Dividend Growth 50: It's A Happy 3rd Anniversary, Even As Mr. Market Gets Some 'Revenge'

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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

The real-money DG50 portfolio had its best year for total return, gaining 15%.

Its "winning" streak against the bullish broad market ended, however.

McDonald's, Microsoft, Lockheed Martin, Deere and Visa were big gainers.

GE was a major drag on the DG50. Target and Walgreens also struggled.

Not long ago, one popular stock-market narrative was that McDonald's (NYSE:MCD) was in trouble because people were trying to eat healthier foods. It was going to be a slow death by a billion kale smoothies.

Microsoft (NASDAQ:MSFT), meanwhile, also was seen as suffering. The company wasn't innovating, and several of its products were deemed failures. Its stock price wallowed well below its hyper-valued, dot-com-era surge.

Well, a funny thing happened on the way to Panic City for those iconic brands. They changed leadership, they shifted strategy some, they improved operations... and they showed it was foolish to write off Mickey D's and Softy so easily.

When I funded the Dividend Growth 50 with more than $25,000 of my own money on Dec. 16, 2014, few would have predicted that McDonald's and Microsoft would be the project's biggest gainers over the next three years. I admit I wouldn't have predicted it, either.

As it turns out, each more than doubled in value - the only two DG50 positions able to make that claim, as shown in this screenshot of performance leaders that was snapped on the portfolio's 3-year anniversary:

The DG50 was selected with income in mind, and I appreciate that many (probably most) folks who have followed this project use the Dividend Growth Investing strategy. And so, shortly after the New Year, I will present a full Year 3 income report. This article focuses on total return, which is extremely important to many investors - even plenty of DGI practitioners.

Bullied By The Bull

Thanks to McDonald's, Microsoft and other big gainers such as Lockheed Martin (LMT), Deere (DE) and Visa (V), my original $25,029 investment into the DG50 has grown to $33,990 - a 36% gain over 36 months. Not too shabby!

In the last 52 weeks, led by gains of 63% by Caterpillar (CAT) and 52% by Apple (AAPL), the Dividend Growth 50 moved up a crisp 15.3% - its best single-year performance. But it wasn't quite enough to run with the bull.

During its first two years, the portfolio outgained the Vanguard S&P 500 ETF (VOO). That was surprising, given the bullish nature of the market - and given that the DG50 is a dividend-first proposition filled with "boring," old-school, widows-and-orphans stocks.

Mr. Market got "revenge" against the DG50 over the last 12 months - and now has performed better from a total return standpoint over the 3 years of the project's existence.

In addition, as the following table shows, two other benchmark funds - Vanguard Dividend Appreciation ETF (VIG) and Vanguard Dividend Growth Fund (VDIGX) - have slightly outgained the DG50. (I also invested real money in VIG, VOO and VDIGX on Dec. 16, 2014.)

ETF/ FUND

SHARES BOUGHT

COST 12/16/14

VALUE 12/16/16

SHARES 12/16/17

VALUE 12/16/17

YEAR-OVER-YEAR

3 YEAR

VIG

6.00

$477.18

$542.00

6.407

$653.45

20.6%

36.9%

VOO

3.00

$552.57

$650.01

3.192

$785.62

20.9%

42.2%

VDIGX

219.348

$5,005.53

$5,773.31

247.777

$6,831.21

18.3%

36.5%

DG50

$25,029.94

$29,487.39

$33,990.31

15.3%

35.8%

A lot of the difference these last 12 months has to do with the relative underperformance of the Telecommunications, Energy, Consumer Staples and REIT sectors; each is well-represented in the DG50.

Additionally, a few laggards - most notably General Electric (GE) with its 42% loss, but also previous stalwarts such as Kraft Heinz (KHC), Walgreens Boots (WBA) and AT&T (T) - held down the Dividend Growth 50.

A Quick DG50 Primer

Before I go any further into this review, here's a refresher about the genesis and purpose of this project.

