- In early 2015, I skimmed 15 of the largest cap Dividend Achievers.
- Had I gone further down the list and skimmed the next 20 largest cap, I would have considerably greater returns.
- In 2017, those "Lesser Caps" beat the Dividend Achievers Total Index.
- We are seeing the size premium on display, but will it continue?
In late 2017, I penned this article The Next Dividend Achievers Absolutely Trounce The Market. These are the 20 companies that have a lesser cap than the top 15 largest cap Dividend Achievers (VIG) that I purchased in early 2015. The next ones are Costco (COST), TJX Companies (TJX), General Dynamics (GD), Target (TGT), Monsanto (MOS), EOG Resources (EOG), FedEx (FDX), NextEra Energy (NEE), Caterpillar (CAT), ADP Data Processing (ADP), Trinity Industries (TRN), Air Products and Chemicals (APD), Northrop Grumman (NOC), Stryker (SYK), Illinois Tool Works (ITW), Ecolab (ECL), Emerson Electric (EMR), Praxair (PX), Yum! Brands (YUM), Chubb Limited (CB).
Here are the full-year returns for "The Next Ones." The portfolio is equal-weighted and rebalanced on an annual basis. The returns history is courtesy of portfoliovisualizer.com. And as always past performance does not guarantee future returns.
And here are the returns for 2017 for the individual assets.
We see that (unlike my Dividend Achievers) there is nary a loser in the bunch. The only drastic underperformer is TJX Companies. Of course, that's another company that is supposed to get wiped out due to the Amazon (AMZN) effect, just like Walmart (WMT) that I own, ha. That might suggest of course that the Dividend Achievers construct of selecting larger cap companies with at least a 10-year history of increasing dividends (each year) combined with the Index financial health screens can find consistent financial success. In the article The Returns of all S&P 500 Members for 2017: Is Winning Found By Not Losing? I showed that 119 companies in the S&P 500 delivered a negative return in 2017, a failure rate of 23.8%. Of the top 35 Dividend Achievers, the failure rate is 2 of 35 or 5.7%. That's a remarkable amount of stability, but of course the index and market outperform are due to the incredible success of many of the Next One Achievers.
Some investors concern themselves with the dividend and the dividend growth rate. Of course, the portfolio success will come down to the business success of the companies that we hold, over time. Business success will give companies the potential to pay dividends and increase dividends over time. I like to write that the dividends are more of a divining rod that might help us find more great companies and the potential of greater financial stability. It's more about what the dividends say or reflect, compared to what the dividends do. But I will humour those that count dividends. Certainly, in the retirement funding stage actual income can have a real effect.
Of course, the Dividend Achievers Index is not a high yield approach. The Vanguard site shows the current yield for the total VIG ETF as 1.77%. That's nothing to write home about if you're Seeking Juicy Yields. If you're in that higher yield camp you might want to check out my article on the MSCI High Yield Indices that beat the market in Canada, the US and International.
The Next Ones Dividend Achievers offer a yield above that of the total VIG, just above 2.2%. But once again, the potential benefit here is total return - making more money - not counting the dividends. I often write in financial slang that "More Money is More Better." I also write that investing ain't rocket surgery, so I can make it a habit to get my "merds wixed up" to make a point or two.
Here's the dividend history for the Next Ones with dividend reinvestment from January of 2014 to end of 2017. With the starting yield of 2%, the 2017 yield on cost with dividend reinvestment was 3.2%. The dividend growth rate from 2016 to 2017 was 18.7%. If the group of companies was to continue with the generous dividend growth rate (supported by strong company performance), this portfolio might eventually begin to throw off considerable income.
If you follow my fellow countryman Kurtis Hemmerling you can find his articles on the optimal methods or factors for finding or creating maximum dividend yield over time. It's not by Seeking Income, but by Seeking Alpha. Making more money also finds more dividends, according to Mr. Hemmerling.
As a comparison point, here's the income history for the 15 largest cap Dividend Achievers that I skimmed from the index. Once again the period is from January of 2014 to end of 2017. The starting yield is 2.3% with the 2017 yield on cost of 3.4% for total 2017.
With the success of the Dividend Achievers holdings and the success of the MSCI indices in the higher yield space, it might make one wonder why investors would "pick stocks" in the traditional sense. We see active managers underperform simple indices. When individual investors report their annual returns we almost exclusively see that underperformance. Many investors will do a lot of work to find that negative alpha. It might be easier and more effective to simply borrow some simple but productive ideas by way of plain vanilla and smart beta indices.
Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences.
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Analyst’s Disclosure: I am/we are long AAPL, NKE, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, PEP, TXN, WMT, UTX, LOW, RY, BNS. 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.
Dale Roberts is an Investment Funds Advisor at Tangerine Investment Funds Limited a subsidiary of Tangerine Bank, wholly owned by Scotia Bank; he is not licensed to provide professional advice on stocks. The opinions expressed herein are Dale Roberts' personal opinions relating to his experience as an investor and are not those of Tangerine Bank or its subsidiaries and/or affiliates. This article is for information purposes only and does not constitute investment advice or an offer or the solicitation of an offer to buy or sell any securities. Past performance is not a guarantee and may not be repeated. Investment strategies are not suitable for everyone and you should always conduct your own research or speak to a financial advisor.
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