Are relative performance comparisons useful?

The Dividend Aristocrats Index underperformed S&P 500 between 1989 and 1999.

A $100 investment in the Dividend Aristocrats at the end of 1989 turned to $413. A $100 investment in the S&P 500 at the end of 1989 turned to $534.

In 1998 and 1999 the Dividend Aristocrats underperformed by 12% and 26%

They underperformed for basically a decade. Since the end of 1999 however:

A $100 investment in the Dividend Aristocrats index turned to $187.45 by 2009 and $742.15 by 2019. A $100 investment in S&P 500 turned to $90.94 by 2009 and $324.34 by 2019. By the end of 2022 the investment was worth $953 in the aristocrats versus $405 in S&P 500. Why am I posting this?

I often hear people stating that if your strategy does not perform well versus some benchmark over an arbitrarily chosen period of time like 5 or 10 years, you should abandon your strategy and just hug the benchmark The history of the Dividend Aristocrats gives a good illustration on the dangers of potentially abandoning your strategy at the worst time possible Past performance is not indicative of future results Returns tend to come in long cycles Returns can also revert to the mean Nobody knows what the future holds, hence the best strategy in my opinion is the one that can help the investor reach their own goals and objectives They have to be able to stick to that strategy, through thick or thin to give it any chance of success The billions dollar question is whether a long-term strategy is "permanently broken" or just experiencing "temporary headwinds" (even if that's a decade).

Why am I really posting this?

To give you context.

I see chatter that the Dividend Aristocrats index has underperformed S&P 500 in 2023.

Some weak hands would likely see that as a problem. I personally do not care, for as long as the companies I hold manage to grow dividends as a group.

Of course, they won't tell you that the Dividend Aristocrats index has outperformed S&P 500 in 2022.

I didn't care about that either. This is just pure noise. Relative performance comparisons are mean reverting and to be honest they do not add much value to me as an investor.

It's also pretty logical to conclude that a group of 500 companies (S&P 500) would likely have different performance than a group of 40 - 60 companies (Dividend Aristocrats Index).

Changing strategies frequently because of past relative performance over an arbitrary period of time is basically called performance chasing. Chasing what's hot could work or it could not. It's not the type of game I want to play. I doubt it works either.

It reminds me of the reason why many investors fail to make money. They consistently buy high and sell low.

In other words, they chase what is hot, and never find a strategy that works for them to achieve their goals and objectives.

My strategy is to invest in companies that can grow dividends over time.

I try to assemble a diversified portfolio of those companies, and go through a process where I try to find the ones that stand a chance of growing those dividends because they are growing those earnings. I also try to buy those companies at attractive valuations. I also try to buy the ones with sustainable dividend payouts. Dividends grow above the rate of inflation over time, and they are more stable, reliable and easier to forecast than share prices. Hence, my strategy is to focus on building out a sustainable dividend income stream that would pay for my retirement. I do not care about keeping up with the Dow Joneses. (pun intended).

My goal has always been to generate enough in dividends to pay for expenses in retirement.

If I outperform S&P 500 over time, (or some other benchmark someone else chooses to compare me against) it won't affect me, for as long as my dividends are covering expenses and growing at or above rate of inflation. If I die at the age of 90 with $9 million in my portfolio, versus $10 million that I could've had with another strategy, I would not care less.

If I underperform S&P 500 over time, (or some other benchmark someone else chooses to compare me against) it won't affect me, for as long as my dividends are covering expenses and growing at or above rate of inflation. If I die at the age of 90 with $10 million in my portfolio, versus $9 million that I could've had with another strategy, I would not care less.

Eighteen Cash Machines Hiking Dividends Last Week

As part of my review process, I evaluate dividend increases every week. This process helps me to see how my portfolio holdings are doing. It also helps me to uncover and review new candidates for my portfolio.

I look for dependable dividends from companies with a minimum ten-year streak of annual dividend increases, fueled by earnings growth. I look for dependable dividends from companies with dependable earnings, and solid competitive advantages, which I can acquire at attractive valuations.

During the past week, the following companies increased dividends to shareholders. Each company has a ten year streak of annual dividend increases. I review the latest dividend increase relative to the ten year average, and the growth in earnings per share over the past decade. Last but not least, I discuss current valuation. The companies include:

This is a list of companies for further review. Most seem attractive as businesses, but that doesn’t mean that they should be invested in at any price, regardless of valuation.

The next step is to check each business, in order to determine if it is worth further review. I would look at ten year trends in earnings per share, dividends per share, payout ratios, shares outstanding. I would try to understand what the business does, and make an assessment if the good times would continue, so that I can expect higher earnings, dividends and intrinsic values over time. I would look at the valuation relative to earnings and dividend growth, in order to determine if the business is fairly valued, if it looks promising too. 