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.

Later that year, 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 80,000 page views, one of the largest totals in recent SA history. Obviously, folks here have a great appetite for knowledge, and I thank the panelists for helping satisfy it.

Importantly, neither of my 10 colleagues nor I ever have suggested that investors replicate this portfolio. The dozens of DG50-related articles I have written have resulted in tens of thousands of comments - and I don't recall anybody claiming to have built an identical portfolio. Even in my personal portfolio, I own only about half of the Dividend Growth 50 components.

The idea of this project always has been to present interesting candidates for consideration and further research, and also to explore the pros and cons of a passive, buy-and-hold, dividend-centric portfolio over time.

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 all of the information presented in this article's tables was pulled directly from my brokerage statements.

I have provided frequent updates on the portfolio's progress. The hope is that, over time, this forward-looking project will help make all of us better investors, even those who aren't DGI practitioners.

Without further ado, here is the total return data for every company in the Dividend Growth 50 (listed in order of 3-year performance):

COMPANY

SHARES BOUGHT

COST 12/16/14

VALUE 12/16/16

SHARES 12/16/17

VALUE 12/16/17

YOY

3 YEAR

McDonald's

5

$450.75

$656.99

5.468

$951.76

44.9%

111.2%

Microsoft

11

$506.66

$723.55

11.866

$1,030.56

42.4%

103.4%

Lockheed Martin

3

$559.77

$790.00

3.243

$1,046.90

32.5%

87.0%

Deere

6

$537.66

$646.68

6.483

$978.03

51.2%

81.9%

Visa#

8

$515.66

$636.12

8.175

$930.47

46.3%

80.4%

Caterpillar

5

$453.00

$499.56

5.548

$813.83

62.9%

79.7%

Becton Dickinson (NYSE:BDX)

4

$541.68

$690.79

4.184

$926.58

34.1%

71.1%

NextEra Energy (NYSE:NEE)

5

$511.80

$631.47

5.459

$864.86

37.0%

69.0%

Apple

5

$546.40

$602.81

5.280

$918.56

52.4%

68.1%

Baxter* (NYSE:BAX)

7

$502.11

$457.03

10.330

$674.85

47.7%

66.0%

Aflac (NYSE:AFL)

8

$466.72

$583.46

8.595

$767.18

31.5%

64.4%

Altria (NYSE:MO)

10

$502.80

$724.16

11.198

$802.56

10.8%

59.6%

Clorox (NYSE:CLX)

5

$499.65

$626.38

5.396

$796.61

27.2%

59.4%

3M (NYSE:MMM)

3

$483.81

$560.91

3.233

$769.45

37.2%

59.0%

Automatic Data (NASDAQ:ADP)

6

$499.50

$631.01

6.395

$755.82

20.0%

51.3%

Philip Morris (NYSE:PM)

6

$496.08

$600.27

6.832

$749.33

24.8%

51.1%

Starbucks# (NASDAQ:SBUX)

12

$486.24

$711.29

12.562

$732.23

2.9%

50.6%

WEC Energy+ (NYSE:WEC)

10

$505.90

$679.58

12.100

$824.85

21.4%

49.1%

Johnson & Johnson (NYSE:JNJ)

5

$522.40

$613.70

5.430

$773.55

26.0%

48.1%

McCormick (NYSE:MKC)

7

$512.26

$672.31

7.418

$752.40

11.9%

46.9%

Kraft Heinz+

8

$479.52

$829.23

9.868

$784.90

(5.3%)

40.6%

Realty Income (NYSE:O)

11

$511.50

$665.30

12.531

$719.27

8.1%

40.6%

AT&T

15

$489.00

$694.22

17.524

$670.11

(3.5%)

37.0%

PepsiCo (NYSE:PEP)

5

$473.95

$556.55

5.406

$644.50

15.8%

36.0%

Chevron (NYSE:CVX)

5

$516.15

$645.30

5.680

$680.06

5.4%

31.8%

Verizon (NYSE:VZ)

