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Dividend Growth Investing vs the S&P500

586902_capoeira_on_streetI’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 (*).

The Rules:

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.

  1. 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.
  2. 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.
  3. 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).
  4. 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):

DGI vs SnP


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)?

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8 Responses to "Dividend Growth Investing vs the S&P500"

  1. This is probably my favorite article you’ve posted. I’m still an index fund investor 100% but its awesome to see people keeping up(and in your case outpacing) with the S&P.

    What did you use to make that graph??

    1. I used Excel to make the graph. The data was pulled in using Google Sheets financial functions. Then I dumped it all into excel in order to make it look pretty.

  2. Back in September I compared all my accounts, 2 Roth IRAs, Rollover IRA, 401k, and FI Portfolio to the SPY . I tried to account for dividends as well, although it’s a little skewed since my actual dividends were reinvested whereas I think the SPY adjusted close prices assumes the dividends were taken in cash plus I’m not sure if they accounted for the fees. At the time I was essentially even with the SPY in 2 accounts, lagging a bit in 1, lagging badly in another, and ahead in my FI portfolio. It’s hard to compare against it because I assumed that the SPY purchases were made the day my capital hit each of the accounts, which isn’t true in real life. I probably need to look at it again to see where I stand 5 months later. I like that you looked at just capital gains, it seems to be a much easier way to determine the relative performance and then just take a look at the yields of both to see which one is higher to determine the dividend performance.

    1. Correct, the SPY assumes that dividends are taken in cash. I’m not sure about the fees either, but I figure that SPY fees are pretty low, so it probably doesn’t make that much of a difference.

      I’m glad you liked the analysis. I went though several versions that I didn’t think were stringent or accurate enough for my tastes before I settled on this one.

  3. says:

    This is awesome information MFIJ! I was always curious about whether it makes any sense for me to buy dividend stocks separately or I should just stick with my index investing which I have been doing for a long time now. The S&P 500 has dividend payouts as well, so the overall yield ignores those dividends as well I take it? I wanted to do this exercise for the target date funds we have in our 401k, did you use excel or is there a tool that makes the comparison easier?

    1. Consider that that a large number of S&P500 stocks pay dividends (exact details coming in a future post). So really, a lot of what I was doing investing wise was picking from the subset of SP500 stocks that paid dividends. So it makes sense that I would track the market.

      All dividend payouts were ignored in the graph that I showed. Those are strictly capital gains.

      What is really exciting about the analysis that I posted today is what would happen if I stopped investing right now. I would have achieved greater (or at least on par) capital gains if I had invested in SPY. And I would have a much higher dividend stream. Since all my stocks pay dividends, my yield is much higher than the SPY yield.

  4. Anton Ivanov says:

    That’s a pretty interesting method for calculating your returns, but it does have its drawbacks. If you are really interested, I developed a method to track the absolute annualized return of your portfolio using excel that I can share with you. It takes into account everything – in/out flows of capital, capital appreciation/depreciation, all income distributions and trading costs.

    Once you understand it, it’s not that difficult to set up for your portfolio. Email me if you’re interested!

  5. [...] the S&P500 to a REIT index fund and to housing prices.  Since my current investing strategy closely parallels the S&P500 with respect to capital gains, I believe that these are fair ways to compare my dividend growth [...]


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