Companies listed in this post include: 

Relevant Articles:

- Ten Dividend Growth Stocks Raising Dividends Last Week

- Nine Cash Machines Hiking Dividends Last Week

- 14 Dividend Growth Stocks Rewarding Owners With A Raise

- 8 Dividend Growth Stocks Rewarding Owners With A Raise

Visa Versus Verizon - A Look at the past decade

At the end of 2012, Visa (V) stock sold at $37.90/share. The stock had a forward annual dividend of $0.33/share. The company generated $1.74/share in Free Cash Flow.

The stock had a low yield of 0.87%, and a high Price to FCF of 21.78.

At the end of 2012, Verizon (VZ) stock sold at $43.27/share. The stock had a forward annual dividend of $2.06/share. The company generated $3.85/share in Free Cash Flow.

The stock had a high yield of 4.76% and a low Price to FCF of 11.24.

Some investors may have shunned Visa in 2012, because of the high valuation and low current yield. They could have picked Verizon instead, because of its higher dividend and lower valuation.

In 2022, Verizon generated $2.48 in FCF/share. The trailing 12-month FCF is at $3.25/share. The stock has a forward annual dividend of $2.66/share. Verizon yields 6.92% today. It sells for 11.85 times trailing FCF.

The investor who bought Verizon in 2012 is sitting at an yield on cost of 6.14%.

In 2022, Visa generated $8.58 in FCF/share. The trailing 12-month FCF is at $10.52/share. The stock has a forward annual dividend of $2.08/share.  Visa yields 0.82% today. It sells for 24 times trailing FCF.

The investor who bought Visa in 2012 is sitting at an yield on cost of 5.48%.

Visa had a high rate of growth over the next decade, while Verizon didn’t.  This is why investors in Visa are generating an yield on cost that is getting closer to that of Verizon, despite the low initial yield.

Growth is never guaranteed of course. If Visa had not delivered much growth for one reason or another, it could’ve actually lost money for investors, as valuations shrunk.

The lesson is that it is important to take into account growth expectations, when determining the value of a company. In other words, value and growth are connected at the core. Meaning, you need to look at the multiple, in conjunction with past and expected rate of growth, stability/durability of the business.

I also wanted to reiterate the sources of investor returns, which put everything in perspective.

 Investor returns are a function of:

1. Dividends

2. FCF/Share Growth

3. Change in valuations

The first two items drive the fundamental return for investors. The last item is the speculative return.

It is important to understand where investor returns come from.

Relevant Articles:

- Value and Growth Are Attached at the Hip

- Sources of Investor Returns: Visa Edition

- Microsoft During the lost decade

- Dividends are a return on investment and a return of investment

- Microsoft and Altria: A Look at the past decade

Ten Dividend Growth Stocks Raising Dividends Last Week

I review the listings of dividend increases every week, as part of my monitoring process. This exercise helps me review existing holdings and also identify companies for further research.

I focus my attention on the companies that have managed to increase dividends for at least ten years in a row, in order to identify consistent dividend growth companies. 

This exercise is also helpful, because it shows the quick review I do before deciding if a company is worth a more thorough review. Notably, this exercise results in three outcomes:

1) Company is not attractive from a fundamentals perspective. So I basically do nothing.

2) Company is attractive from a fundamentals perspective, but seems overpriced. So I basically put it on a list for potential acquisitions, assuming my ideal price hits. I try to familiarize with these companies during downtime, in order to be able to act if/when they become attractively priced.

3) Company is attractive from a fundamentals perspective and seems attractively priced today. I would prioritize this company for research today. Depending on findings, there is a high chance I may add it if I understand it well.

This is just a general framework I use when evaluating dividend growth stocks in general. That applies for screening companies as well as more manual processes such as reviewing the list of dividend increases every week.

The list of ten companies listed below includes the companies that raised dividends last week, and also have a ten year track record of annual dividend increases.

ChoiceOne Financial Services, Inc. (COFS) operates as the bank holding company for ChoiceOne Bank that provides banking services to corporations, partnerships, and individuals in Michigan.

The company raised quarterly dividends by 3.80% to $0.27/share. This was the 12th consecutive annual dividend increase for this dividend achiever. The company has managed to increase dividends at an annualized rate of 8.30%/year during the past decade.

The company managed to grow earnings from $1.40/share in 2013 to $3.15/share in 2022. ChoiceOne Financial Services is expected to earn $2.79/share in 2024.

The stock sells for 8.96 forward earnings and yields 4.19%.

Graco Inc. (GGG) designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide.

