Dividend Growth Index Update Q1 2012

As some of you may remember, I was picked to be part of a Dividend Growth Index back in September of 2011. I joined a number of well-known and respected dividend bloggers, where we formed an index of high-quality dividend stocks that we all decided we would keep track of over the long-term. It’s an exercise determined to show the power of dividend investing over the long haul.

A total investment of $24,000 on September 30, 2011 in the Dividend Growth Index would now be worth $28,978.


As we compare the index to applicable benchmarks, the SPY would be worth $30,188 and the XDV would be worth $26,328.

I’m going to remind everyone of my picks below, and their performance in the index thus far. I picked my three stocks based on solid fundamentals of the underlying companies, strong cash flows, durable competitive advantages, attractive valuations and most important: solid dividends that are growing at a pace that exceeds inflation.

Philip Morris International Inc. (PM)

My favorite stock right now, and the largest position in my personal stock portfolio. Even with the huge run it’s had over the last six months, I think this is still a winner long-term. I think there is still a lot of growth behind this company and the strong yield, coupled with the huge dividend growth rate, should provide loyal shareholders healthy returns for years to come.

Performance since DGI inception: 44.74%

ConocoPhilips (COP) 

This was a tough stock to put into the index, to be honest, only because its price is based on the underlying commodity of oil which can fluctuate wildly. Even so, I felt confident in the long-term health of this company and with a large yield, healthy balance sheet and commitment to rewarding shareholders I think this is a solid company to own. The split that’s occurring soon appears to unlock further value from this company.

Performance since DGI inception: 22.32%


The Procter & Gamble Company (PG)

There are few companies I can think of that would be more of a “core” holding to an index like the DGI. PG is such a dividend growth stalwart there are no words I can add to this short paragraph that will somehow enlighten you. It’s a solid company that sells necessary products all over the world. With 55 years of dividend growth behind it, I see no signs of PG slowing down.

Performance since DGI inception: 8.09%

It’s important to note that these are companies that I believe in holding for the long-term. Short-term price fluctuations due to a market that is not always efficient means nothing to a dividend growth investor like myself. I picked these three companies for the index because I believe that long-term they’ll provide outsized returns to loyal shareholders.

Please check the websites of the other bloggers involved for their individual picks and performance:

The Dividend Guy
The Passive Income Earner
Dividend Growth Investor
Dividend Monk
My Own Advisor
The Wealthy Canadian
The Dividend Ninja

Full Disclosure: I’m long PM, COP, PG.

Thanks for reading.

Comments

  1. says

    Hi DM,

    Thanks for the post. I am new to dividend investment and I see your blog as a great source of inspiration.

    Although I am very impressed by your approach on dividend investing and you are able to showcase that dividend investing is working for you, I do have a question for you.

    In your above example you showed that A total investment of $24,000 on September 30, 2011 in the Dividend Growth Index would now be worth $28,978.

    As we compare the index to applicable benchmarks, the SPY would be worth $30,188 and the XDV would be worth $26,328.

    In such a case, why would someone not just invest in SPY? Forgive my ignorance if I missed something very basic here. I am very new to stocks investing.

    • says

      Denver,

      Thanks for stopping by. I’m glad you find the blog inspiring. It’s truly the main reason I continue to write! I hope you continue to keep in touch.

      As far as your question regarding the numbers, I did not do a very good job of explaining the numbers. We had both Canadian stocks and U.S. stocks in the index (somewhat due to the large number of Canadian bloggers involved), and so due to that aggregate the best way to compare the returns is to compare it against an aggregate of the main indexes in the U.S. and Canadian markets.

      The Dividend Guy does a much better job of explaining this than I did:

      http://www.dividendguyblog.com.

      Basically, when you compare our aggregate against the aggregate of the largest ETF’s or indexes of our two countries, the Dividend Growth Index beat both.

