Thursday, February 23, 2017

Dividend Achievers Offer Income Growth and Capital Appreciation

The NASDAQ US Broad Dividend Achievers Select Index is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. There are 272 companies in this index today. You can find all those holdings as of February 2017 at the following location.

Peter Lynch, the legendary manager of the Fidelity Magellan Fund has mentioned the following about dividend achievers:

"The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"

The stocks he mentions in his book, "One Up on Wall Street", is Automatic Data Processing (ADP), which incidentally has kept raising distributions 25 years after his book was published.

In fact some of the best performing stocks on Wall Street over the past decade have been the dividend achievers. Dividend achievers are companies which have increased their distributions for at least ten consecutive years. They provide a superior alternative than investing in fixed income because they provide investors with the opportunity of a rising dividend payment and they could also receiving higher total returns over time as well. The premise is that higher dividends are a direct result of rising earnings, which translates into higher stock prices. When managements boost distributions, this shows what their outlook for the business and the economy really is.

Over the past decade, the broad dividend achievers index has delivered annual total returns of 5.90%, which was slightly higher than the 5.69% annual returns realized by the Russell 3000 value index.


Currently, there are approximately 272 stocks in the dividend achievers index.

The ten largest holdings account for one-third of the portfolio weight and include:


Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has managed to raise dividends for 54 years in a row. Over the past decade, Johnson & Johnson has raised its dividends at a rate of 8.80%/year. The stock sells at 16.90 times forward earning and yields 2.70%. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company has managed to raise dividends for 34 years in a row. Over the past decade, Exxon Mobil has raised its dividends at a rate of 9.70%/year. The stock sells at 19.70 times forward earning and yields 3.70%. (analysis)

Microsoft Corporation (MSFT), a technology company, develops, licenses, and supports software products, services, and devices worldwide. The company has managed to raise dividends for 15 years in a row. Over the past decade, Microsoft has raised its dividends at a rate of 15%/year. The stock sells at 21.70 times forward earning and yields 2.40%.

AT&T Inc. (T) provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide. The company has managed to raise dividends for 33 years in a row. Over the past decade, AT&T has raised its dividends at a rate of 3.80%/year. The stock sells at 14.10 times forward earning and yields 4.70%.(analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company has managed to raise dividends for 60 years in a row. Over the past decade, Procter & Gamble has raised its dividends at a rate of 9.20%/year. The stock sells at 23.60 times forward earning and yields 2.90%. (analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company has managed to raise dividends for 29 years in a row. Over the past decade, Chevron has raised its dividends at a rate of 9.40%/year. The stock sells at 24.10 times forward earning and yields 3.90%.(analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has managed to raise dividends for 43 years in a row. Over the past decade, Wal-Mart Stores has raised its dividends at a rate of 12.90%/year. The stock sells at 16.10 times forward earning and yields 2.90%. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide.The company has managed to raise dividends for 55 years in a row. Over the past decade, Coca-Cola has raised its dividends at a rate of 9%/year. The stock sells at 22 times forward earning and yields 3.60%. (analysis)

Verizon Communications Inc. (VZ), through its subsidiaries, provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company has managed to raise dividends for 12 years in a row. Over the past decade, Verizon has raised its dividends at a rate of 3.30%/year. The stock sells at 12.70 times forward earning and yields 4.70%. (analysis)

International Business Machines Corporation (IBM) develops and manufactures information technology (IT) products and services worldwide. The company has managed to raise dividends for 21 years in a row. Over the past decade, IBM has raised its dividends at a rate of 21.40%/year. The stock sells at 13.10 times forward earning and yields 3.10%.(analysis)

There are several funds focusing on the dividend achievers index.

One of them is the Vanguard Dividend Appreciation ETF (VIG), which to track the performance of the NASDAQ US Dividend Achievers Select Index. It has a low annual expense of 0.09%/year. If you want to invest in the dividend achievers and are low on time, or do not want to spend any time analyzing individual companies, paying an annual fee in perpetuity by owning this ETF may be an option for you.

Another one is the Powershares Dividend Achievers (PFM), which will normally invest at least 90% of its total assets in dividend paying common stocks that comprise Index. This ETF has an annual expense of 0.55%.

The annual dividend paid on the dividend achievers ETF has increased from roughly 31 cents/share in 2006, to roughly 60 cents/share in 2016. While the annual amount of dividends paid fell to 30 cents/share in 2009 and 28 cents/share in 2010, it quickly recovered by 2012. Despite the severity of dividend cuts during the financial crisis, the annual dividend paid in 2010 was a mere 11% - 12% lower than the dividend paid at the inception of the ETF. For the investor who reinvested those dividends, chances are that dividend income would have done even better.


Because of the annual fees on those funds, I typically end up constructing my own dividend portfolios. In the era of low or no commission internet stock brokerages, investors could easily save on annual fees, which add up over the long run.

If an investor builds a diversified portfolio using the list of dividend achievers, they never sell, and just keep reinvesting dividends, they will not incur any additional costs that the index investor will incur. In addition to that, a do-it-yourself investor will be able to weight each portfolio holding as they wish. I usually prefer equal weights at portfolio construction, followed by no re-balancing afterwards.I do not like situations where I would own 272 individual securities, but the largest ten companies account for a third of  the portfolio value. This is not good diversification.

The other thing to consider is that the dividend achievers list is incomplete, relative to the list of dividend champions and contenders that David Fish painstakingly maintains every month. There are 333 companies which  have raised dividends for at least 10 years in a row on the list of champions and contenders compiled by David Fish. This is about 61 companies more than what we have on the Dividend Achievers list. The main reason for the difference is that the Dividend Achievers index committee removes companies that are not actively traded. To a long-term investor like myself, I could not care less if the companies I own trade 100 or 100 million shares per day. But in the increasingly indexed world we live in today, index committees have minimum volume requirements for companies that need to be included in a certain index. Fun fact, my least liquid investment is Hingham Institutions for Savings (HIFS), which has been a six-bagger since I bought it in 2010. It is on David Fish's list, but not on the Dividend Achiever's list.

So if I were looking for a good list of dividend achievers, I would bump that group against the list maintained by David Fish. His list is not without some imperfections either, though they are not as glaring. For example, it has excluded Abbott (ABT) after the 2013 split into two, which has raised dividends or over four decades. This is where it helps to do your own analysis, and do your own due diligence, rather than rely on third parties for everything.

Full Disclosure: Long JNJ, XOM, PG,CVX, WMT, KO, VZ, IBM, ABT, HIFS,ADP


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