The company increased quarterly dividends by 8.50% to $0.255/share. This was the 26th consecutive annual dividend increase for this dividend champion. The company has managed to increase dividends at an annualized rate of 10.80%/year during the past decade.

The company has also managed to grow earnings from $1.15/share in 2014 to $2.73/share in 2023. Graco is expected to earn $3.03/share in 2024.

The stock sells for 26.66 times forward earnings and yields 1.16%.

Merck & Co., Inc. (MRK) operates as a healthcare company worldwide. It operates through two segments, Pharmaceutical and Animal Health.

The company increased quarterly dividends by 5.50% to $0.77/share. This was the 12th consecutive annual dividend increase for this dividend achiever. The company has managed to increase dividends at an annualized rate of 5.10%/year during the past decade.

The company has also managed to grow earnings from $1.49/share in 2013 to $4.73/share in 2022. Graco is expected to earn $8.44/share in 2024.

The stock sells for 12.14 forward earnings and yields 2.98%.

McCormick & Company, Incorporated (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates in two segments, Consumer and Flavor Solutions. 

The company increased quarterly dividends by 7.70% to $0.42/share. This marks the 38th consecutive year that the Company has increased its quarterly dividend.  This dividend aristocrat has managed to increase dividends at an annualized rate of 9.10%/year during the past decade.

Brendan M. Foley, President & CEO, said, "With our relentless focus on growth, performance and people, and the continued execution of our proven strategies, we are well positioned to deliver sustainable long-term growth and build shareholder value. We remain committed to our long history of returning cash to shareholders and I am pleased to announce another dividend increase."

The company managed to grow earnings from $1.47/share in 2013 to $2.54/share in 2022. McCormick is expected to earn $2.64/share in 2024.

The stock sells for 24.56 times forward earnings and yields 2.55%.

Raymond James Financial, Inc. (RJF) is a diversified financial services company, provides private client group, capital markets, asset management, banking, and other services to individuals, corporations, and municipalities in the United States, Canada, and Europe.

The company increased quarterly dividends by 7.10% to $0.45/share. This was the 11th consecutive annual dividend increase for this dividend achiever. The company has managed to increase dividends at an annualized rate of 14.60%/year during the past decade.

The company managed to grow earnings from $2.27/share in 2014 to $8.16/share in 2023. Raymond James Financial is expected to earn $9.27/share in 2024.

The stock sells for 11.34 times forward earnings and yields 1.67%.

RGC Resources, Inc. (RGCO) operates as an energy services company. It sells and distributes natural gas to residential, commercial, and industrial customers in Roanoke, Virginia, and the surrounding localities. The company also provides various unregulated services.

The company raised quarterly dividends by 1.30% to $0.20/share. The Company has now increased the annual dividend 20 consecutive years.

The company managed to grow earnings from $0.67/share in 2014 to $1.14/share in 2023. RGC Resources is expected to earn $1.07/share in 2024.

The stock sells for 16.40 times forward earnings and yields 4.32%.

There were also four Canadian Banks that increased dividends over the past week as well. Each has managed to raise annual dividends for a decade as well. The numbers listed are in Canadian Dollars.

Canadian Imperial Bank of Commerce (CM) provides various financial products and services to personal, business, public sector, and institutional clients in Canada, the United States, and internationally. The company operates through Canadian Personal and Business Banking; Canadian Commercial Banking and Wealth Management; U.S. Commercial Banking and Wealth Management; Capital Markets and Direct Financial Services; and Corporate and Other segments. 

The bank raised quarterly dividends by 3.40% to $0.90/share. This was also a 5.88% increase over the dividend paid during the same time last year. It's also the 13th consecutive year of annual dividend increases for this Canadian Dividend Achiever.

Over the past decade, the company has managed to grow dividends at an annualized rate of 6.12%.

It has also managed to grow earnings from $3.94/share in 2014 to $5.16/share in 2023. Canadian Imperial Bank of Commerce is expected to earn $6.66/share in 2024.

The stock is selling for 8.42 times forward earnings and yields 6.42%

National Bank of Canada (NA) (NTIOF in US) provides various financial products and services to retail, commercial, corporate, and institutional clients in Canada and internationally. It operates through four segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International.

The bank raised quarterly dividends by 3.90% to $1.06/share. This was also a 9.27% increase over the dividend paid during the same time last year. It's also the 14th consecutive year of annual dividend increases for this Canadian Dividend Achiever.

Over the past decade, the company has managed to grow dividends at an annualized rate of 8.90%.

It has also managed to grow earnings from $4.32/share in 2014 to $9.42/share in 2023. National Bank of Canada is expected to earn $9.41/share in 2024.