11

$510.29

$629.59

12.638

$665.84

5.8%

30.4%

Dominion (NYSE:D)

7

$506.66

$567.50

7.770

$659.75

16.3%

30.2%

J.M. Smucker (NYSE:SJM)

5

$497.95

$674.62

5.357

$639.84

5.2%

28.5%

Coca-Cola (NYSE:KO)

12

$491.76

$534.18

13.228

$611.00

14.4%

24.3%

Hershey (NYSE:HSY)

5

$494.30

$531.09

5.372

$613.16

15.5%

24.1%

Wal-Mart (NYSE:WMT)

6

$507.18

$447.38

6.478

$629.07

40.6%

24.0%

Emerson Electric (NYSE:EMR)

8

$482.96

$478.72

8.864

$596.19

24.5%

23.5%

Southern (NYSE:SO)

10

$482.20

$537.63

11.504

$590.27

9.8%

22.4%

Wells Fargo (NYSE:WFC)

9

$483.03

$527.22

9.799

$586.66

11.3%

21.5%

General Mills (NYSE:GIS)

10

$520.00

$674.56

10.994

$625.44

(7.3%)

20.3%

United Technologies (NYSE:UTX)

4

$458.24

$456.21

4.304

$543.03

19.0%

18.5%

Colgate-Palmolive (NYSE:CL)

7

$478.10

$484.40

7.478

$553.74

14.3%

15.8%

Kimberly-Clark (NYSE:KMB)

4

$455.08

$489.83

4.347

$515.16

5.2%

13.2%

Procter & Gamble (NYSE:PG)

6

$542.46

$542.20

6.603

$606.74

11.9%

11.9%

IBM (NYSE:IBM)

3

$460.77

$535.70

3.336

$508.74

(5.0)

10.4%

Exxon Mobil (NYSE:XOM)

6

$533.28

$586.74

6.682

$554.80

(5.4%)

4.0%

Walgreens Boots

7

$513.80

$623.47

7.387

$531.42

(14.8%)

3.4%

Qualcomm (NASDAQ:QCOM)

7

$497.77

$497.32

7.777

$503.63

1.3%

1.2%

Genuine Parts (NYSE:GPC)

5

$517.45

$513.80

5.395

$496.23

(3.4%)

(4.1%)

Target (NYSE:TGT)

7

$511.49

$570.09

7.750

$485.22

(14.9%)

(5.1%)

Omega Healthcare (NYSE:OHI)

13

$497.90

$450.11

16.163

$455.79

1.3%

(8.5%)

ConocoPhillips (NYSE:COP)

8

$515.76

$448.34

8.832

$460.76

2.8%

(10.7%)

General Electric

20

$501.00

$677.64

22.107

$393.94

(41.9%)

(21.4%)

HCP** (NYSE:HCP)

11

$494.23

$362.21

13.057

$350.31

(3.3%)

(23.2%)

Kinder Morgan (NYSE:KMI)

13

$505.31

$301.83

14.505

$260.07

(13.8%)

(48.5%)

Quality Care Properties** (NYSE:QCP)

NA

NA

$30.54

2.00

$29.44

(3.6%)

NA

Shire* (NASDAQ:SHPG)

NA

NA

$179.64

1.050

$158.83

(11.6%)

NA

Cash

$6.16

$6.16

TOTAL

$25,029.94

$29,487.39

$33,990.31

15.3%

35.8%

Notes

  • * Baxter in 2015 spun off Baxalta, which in turn was acquired by Shire in 2016. For comparison sake, the percentage in the 3-YR INC column reflects the combined value of the DG50's Baxter and Shire positions ($833.68) on 12/16/17. (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 in 2016, resulting in two shares of QCP (and $6.15 in cash) coming into the DG50. For comparison sake, the percentage in the 3-YR INC column reflects the combined value ($379.75) of the HCP and QCP positions on 12/16/17.
  • + 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. Totals in the Shares Bought column are split-adjusted.
  • Free trades were received for opening the account with the brokerage. Total commissions paid to date = $7.95; that was for the 2016 BAX purchase.
  • DIVIDENDS WERE AUTOMATICALLY REINVESTED BACK INTO EACH POSITION, PER PORTFOLIO RULES.