      It should also be noted that we dividend growth investors primarily invest to receive ever-growing dividends that grow at a rate that exceeds inflation. These payouts can be reinvested until one needs them for living expenses. That can’t really be accomplished by investing in SPY. We used it as a benchmark only. Index investing has its merits, but is very different from DG investing.

      Hope that helps!

  2. says

    I have followed this index since it started and I like it a lot. I just have one qualm with your pick that you have likely heard a thousand times.

    I do not believe Phillip Morris will be a great long term stock. If a company sells a product that most of the buyers are actively trying to stop buying it is not a good long term business plan. And the tobacco industry is always at risk of having further regulations put against them. While I see the points you make are valid, I think based on most people trying to quit smoking that they won’t be sustainable long term, especially considering that they kill their best customers. I know somebody else will gladly take my place but I couldn’t sleep at night knowing I was in some small way funding that.

    Sorry for the rant, you have obviously put a lot of thought into your investments so you are okay with it and I respect that. Otherwise I believe this to be a portfolio that could benefit any investor both short and long term.

    • says

      Poor Student,

      I wouldn’t suggest you invest in something that goes against your sensibilities. But, this preference by some investors to shun these stocks as well as a misunderstanding about how these companies make money as investments creates a very unusual opportunity for out performance.

      I wrote about this more on my post concerning investments for 2012.

      The long term viability of PM will be what Altria (MO) looks like today. It that’s the case, then I’ll take it! MO has to deal with high regulatory burdens (FDA oversight), high government taxes and fees, continuing lawsuits all over the country, and continued persecution of their customers.

      And yet they keep making more and more money to the consternation of everyone.

  3. Anonymous says

    Poor Student – I disagree with your assumption that most smokers are “actively trying to stop buying” cigarettes. I work with a lot of smokes, and none of them are trying to stop buying cigarettes or quit smoking.

    • says

      Perhaps saying most smokers are trying to stop was a generalization, but I know a lot of smokers too and a lot would like to quit or have tried in the past. I also know smokers who don’t want to quit.

      The sweeping assumption was a mistake on my part but I stink by the statement that if some people want to quit using your product that isn’t exactly a good thing for business. And now thinking about it I can say that a lot of people also don’t want to keep drinking sugary soft drinks but Pepsi and Coke are good investments still. Same thing with people trying to use less oil but oil companies still being good investments.

      If I had used more time to think about my comment I likely wouldn’t have made it or would have argued it better. I now realize that there are better forums and mediums to state my opinion about investing in tobacco companies than this.

  4. says

    Hi DM,

    Nice run for the Index. What would be interesting is to check whether any of the companies increased their dividends and track the yield on the initial investment. It will be steadily increasing over the long-run, which will be a nice example of dividend growth investing at work.

    RE: Poor Student comment.
    While my view may be cynical, it is fair to say that people do not control their reactions and behavior. It is conceptually easy to stay fit – just eat a balanced meal and give the body some exercise (its an oversimplification of course). Yet many people do not exercise or eat healthy, even though they know it isn’t good for them. The list may go on. Larry Winget has a great book “People Are Idiots and I Can Prove It” which has more examples.

    Suffice to say there will always be people behaving in ways detrimental to their health. They will spend the money unwisely anyway and than includes smoking (which is also hard to quit). Rather than the profit going to someone else, why not share some of it with our friend Dividend Mantra?

    • says

      I know that people have the opinion of if someone has to profit from it, it might as well be me. And that view is completely valid. I am not denouncing him or anybody else for investing in PM. I know that most people that invest in the company would not advocate smoking, they are just looking for a good investment. and there is nothing wrong with that.

      I just think that the nature of the tobacco industry makes it a poor investment choice. Obviously I have been proven wrong on this point. I stink to my belief though that it will not continue to be because of regulations or health declines in smokers and hopefully better decisions by future generations. Again, I am likely mistaken in these beliefs.

    • says

      Hey guys,

      All great comments here. There are many different investments available to us, and that’s what makes it a free market.

