surpassed all of the benchmarks this past year. It also outperformed them during the 24-month period since the portfolio's inception.

Happy Birthday, indeed!

Hey, I am fully aware that to many of my fellow Dividend Growth Investing practitioners, total return is a secondary consideration. Above all, they want to establish, build and maintain reliable income streams.

Well, despite some adversity, the DG50 had another solid year there, too. That will be covered in Part 2, which will be posted on Seeking Alpha during the first week of the New Year.

Here, the subject du jour is the outsized total return of a portfolio filled with what many would call "boring" stocks - the kind many of our parents owned for years.

What Is The DG50? A Quick Recap

In the fall of 2014, I asked 10 fellow Seeking Alpha contributors to choose 50 companies each. The panelists - Chowder, David Crosetti, David Fish, Eli Inkrot, Eric Landis, Tim McAleenan, Miz Magic DiviDogs, ScottU, David Van Knapp and Bob Wells - combined to select 163 stocks, with the 50 leading vote-getters forming what I initially called the New Nifty Fifty.

About two months later, on Dec. 16, 2014, I funded the portfolio, investing about $500 in each company. I renamed it the Dividend Growth 50, which more accurately reflects what the portfolio represents. The article I wrote back then has received nearly 75,000 page views, one of the largest totals in recent SA history. Obviously, folks here have a thirst for knowledge, and I thank the panelists for helping quench it.

Importantly, neither my 10 cohorts nor I have suggested that investors replicate this portfolio. The idea has been to present interesting candidates for consideration and further research.

Moreover, it's a real-world endeavor. There is no cherry-picked data here, nothing hypothetical. These are real companies purchased with real money in real time, and I have provided frequent updates on the portfolio's progress. The hope is that, over time, this forward-looking project will contribute to making us better investors, whether or not we are DGI proponents.

Here, then, is the Year 2 total-return report on the Dividend Growth 50. Please note that the last four columns present the most recent information:

COMPANY

ORIG SHR

COST 12/16/14

SHARES 12/16/15

VALUE 12/16/15

INC (DCR)

SHARES 12/16/16

VALUE 12/16/16

1-YR INC

2-YR INC

3M (NYSE:MMM)

3

$483.81

3.081

$461.99

(4.5%)

3.161

$560.91

21.4%

15.9%

Aflac (NYSE:AFL)

8

$466.72

8.205

$506.24

8.5%

8.406

$583.46

15.3%

25.0%

Altria (NYSE:MO)

10

$502.80

10.416

$614.02

22.1%

10.802

$724.16

17.9%

44.4%

Apple (NASDAQ:AAPL)

5

$546.40

5.085

$566.16

3.6%

5.198

$602.81

6.5%

10.3%

AT&T (NYSE:T)

15

$489.00

15.846

$545.10

11.5%

16.660

$694.22

27.4%

42.0%

Automatic Data Processing (NASDAQ:ADP)

6

$499.50

6.107

$526.42

5.4%

6.257

$631.01

19.9%

26.3%

Baxter* (NYSE:BAX)

7

$502.11

7.129

$533.45

6.2%

10.220

$457.03

19.3%

26.8%

Becton, Dickinson (NYSE:BDX)

4

$541.68

4.051

$631.51

14.2%

4.118

$690.79

9.4%

27.5%

Caterpillar (NYSE:CAT)

5

$453.00

5.188

$351.33

(22.4%)

5.396

$499.56

42.2%

10.3%

Chevron (NYSE:CVX)

5

$516.15

5.239

$489.53

(5.2%)

5.465

$645.30

31.8%

25.0%

Clorox (NYSE:CLX)

5

$499.65

5.134

$673.17

34.7%

5.262

$626.38

(7.0%)

25.4%

Coca-Cola (NYSE:KO)

12

$491.76

12.395

$543.39

10.5%

12.798

$534.18

(1.7%)

8.6%

Colgate-Palmolive (NYSE:CL)

7

$478.10

7.154

$488.83

2.2%

7.314

$484.40

(0.9%)

1.3%

ConocoPhillips (NYSE:COP)

8

$515.76

8.423

$415.67

(19.4%)

8.632

$448.34

7.9%

(13.1%)

Deere (NYSE:DE)

6

$537.66

6.169

$482.35

(10.3%)

21.343

$646.68

34.1%

20.3%

Dominion (NYSE:D)

7

$506.66

7.200

$486.50

(4.0%)

7.480

$567.50

16.6%

12.0%

Emerson Electric (NYSE:EMR)

8

$482.96

8.292

$382.26

(20.9%)

8.590

$478.72

25.2%

(<1%)

Exxon Mobil (NYSE:XOM)

6

$533.28

6.220

$492.31

(7.7%)

6.435

$586.74

19.2%

10.0%

General Electric (NYSE:GE)

20

$501.00

20.703

$641.37

28.0%

21.343

$677.64

5.7%

35.3%

General Mills (NYSE:GIS)