Observations

Yes, the DG50 actually has 52 companies, thanks to the Baxter and HCP spin-offs. I never considered changing the name; if the Big Ten can have 14 teams and the Big 12 can have 10, why can't the DG50 have 52 stocks?!?!

Aside from GE, Industrials showed well the past year, with CAT up 63%, DE 51%, MMM 37%, LMT 33%, EMR 25%, ADP 20% and UTX 19%. All of those are cyclical companies - and what goes up almost always comes down pretty hard eventually - but they have been riding the right end of the cycle for some time now.

It's notable that CAT, DE, EMR and even MMM were losers in the first year of the DG50. Caterpillar, which lost 22% in the year ending 12/16/15, is up an incredible 132% over the last 24 months!

Technology companies also shined, with Apple ahead 52%, Visa 46% and Microsoft 42%. Even long-troubled Qualcomm finished the year in the black, rallying late on acquisition rumors.

Utilities NextEra and WEC have been outperformers, with NEE really coming through this past year. NEE is up 69% over the 3-year stretch, demonstrating that utes need not be "stodgy" investments.

One Consumer Staples company that authored a nice comeback story was Clorox, which was up 27% after being down 7% in the year ending 12/16/16. Coke didn't beat the market, but it was still ahead 14% after having fallen 2% the year before.

Visa made a great year-over-year move - going from a 1% loss to a 46% gain. The stock is unquestionably expensive, with its 40-ish price/earnings ratio, but I like its fundamentals, potential and business model so much that I have been buying it for my personal portfolio this year.

(Graphic from Visa proxy statement of Dec. 7, 2017)

GE was ahead 35% after two years before myriad problems condemned it to a portfolio-worst 42% fall in the last 12 months. Remarkably, GE still doesn't seem like much of a bargain for investors; its P/E ratio is over 20.

KMI was down 14% in Year 3 to solidify its grasp as the DG50's worst all-time performer (minus-49%). Umm... congratulations?

Unlike GE, which has cut its dividend for the second time in eight years, KMI's leaders have pledged a return to the company's divvy-boosting ways in 2018. Here's hoping those aren't hollow promises - I'd hate to see the DG50 get "kindered" again.

Despite rallying in December, Target finished the 12-month stretch down 15%, as did Walgreens. Another major brick-and-mortar retailer, Wal-Mart, is up 70% over the last two years after losing 27% in the portfolio's first year of existence. Obviously, the "Amazon Effect" isn't universal.

Chart TGT Total Return Price data by YCharts

HCP was the only DG50 company to show a paper loss in each of the Dividend Growth 50's three years. Fellow healthcare REIT Omega avoided the same dubious distinction by squeaking out a 1.3% gain this time. Also unlike HCP, at least OHI kept raising its dividend.

Conclusion

As one who invests primarily to build an income stream for retirement and secondarily to increase my overall wealth, I have been very satisfied with the Dividend Growth 50's performance.

So far, it appears the DG50 will compete well on a total-return basis in all but the strongest of bull markets. Having said that...

When I did my 1-year review, my 2-year review and other various DG50 updates, I stressed that not enough time had passed to conclude much of anything. The same certainly is true after 3 years.

I plan to maintain the Dividend Growth 50 for at least 14 more years - until I reach RMD age. During that time, there figures to be a major correction and/or recession and/or crash and/or bear market (or two). We need to see how the DG50 survives such adversity, especially in comparison to the overall market, before any conclusions can be drawn.

As McDonald's and Microsoft proved, things can change quite dramatically in the investing universe.

See y'all again in a couple of weeks, when I present the DG50 income report.

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.

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