The stock is selling for 9.56 times forward earnings and yields 4.50%

Royal Bank of Canada (RY) operates as a diversified financial service company worldwide. 

The bank raised quarterly dividends by 2.20% to $1.38/share. This was also a 4.55% increase over the dividend paid during the same time last year. It's also the 13th consecutive year of annual dividend increases for this Canadian Dividend Achiever.

Over the past decade, the company has managed to grow dividends at an annualized rate of 7.76%.

It has also managed to grow earnings from $6.03/share in 2014 to $10.51/share in 2023. Royal Bank of Canada is expected to earn $11.72/share in 2024.

The stock is selling for 10.47 times forward earnings and yields 4.49%

The Toronto-Dominion Bank (TD) provides various financial products and services in Canada, the United States, and internationally. It operates through four segments: Canadian Personal and Commercial Banking, U.S. Retail, Wealth Management and Insurance, and Wholesale Banking.

The bank raised quarterly dividends by 6.30% to $1.02/share. It's also the 13th consecutive year of annual dividend increases for this Canadian Dividend Achiever.

Over the past decade, the company has managed to grow dividends at an annualized rate of 7.76%.

It has also managed to grow earnings from $4.15/share in 2014 to $5.61/share in 2023. The Toronto-Dominion Bank is expected to earn $8.26/share in 2024.

The stock is selling for 10.02 times forward earnings and yields 4.93%

Sources of Investor Returns: Visa Edition

 Investor returns are a function of:

1. Dividends

2. FCF/Share Growth

3. Change in valuations

The first two items drive the fundamental return for investors. The last item is the speculative return.

It is important to understand where investor returns come from.

Let's illustrate this concept with an actual example, using Visa (V).

At the end of 2012, Visa $V stock sold at $37.90/share. The stock had a forward annual dividend of $0.33/share. 

The company generated $1.74/share in Free Cash Flow.

The stock had a low yield of 0.87%, and a Price to FCF of 21.78.

In 2022, Visa generated $8.58 in FCF/share. The trailing 12-month FCF is at $10.52/share. The stock has a forward annual dividend of $2.08/share.  

Visa yields 0.88% today. It sells for 22.50 times trailing FCF..

An investor who bought 1 share of Visa at the end of 2012, and reinvested dividends, would have 1.077665 shares today.

This $37.90 investment in Visa turned to $252.87

Going back to the formula for estimating returns, they are a function of:

1. Dividends

2. FCF/Share Growth

3. Change in Valuation Multiple

For Visa, between 2012 and today, the majority of returns in this case came from growth in FCF/Share from $1.74 to $10.52.

This drove growth in dividends, though dividends accounted for a smaller return than growth in FCF/Share.

The slight uptick in valuation contributed a miniscule amount to returns.

Going forward however, any thing could happen. There are various outcomes/possibilities.

For example, the business may still grow at a high pace over the next decade (though probably not by 500%).

However, a contraction in the valuation multiple could depress returns over a short period of time such as a decade

For example, if Visa generated $25/share in FCF in 2034, that would be a 137% increase in FCF/Share

However, if the business sells for only 10 times FCF, the share price would be $250. So that would be not much further from here, because the speculative return would be negative.

In that case, dividends would likely provide a higher level of returns, as yields would be higher and there would be less of a need for growth to generate returns.

The total investment return would be higher than the share price, because of the DRIP.

If the business sells for 20 times FCF, share prices would likely be driven by FCF/growth and Dividend reinvestment for the rest. The speculative return would be negative, but won't have much of a noticeable impact.

It is fascinating to look at the past history of FCF/EPS, Dividends, Valuations, and try to project onto the future, while also thinking of various scenarios. Note, I am not predicting anything, just trying to show how change in one variable could have a drastic impact. 

For example, a business could operate at a steady rate of growth, but could generate great returns if the valuation multiple stays flat, but terrible returns if the valuation multiple shrinks. That's assuming we did a good job evaluating the fundamental characteristics of the business of course. 

So even if we did a good job of evaluating a business, we have no idea what the multiple would be in a decade for example. It's just good to be aware that various outcomes are possible. This keeps us humble, and searching for ways to protect ourselves from future ignorance. 

To me, this means diversification, and trying to avoid overpaying for a security. Sometimes, a security would get ahead of itself, and sell at a very high valuation. This depresses future returns, even if the business does as expected. On the other hand, the business may do well, while the security languishes for a long time. This increases future returns. It's therefore important to have some margin of safety. Easier said than done of course.

 It also means building out positions slowly and overtime, while checking my thesis. It also means limiting how much I invest in a security. Reinvesting dividends elsewhere, versus DRIP is another risk management tool, as is keeping investment costs low.

Having an exit plan set out before the investment is purchased can be helpful as well