I’ve always wondered how my dividend growth portfolio was doing vs some common index, like the S&P500. I’ve got lots of S&P stocks like CocaCola (KO) in there. But I’m missing some of the big boys like Apple. So does the lack of certain non-dividend stocks hinder my capital gains? Maybe it helps?
I’ve heard a lot of investors say that they think that their dividend growth stocks are as good as an index fund. Thinking only gets you so far. So let’s play every scientist’s favorite game: shut up and do the experiment. It’s time to put things to the test (*).
There isn’t an easy way to compare my portfolio to the S&P500 since I’m continually adding new capital, while the S&P just says that it went up by 13% last year. Basically I need a way to control for capital additions while still being able to track stock appreciation (capital gains). Below are the rules that I developed in order to present the most fair comparison I could.
- The performance of the S&P500 will be measured by SPY, an S&P500 exchange traded fund, which seeks to replicate the performance of the S&P500 index.
- Any time I buy or sell a stock in my dividend growth portfolio, I must buy or sell an equivalent amount of SPY on the same day. For example: If I buy 100 shares of KO on July 2nd, 2011 for $4,000. I must buy $4,000 worth of SPY on July 2nd, 2011.
- Only changes in the stock’s price are tracked. Dividends are ignored since they get dumped back into the capital pile for reinvestment (see point #2).
- My high yield portfolio and options that did not result in assignment are ignored. I want to focus solely on my dividend growth portfolio.
The Results (in a pretty graph):
What happened in 2011?
In mid 2011 our government was in the middle of the debt ceiling debate. Basically a gigantic exercise in political stupidity where an artificial crisis was created and artificial deadlines established. Congress decided that brinkmanship was a better answer than compromise and the whole fiasco ran out until well past the eleventh hour. The markets responded, as markets do, by engaging in a frantic drunken orgy of reflexive selling. The speculators and algorithms held a firesale and dumped everything in sight regardless of how good or bad the company actually was?
My best guess is that dividend growth stocks recovered faster than the S&P as a whole, which led to my portfolio pulling above the S&P500.
I am very happy that I am at least matching the S&P500 in terms of capital gaines, and even pulling ahead of it. Over the long term, I expect that my portfolio will go back to overlapping with the S&P500. Given that most of my dividend growth stocks have betas around 1, this is not unexpected.
If anything, this exercise really drives home the importance of trying to find undervalued, over-performing, dividend paying stocks. Much like good employees, they’re hard to come by.
But what about the dividends?
Since I’ve been focused on building my principal I’ve ignored the effects of dividends, since I’ve been treating them like all other capital and using them to buy more shares.
But consider the following. For 2012, my dividend growth portfolio had a yield of 3.04% (not YOC) compared to the SPY’s yield of 2.17%. My portfolio’s yield is actually higher than 3.04% because I just added up all the dividends that I received and divided by the value of the portfolio at the end of 2012. Since many positions were opened later in the year, I did not get a complete year’s worth of dividends from them.
Disclosure: I’m long KO.
(*) Investing is totally, exactly, like capoeira.
Readers: Have you compared your portfolio’s performance to a major index? If so, what method did you use to make the comparison? How are you doing relative to the S&P500 (or your chosen index)?