10

$520.00

10.309

$610.18

17.3%

10.623

$674.56

10.6%

29.7%

Genuine Parts (NYSE:GPC)

5

$517.45

5.105

$444.84

(14.0%)

5.244

$513.80

15.5%

(<1%)

HCP** (NYSE:HCP)

11

$494.23

11.646

$432.64

(12.5%)

12.430

$362.21

(7.8%)

(19.3%)

Hershey (NYSE:HSY)

5

$494.30

5.122

$468.25

(5.3%)

5.250

$531.09

13.4%

7.4%

IBM (NYSE:IBM)

3

$460.77

3.101

$431.93

(6.3%)

3.213

$535.70

24.0%

16.3%

J.M. Smucker (NYSE:SJM)

5

$497.95

5.112

$634.24

27.4%

5.224

$674.62

6.4%

35.5%

Johnson & Johnson (NYSE:JNJ)

5

$522.40

5.151

$542.14

3.8%

5.296

$613.70

13.2%

17.5%

Kimberly-Clark (NYSE:KMB)

4

$455.08

4.099

$516.14

13.4%

4.214

$489.83

(5.1%)

7.6%

Kinder Morgan (NYSE:KMI)

13

$505.31

13.760

$219.33

(56.6%)

14.144

$301.83

37.6%

(40.3%)

Kraft Heinz+ (NASDAQ:KHC)

8

$479.52

9.257

$675.85

40.9%

9.591

$829.23

22.7%

72.9%

Lockheed Martin (NYSE:LMT)

3

$559.77

3.069

$667.50

19.2%

3.159

$790.00

18.4%

41.1%

McCormick (NYSE:MKC)

7

$512.26

7.141

$617.12

20.5%

7.273

$672.31

8.9%

31.2%

McDonald's (NYSE:MCD)

5

$450.75

5.173

$609.58

35.2%

5.331

$656.99

7.8%

45.8%

Microsoft (NASDAQ:MSFT)

11

$506.66

11.309

$634.77

25.3%

11.614

$723.55

14.0%

42.8%

NextEra Energy (NYSE:NEE)

5

$511.80

5.159

$534.73

4.5%

5.311

$631.47

18.1%

23.4%

Omega Healthcare (NYSE:OHI)

13

$497.90

13.795

$478.41

(3.9%)

14.865

$450.11

(5.9%)

(9.6%)

PepsiCo (NYSE:PEP)

5

$473.95

5.109

$516.41

9.0%

5.257

$556.55

7.8%

17.4%

Philip Morris (NYSE:PM)

6

$496.08

6.302

$568.12

14.5%

6.574

$600.27

5.7%

21.0%

Procter & Gamble (NYSE:PG)

6

$542.46

6.202

$502.29

(7.4%)

6.403

$542.20

7.9%

(<1%)

Qualcomm (NASDAQ:QCOM)

7

$497.77

7.154

$343.89

(30.9%)

7.483

$497.32

44.6%

(<1%)

Quality Care Properties** (NYSE:QCP)

NA

NA

NA

NA

NA

2.000

$30.54

NA

NA

Realty Income (NYSE:O)

11

$511.50

11.533

$590.83

15.5%

11.994

$665.30

12.6%

30.1%

Shire* (NASDAQ:SHPG)

NA

NA

NA

NA

NA

1.044

$179.64

NA

NA

Southern (NYSE:SO)

10

$482.20

10.501

$486.51

0.9%

10.990

$537.63

10.5%

11.5%

Starbucks# (NASDAQ:SBUX)

6

$486.24

12.152

$733.37

50.8%

12.336

$711.29

(3.0%)

46.3%

Target (NYSE:TGT)

7

$511.49

7.199

$531.28

3.9%

7.428

$570.09

7.3%

11.5%

United Technologies (NYSE:UTX)

4

$458.24

4.099

$389.93

(14.9%)

4.204

$456.21

17.0%

(<1%)

Verizon (NYSE:VZ)

11

$510.29

11.521

$535.84

5.0%

12.045

$629.59

17.5%

23.4%

Visa# (NYSE:V)

2

$515.66

8.057

$643.43

24.8%

8.119

$636.12

(1.1%)

23.4%

Walgreens Boots (NASDAQ:WBA)

7

$513.80

7.114

$602.62

17.3%

7.243

$623.47

3.5%

21.3%

Wal-Mart (NYSE:WMT)

6

$507.18

6.121

$369.09

(27.2%)

6.303

$447.38

21.2%

(11.8%)

Wells Fargo (NYSE:WFC)

9

$483.03

9.244

$516.27

6.9%

9.527

$527.22

10.8%

9.1%

WEC Energy+ (NYSE:WEC)

10

$505.90

11.328

$580.22

14.7%

11.715

$679.58

17.1%

34.3%

Cash

$13.15

$6.16

TOTAL

$25,029.94

$26,272.65

5.0%

$29,487.39

12.2%

17.8%

Notes:

