Seeking Alpha

Buying Dividend Growth Stocks Without Looking; 5 Years Later

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Includes: AAPL, ABT, CL, CVS, JNJ, LOW, MDT, MMM, MSFT, NKE, PEP, QCOM, TXN, UTX, VIG, WBA, WMT
by: Dale Roberts
Dale Roberts
Long-term horizon, portfolio strategy, bonds, dividend investing
Summary

In early 2015, I skimmed 15 of the largest cap companies from the Vanguard Dividend Appreciation Fund.

What happens when you buy dividend growth stocks without looking? Well, we'll have a look.

I've bought and held. I have been more passive than the index.

I trusted the initial portfolio criteria of a meaningful dividend growth history, a few financial screens and a large cap bias.

You might find the results more than surprising.

Yes, I've been away from Seeking Alpha for a few months. I've been busy trying to get my own blog up to speed. I hope to be back on Seeking Alpha at least 2-4 times per month. I certainly have several ongoing research projects that I need to update for Seeking Alpha readers and followers.

And I think you'd enjoy this post on some simple market-beating strategies for Canadian dividend stocks. Those large-cap companies are available on US exchanges.

I hope you are all well, and I wish you all the best for 2020 and our new exciting decade.

I would think and hope that my most interesting contribution to Seeking Alpha is the real life exercise of buying dividend growth stocks without looking.

As my readers will know, I purchased 15 of the largest cap Dividend Achievers in early 2015. Of course that index is available in ETF, courtesy of Vanguard and by way of the ticker VIG (NYSEARCA:VIG).

As a backgrounder you can have a read of Buying Dividend Growth Stocks Without Looking. Now I did not look, but the index certainly did. I did no further evaluation. I trusted the index criteria, and the larger-cap bias.

The 15 companies that I bought are 3M (NYSE:MMM), Pepsi (NASDAQ:PEP), CVS Health Corporation (NYSE:CVS), Walmart (NYSE:WMT), Johnson & Johnson (NYSE:JNJ), Qualcomm (NASDAQ:QCOM), United Technologies (NYSE:UTX), Lowe's (NYSE:LOW), Walgreens Boots Alliance (NASDAQ:WBA), Medtronic (NYSE:MDT), Nike (NYSE:NKE), Abbott Labs (NYSE:ABT), Colgate-Palmolive (NYSE:CL), Texas Instruments (NASDAQ:TXN) and Microsoft (NASDAQ:MSFT).

I have bought and held and added. In fact, I've mostly added to companies that were out of favour. I've also done the same with my Canadian stocks.

While I sold VIG and moved to the Dividend Appreciation 15 in February and March of 2015, we'll evaluate the exercise from January of 2015 to get a full year of evaluation. The 15 holdings were top holdings in January of 2015.

To cut to the chase, here're the returns of the skimmed 15 vs. the total market VIG. The chart is courtesy of portfoliovisualizer.com.

The following chart represents a drip scenario with no rebalancing.

This was also an exercise in buy and hold. There is no portfolio rebalancing. If we rebalance, the returns are essentially the same as the index fund. When you let the winners run in a period of extended gains you can create additional returns. Many investors who hold individual stock portfolios will offer that the 'non rebalancing' is the key to creating greater performance. It will often be a few runaway winners that drive an out-performance.

Let the winners run

Here're the returns of the individual stock holdings.

For the period VIG delivered 11.24%. The outperformance was driven by 6 stocks. We now only have 2 losers. I've had many that were in losing positions over the years. I've watched them fall away one by one. We're left with 2 very profitable pharma retailers. Certainly, CVS is making moves into other business segments and it is executing with great success. I am hoping that in 2020 I can write that the portfolio is batting 1.000 with respect to delivering positive returns.

Here's the performance of CVS as Portfolio 1, and Walgreens as Portfolio 2.

The period is January of 2018 through to end of 2019. We see them both battling back from last Summer. Though most recently, Walgreens stumbled again.

But again, it's about those winners. And certainly many stocks in the portfolio have been very steady.

Most of the growth names are held in my wife's main RRSP account. Here's a near equal-weight representation.

There is a portfolio/retirement benefit here, as this is my wife's largest US portfolio. And certainly that means that my personal returns have been more muted on the US side. That has been counterbalanced somewhat by a dividend income focus and the returns of my Canadian Wide Moat 7.

I also have Apple (AAPL) as a pick that has bested the market by an incredible degree. That stock is also over-weighted. The growth is so generous I've been able to make some homemade Apple dividends, and still the tree grows back. It does not mind a little bit of careful pruning.

The changing face of VIG

Again, I continue to hold companies that have been removed from the index. Qualcomm was given the boot. Glad I held that in 2019 as it returned some 60%. That's almost as good as Apple's ridiculous 85%.

In April I wrote that there were big changes at the top of VIG.

Three new additions to the top 10 beat VIG handily in 2019. Here's the 3-pack with a slight overallocation to PG and Visa due to fund weighting. All 3 stocks beat the total index in 2019. It's a nice little growth kicker addition. Certainly PG is a stodgy old consumer staple, we'll leave that growth to Visa and Comcast.

I now only hold 10 of the top 20 stocks in the Vanguard fund. Only 12 of the personal holdings remain in the index. CVS (on dividend hold), Qualcomm and Pepsi have been given the boot.

What this exercise might demonstrate is that it's often about the 'types of stocks' that you own compared to the actual companies. The index methodology is trumping the moves made by the index. That said, the big driver is the use of letting the winners run. Investors such as Buyandhold2012 will tell you that the key of a more concentrated portfolio is to let the winners do their thing. With a buy and hold and add portfolio, a few of the stocks will soon dominate the returns and dominate the weighting in your portfolio.

Why cut success off at the knees?

Thanks for reading. I'll be back soon with a 2019 update on my Canadian portfolio returns. Here's the benchmark that we'll use for returns in 2019.

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.

Dale

Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, WMT, TXN, PEP, LOW. 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.