Thursday, February 6, 2020

Where are the 2007 Dividend Aristocrats today?

There is a big misunderstanding that somehow the financial crisis was worse for dividend growth investors, than equity investors in general.

This is an incorrect statement. 

Dividend growth investors did fine during the financial crisis, despite having a high allocation to financials. That's because a lot of companies that end up increasing dividends for 25 years in a row, and get to a membership into the S&P 500 have wide moats, strong competitive advantages, lasting earnings power, and earn consistent profits. While there are always disruptions, and the risk of change is there, a lot of the dividend aristocrats as a group have managed to withstand a lot of obstacles in their way, including recessions, wars, inflation and deflation, and different business conditions in the US and Globally.

I will use the performance of the Dividend Aristocrats to illustrate why that is the case in aggregate.

I obtained the list of the Dividend Aristocrats from 2007, and tracked them to see where they are today. This article is a continuation of my analysis of the performance of the same list of companies between 2007 and 2016. Check the article titled "Investing in the Dividend Aristocrats from 2007"

There were 60 companies on the Dividend Aristocrats list at the end of 2007. That was right when the financial crisis was about to hit the world. No one knew if we were in a recession, and there were doubts whether the worst was over or just beginning. Obviously, the end of 2007 was a peaceful time, as the storm was about to hit everyone. Hence, I chose the end of 2007 list of dividend aristocrats as the starting point for my study.

Out of the 60 aristocrats in 2007, there are 31 dividend aristocrats remaining as of 2020.

This means that there were 29 companies that were removed from the list of dividend aristocrats for one reason or another.

Seventeen companies were removed from the list due to dividend cuts. Most of those dividend cuts occurred in 2008 and 2009. They were heavily concentrated in the financial sector too.

Three companies kept dividends unchanged for longer than one year, which meant that they were booted off the index. However, all those companies have since resumed increasing dividends.

Eight companies ended up being acquired, which is why they were booted off the index.

None of the companies went under. A lot of the companies that cut dividends in 2008 – 2009 are now recovering, and growing their dividends above their pre-crisis levels.

It is fascinating to me that investors who sold due to dividend cuts in 2008 were able to save a large portion of their capital, and avoided several of the collapses. I am referring to the likes of Citigroup, Bank of America, but also Fannie and Freddie.

However, investors who bought after a major dividend cut, such as the ones from Wells Fargo, US Bank, JP Morgan and even General Electric, did very well.

It should not be surprising that when a once in a generation financial crisis hits the world, you would get an increase in dividend cuts. For milder recessions such as the 2000 – 2003 one, the level of dividend cuts was more subdued. One of those dividend cutters ended up being acquired, but I am classifying it under dividend cuts. That’s because it was acquired a few years after the dividend was cut.

I decided to backtest how a completely passive investor in an equal weighted version of the Dividend Aristocrats list from 2007 would have done. I used the dividend channel tool and made the following assumptions:

1) The investor puts equal amounts of money into each company
2) The investor holds on to all shares, but doesn’t sell, unless a company is acquired. We even hold on to dividend cuts
3) All dividends are reinvested
4) For acquisitions, we reinvest the money in S&P 500, since the Dividend Aristocrats ETF was not available until 2013. I didn’t want to end up making too many calculations by equally distributing the funds into the remaining companies, because the data gathering process by using dividend channel was very manual and time intensive.

I did a more manual calculation a couple of years ago, which many seem to have forgotten about. So I /decided to just update the numbers using a slight modification to the original approach.

If I had more time, and a better process for testing data using historical databases that account for delisted companies and calculated historical total returns, I would have been able to test a few variations. Notably selling after a dividend cut, allocating the money on to the remaining companies. I may have tried testing if rebalancing would have added anything to the returns. Unfortunately, being a one person operation, and the datasets I have, I am limited in what I can do.

I did like the fact that Dividend Channel had information on companies that are no longer being traded, which reduces the risk of survivorship bias in testing to a certain degree. If I had just focused on the companies that remained in the index, without accounting for the ones that were deleted, I would have done fantastically well. However, I did not know in advance in 2007 which 31 companies would remain as dividend aristocrats. All I knew in early 2008 was that I liked the dividend aristocrats, and provided the reasons in the following article: Why do I like the Dividend Aristocrats?

The results of this passive investing strategy are really amazing. An equally weighted amount placed in each of the 60 dividend aristocrats at the end of 2007 would have resulted in an initial outlay of $600,000 (or $10,000 each). By the end of 2019, the portfolio would be worth $2.057 million, versus $1.683 million for a similar investment in the S&P 500.

The most interesting fact was that an investment in the Dividend Aristocrats index, which accounts for the addition and removal of companies as well as the quarterly rebalancing, did even better. An investment in the dividend aristocrats index in 2007 would have turned to $2,348,840. That surprised me when I initially ran the numbers in 2007, and still shows me that anything is possible in the world of investing. Those results go contrary to my preaching on the site that one should never sell, they should never rebalance, and they should actively change portfolio components.

This is why I am always staying that investing is part art, part science.

For example, the best performing stock was Sherwin-Williams (SHW), which turned a $10,000 initial investment at the end of 2007 into $119,530.82 by the end of 2019.

The second and third best performing companies were V.F. Corp (VFC) and Standard & Poor's Global (SPGI), turning that $10,000 investment into $83,404.49 and $81,906.11 respectively.

The worst performing dividend aristocrat over the past 12 years was Supervalu (SVU), which turned a $10,000 investment into $1,758.29. The company cut dividends in 2013, and was acquired in 2018.

The second and third worst performing companies were Pitney Bowes (PBI) and General Electric (GE), turning the initial investment of $10,000 into $2,128.14 and $4,642.60 respectively.

I would have never known in advance which would have been the best and worst companies to invest in 2007. But I did know to own a diversified list for the long run. Check my article on the best dividend stocks for the long run from 2008, and the update from 2018.

Thank you for reading!

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