  • * Baxter spun off Baxalta, which in turn was acquired by Shire. For comparison sake, the percentages in the 1-YR INC and 2-YR INC columns reflect the combined value of the DG50's Baxter and Shire positions ($636.67) on 12/16/16. They were compared to the combined Baxter/Baxalta position from 12/16/15. The transactions also resulted in $126.72 in cash coming into the DG50; that was used to purchase three additional BAX shares, per portfolio rules.
  • ** HCP spun off Quality Care Properties, resulting in two shares of QCP and $6.15 cash coming into the DG50. For comparison sake, the percentages in the 1-YR INC and 2-YR INC columns reflect the combined value ($398.90) of the HCP and QCP positions on 12/16/16 together with the cash received. They were compared to HCP's position from 12/16/15.
  • + Due to M&A activity, the Kraft Heinz and WEC Energy positions produced cash for the portfolio in 2015. That was used to buy one additional share each of KHC and WEC, per portfolio rules.
  • # Starbucks and Visa had stock splits in 2015; SBUX 2-for-1 and V 4-for-1.
  • Dollar values were lifted directly off of brokerage statements.
  • Dividends were automatically reinvested back into each position, per portfolio rules.
  • Free trades were received for opening the account with the brokerage. Total commissions paid to date = $7.95; that was for this year's Baxter purchase.

Observations:

Some of the biggest losers in the year ending 12/16/15 became big winners this time around. Kinder Morgan went from falling 57% to gaining 38%; Qualcomm turned it around from a 31% loss to a 45% rally; Caterpillar followed a 22% decline with a 42% advance; Emerson Electric went from being down 21% to going up 25%; and Wal-Mart's 27% pullback last year turned into a 21% run-up in 2016.

Meanwhile, the biggest gainer last time, Starbucks, at 51%, has stagnated so far this year, losing 3%. Others brought back to earth included Clorox (from 35% gain to 7% loss); and Visa (plus-25% to minus-1%).

Alert readers no doubt noticed that the DG50 actually has 52 companies now, thanks to the Baxter and HCP spin-offs. I never considered changing the name - kind of like the Big Ten, which has 14 schools. Hopefully, Shire and QCP will do better among their new peers than Rutgers has done among its football and basketball peers!

Unlike last year, not a single DG50 company suffered a double-digit loss. HCP, plagued by all kinds of management, portfolio and performance issues, was down 7.8%. It was one of only two companies to register losses both years of the DG50's existence; fellow healthcare REIT, Omega, was the other.

The two-year numbers for oil giants Chevron and Exxon Mobil turned solidly positive, at 25% and 10%, respectively. ConocoPhillips was still down 13%. And pipeline company KMI still has a looooooong way to go, having lost 40% since the DG50's inception. The only other double-digit losers over two years: HCP (19%) and WMT (12%).

The biggest two-year gainer was Kraft Heinz, at 73%, although it carries a little asterisk because it benefited from an extra share being bought from M&A money. Next in line were Starbucks (46%), McDonald's (46%), Altria (44%), Microsoft (43%), AT&T (42%) and Lockheed Martin (41%).

Those who looked at MCD and T in December 2014 and envisioned two-year gains exceeding 40%, raise your hands. And no fair fibbing! I mean, McDonald's was seen as an out-of-ideas junk-food company in an increasingly health-conscious world, and AT&T ... there aren't too many companies considered slower-growing and more boring.

In all, 27 DG50 components exceeded the S&P 500's 11.3% gain this past year and 25 surpassed its 17.6% two-year run.

The market has soared in the six weeks since Donald Trump was elected president on Nov. 8, with the S&P 500 up nearly 6%. The DG50 has benefited from the "Trump Rally," too, with a 3% gain. It's fairly common for dividend growth stocks (which tend to be more conservative and relatively low-beta) to underperform the S&P 500 in a hot market.

Closing Notes

Two years into what I hope is a two-decade project, the Dividend Growth 50 continues to perform admirably, to say the least.

Does that mean every component is wonderful all the time? No, of course not. That isn't true even in the most carefully constructed portfolios by the greatest investing minds ever. Almost every investor will own a few lemons.

Indeed, one thing I really like about the DG50 is that it demonstrates how a lemon or three need not sour an entire portfolio. It isn't perfect, nor does it need to be.

Even with this year's rally, KMI has lost 40% since Dec. 16, 2014. In addition, HCP has lost 19% and COP has fallen 13%. Nevertheless, the Dividend Growth 50 still has advanced 18%, beating the S&P 500 and two other benchmarks. And as readers will see in Part 2, the portfolio is still growing income nicely despite a few setbacks.

So happy second birthday, DG50! As Rick said to Ilsa: "Here's looking at you, kid."

Disclosure: I am/we are long ALL STOCKS MENTIONED.

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.