Wednesday, January 9, 2019

We win again. Dividend Growth Stocks from "Investing in Dividend Growth Stocks" beat the market again in 2018.

2018 was a bad year for most U.S. stocks. The stock market, as measured by the S&P 500, returned -4.38 percent for the year. The typical fund did much worse. According to the January 7, 2019 edition of the Wall Street Journal, "the average manager overseeing a diversified U.S.-stock fund saw a total return of minus 7.73% in 2018..."


As they are wont to do, dividend growth stocks fared better. VIG, Vanguard's Dividend Appreciation ETF, returned -2.1 percent in 2018.

The portfolio of dividend growth stocks from my book, Investing in Dividend Growth Stocks, typically beats both the Dividend Growth Index and the market. 2018 was no different. In 2018, the portfolio from the print edition of the book returned -1.39 percent, again besting both the market and VIG. The figure below shows that it has beaten the market for each of the last three years.

The longer-term pattern is just as dominant. As the figure below shows, the portfolio from the print edition of the book has beaten the Dividend Growth Index every (full) year since the index's inception in April, 2006. Likewise, the book's portfolio has beaten the market every year over this period except for slightly underperforming in 2014.

So the book portfolio has beaten the Dividend Growth Index for 12 straight years and has beaten the market 11 of the last 12 years, marginally trailing in the one year that it did not (2014). I would venture to guess no more than a handful -- literally -- of professional funds can stake such a claim -- the odds are very low. I remember, years ago, what a big deal magazines and websites were making of a fund manager that had beaten the market 10 then 15 years in a row. This kind of thing is not common, at all.


The reason for our long-term consistent outperformance is quite simple: These are good companies that typically do not get outrageously valued. There are ample subtleties in this simple statement, of course, and that is the rub.

The trick is to have a sound dividend growth strategy, a sound dividend growth model! For instance, many investors in the naughts thought banking stocks were all the rage because they kept consistently raising their dividends -- they completely ignored the high and rising leverage inherent in these companies, as one self-evident and obvious mistake. As one of many examples, Lehman was raising its dividend at a 25 percent a year clip for several years. Meanwhile, and comically ignored by many, its leverage kept rising as well. We all know what happened to Lehman and many other banking stocks -- Lehman went kaput and many banking stocks are still in the doghouse -- with no real dividends to speak of. Likewise, many investors choose utilities as dividend growth stocks. That too is incorrect. You need growth. These fellows don't have it. Dividend and dividend growth investors ignore share buybacks. You simply cannot do that as well. And on and on it goes. These are logical mistakes that damage your returns.


Any old dividend growth "strategy" will not work. Most of what you read, even in published and putatively well-regarded books, is incorrect. The underlying theory must be logically sound. At the very least, it must be consistent and complete. Where's the Beef?



The S&P 500 returned -4.38 percent in 2018. Many websites and publications quote a different value, very often, -6.2 percent. That value is incorrect.

Performance page for VIG, the Vanguard Dividend Appreciation ETF,

Bill Miller was the mutual fund manager who beat the market for 15 years in a row. He was a star for many years -- though he took big risks to generate these returns, risks that were unappreciated by many writers -- and he did struggle for a while later on. An old book about him, The Man Who Beats the S&P,

A 2008 article on Bill Miller's subsequent troubles, also highlighting the riskiness of his strategy,

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