Tuesday, February 19, 2013

Dividend Champions Index – Five Year Total Return Performance

The list of dividend champions was created by David Fish, who painstakingly compiled the data, and updates it every single month. You can find the data from his site. In my review of the spreadsheet that he provides, I discussed how the group of dividend champions is without doubt the most comprehensive list of dividend growth stocks for further research. The other options that I used, such as the Dividend Aristocrats index lost my respect due to the exclusion of quality income companies because of bizarre reasons such as low trading volume or because the companies were not members of the S&P 500 index.

My only issue with the dividend champions index was that past performance was not calculated. As a result, I could not really use the index as a benchmark for calculating returns.

Luckily, Robert Alan Schwartz had been able to post the historical lists going back to the end of 2007. As a result, I was able to obtain the December version for each year between 2007 and 2011, and then calculate the returns of the index once/year. For example, in order to calculate 2008 returns for the index, I would obtain the December 2007 list of Dividend Champions. I would then pull the adjusted closing prices from Yahoo Finance for the last trading day of 2007 and for the last trading day of 2008. I would then calculate the percentage change between the two, and average it out. For the purposes of simplicity, I assumed that each company was equally weighted at the start of the year, and also assumed that dividends were automatically reinvested.

The main drawback was that I did not exclude dividend cutters from the index until the re-balancing in the next December. As a result, a company included in the December 2007 list would remain in it until December 2008, even if it cut distributions in May 2008. However, if a company was bought out and delisted in the middle of the year, I would use the last price available. In addition, when companies split, I also treated this event as a sale, with the amount sitting in cash until the re-balance date. On December 31, of the next year, I would rebalance the whole portfolio by selling off all prior year holdings, and then equal weighting all the companies on the list for the next year. The portfolio performance excluded capital gains and dividend taxes, as these vary for every individual investor.

Since 2007 the total return Dividend Champions index has outperformed the total return on the S&P 500 in three out of five years. A $100 investment in S&P 500 made on 12/31/2007 would have been worth $108.59 by 12/31/2012. The same investment in the Dividend Champions list of companies would have been worth $133.24 by 2012. As a group, dividend growth stocks do not fall as much during bear markets, and typically follow the markets on the uptrends. The only time when dividend growth stocks underperform is during the initial stages of a bull market when companies that are the most beaten down rally the most.



It is interesting to note that the year 2008 was pretty bad for financials, and the overall sentiment towards dividends was very negative. After reviewing the 2008 results however, I was reminded that several quality dividend stocks were bought out at significant premiums during those trying times for income investors – EnergySouth, Rohm & Haas, Anheuser Busch, and WW Wrigley come immediately to mind.
Overall, I am really surprised that ETF or Mutual Fund promoters have not crunched the numbers, and come up with products to capitalize on the Dividend Champions list.

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
Dividend Conspiracies
Historical changes of the S&P Dividend Aristocrats Index
Where are the original Dividend Aristocrats now?

5 comments:

  1. Nice piece! Would be interesting to see how Challengers and Contenders stack up as well.

    ReplyDelete
  2. The etf by Vanguard, VIG, or Vanguard Dividend Appreciation ETF, does a fairly good job of replicating the dividend champions index, and it is fairly low cost, so would be a good alternative to those who are not able or willing to buy individual securities.

    ReplyDelete
  3. Robert,

    After reading your post, I decided to take a look at this etf and downloaded the fund prospectus. It's interesting. Seems the fund is paying about a 2% dividend and had a cut in '09 I think. Overall, the dividend growth is impressive. I found a few stocks missing from the holdings. For instance, I did not see JNJ, MO, or PM there. All would push up the dividend and have long dividend growth histories. I'm considering it as a way to diversify my DG portfolio. Thank you for the heads-up!

    A

    ReplyDelete
  4. Glad I found your post! A question on the index return calculation method. I am not sure about the assumption of the dividend is being reinvested automatically. The yahoo finance adjusted closing price deducts the dividend after an ex-date. If you calculate the percentage diff of the adjusted closing price of 2 years, I would think that the dividend is being cashed out instead of reinvesting. What am I missing?

    ReplyDelete
  5. Hello,

    To clarify,I assumed that dividends were reinvested along the year. So lets assume you have a stock worth $100. If you had the stock trading at $80 when it paid a 4 dollar annual dividend, you would have bought 0.05 shares. If at year end the stock went to 100, you would have $105 worth of shares.

    This is what I mean by automatically reinvesting dividends.

    ReplyDelete

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