      I don’t smoke. However, that doesn’t make my opinion on whether smoking is worth the costs/health risks valid to anyone else but me. I don’t enjoy when others force their opinions on me, much the same as I don’t on others. That being said, I enjoy PM as an investment but not as a product.

      I’ve said this before, and I’ll say it again: you can find something wrong/bad with just about any company in the world.

      PM sells cigarettes. Cigarettes can cause cancer.

      WM picks up trash and puts it in a landfill. Landfills aren’t good for the environment.

      Coke sells sugary beverages. Sugar can cause diabetes.

      McDonald’s sells cheeseburgers. Cheeseburgers can cause heart attacks.

      Exxon sells oil. Oil is bad for the environment.

      The list can go on and on. I think that it’s important to separate emotions from investing. What difference is it to me what John Doe does with his hard earned money? If drinking Coke makes him happy (as it does me), then I’m okay with profiting from that decision.

      Just my take on it. I could write a very lengthy op-ed piece on this, but again it’s all just my opinions. The best thing you can do, if you disagree with a company’s products, is simply not invest with them. And, again, that’s why it’s a free market.

      Best wishes!

    • says

      I guess the question was not on the ethics or usefulness of the product. The point was that cigarette maker will go out of business since people will eventually smoke less.

      My take is that we have decades before world consumption goes down. People are aware of risks and effect of smoking, yet they care more about immediate craving than what may happen to them in 30+ years. PM operates outside of US, which is a health-conscientious society. In other countries life is less predictable and thus current consumption is favored even more.

      In addition, efficiencies in production and distribution will increase with time while prices will increase to offset any reduced demand. EPS will keep growing and drive dividend increases.

      I hope eventually this world will stop buying tobacco, but doubt it will happen in the next 20 years.

    • says

      AverageCFA,

      My apologies. I didn’t understand the comment properly. After reading it back through, I agree with you. The premise against PM is a reduction in the customer base over time.

      I do agree with you, however, that this will not happen any time quickly. Their markets are everywhere but here, and even here in one of the wealthiest/most educated society with plenty of “stop smoking!” commercials, Altria continues to make lots of money in this market.

      I guess we’ll see how this translates over time. I think as emerging markets continue to drive growth and as middle class consumers continue to grow in these economies, PM’s profits will surge.

      Best wishes!

  5. says

    Fantastic picks. PM has been an absolute monster during this time period. I actually bought shares of PM last September, it hasn’t disappointed. I wonder how much further up it will go? I don’t see it going past $100, but who knows in this market. I’m excited about the COP split, and PG is Steady Eddy as usual.

    • says

      Compounding Income,

      Thanks for stopping by!

      Yes, PM has been a monster. It will exceed $100, it’s just a matter of when. I’d be willing to bet it crosses that mark by the end of the year or soon thereafter. I’m not as concerned about that as the dividend growth, as are you I’m sure. I see the next dividend boost being another huge raise.

      I’m also excited about the COP split, and it’s something to carefully watch. That has been a big performer as well.

      I like PG, but I’d like to see it closer to $60-63 before adding to my holdings. I don’t mind it at these prices, however. It’s a solid company as you put it.

      Best wishes!

    • says

      Financial analysis,

      Thanks for stopping by and commenting!

      I would agree with you that PG’s balance sheet leaves something to be desired, but I wouldn’t say it’s “risky”. I do think the goodwill is a little high, but I still like this company long-term and I don’t see any insolvency occurring anytime soon.

      Best wishes!

    • says

      Soon, yes, but at last 4Q goodwill correction decreased companies profit. As I understand that goodwill is due to companies expansion acquiring other companies. Well its all about generating profit. If its generates profit I guess it does not matter if its equipment, inventory or goodwill.

  6. says

    Under current conditions in the stock market it sure makes a lot of sense to invest in companies paying attractive dividends. If the market stays flat your going to make at least a little money and if it goes higher you could do much better.

Join The Discussion!