WBA - Dividend Growth 50: Adieu And Thanks For The Lessons Learned

2023-05-10 09:00:00 ET

Summary

• After 8 1/2 years, I've dropped the curtain on the real-money DG50 project.
• The portfolio had market-matching total return while generating thousands of dollars in income.
• Microsoft finished as the DG50's total return champion.
• I learned a ton while managing the portfolio, and I share three of the biggest lessons.

All good things must come to an end, and that time has arrived for the Dividend Growth 50 -- the real-money, buy-and-hold portfolio I've been writing about on this site for 8 1/2 years.

Last month, I liquidated all of the portfolio's positions, and I'm temporarily housing the proceeds in a money market fund that yields more than 4.5% until I decide how I want to invest it. (The portfolio was held in an IRA, so there are no current tax consequences.)

It's been a great run, with the DG50 roughly matching the performance of the Vanguard S&P 500 ETF ( VOO ) through its first eight years (Table 1 below) while simultaneously generating significant, growing income (Table 2).

TABLE 1 - TOTAL RETURN

TABLE 2 - INCOME GROWTH

Along the way, the DG50 has taught me numerous lessons that have helped me as an investor. In a minute, I'll discuss a few of those, as well as my reasons for ending the project, but first let's take one last look back at its genesis.

The Dawn of the DG50

Back in the fall of 2014, I asked a group of fellow investors who also were Seeking Alpha contributors to help me put together a portfolio. My note to them included the following request:

I am asking each of you to name the 50 DGI companies you would recommend right now to a loved one or any investor you'd want to have the best of the best. Heck, maybe you already own all 50 of your choices yourself. I know that ideally a list might change a little depending upon an investor's age or circumstances, but please name your best 50 "all-occasion" DGI companies.

Beyond that, I have no requirements that companies be on the (Dividend Champions list) or that they have a minimum yield or that they have a certain level of dividend growth or that tax implications are considered. They can come from any sector or country. They need not be fairly valued at this time, either. Having said that, if you want to give yourself guidelines pertaining to any of those things, that's perfectly fine.

The 10 who agreed to take part in the collaborative project were (in alphabetical order): Chowder, David Crosetti, David Fish, Eli Inkrot, Eric Landis, Tim McAleenan Jr., Miz Magic DiviDogs, Scott U, David Van Knapp and Bob Wells.

(Of the 10, only Eric Landis has written any Seeking Alpha articles in the last year. Most haven't been published on SA for quite some time, though a few still participate in conversations in DGI blog streams such as THIS ONE . Sadly, Dave Fish and Bob Wells , beloved and valuable members of our community, passed away.)

Together, they "nominated" 163 stocks , including many that didn't even pay a dividend at the time (and some that still don't). After tallying the "votes" to produce a top 50, the endeavor began as a concept for my article about the " New Nifty Fifty ." And then, when I funded the project with $25K of my own money on Dec. 16, 2014, the Dividend Growth 50 was born.

Unbeknownst to me or any of the panelists back in 2014, the portfolio of companies they selected would become a popular fixture on this site for years.

I have written dozens of articles related to the DG50. Tracking the portfolio's progress was informative, and a labor of love. I especially enjoyed discussions with fellow investors in what often were very active comment streams. (For example, a 2016 article received more than 1,100 comments, and another from 2019 generated 800+ responses.)

So why stop now?

Well, as the post-Great Recession, bull-market run continued through 2021, the DG50 gradually fell behind the S&P 500 Index in total return. But then 2022 happened; the market sank and the Dividend Growth 50, filled with "boring," dividend-growing companies, caught up.

So in a way, the cycle was complete. Add in the fact that the portfolio was time-consuming to manage and chronicle, and I came to believe this was the right time to say a fond farewell to the project.

Here's a final look at the total return for each Dividend Growth 50 component, from the portfolio's inception through the moment I sold each position:

Portfolio Notes

• In April 2020, United Technologies spun off Carrier and Otis and then merged with Raytheon, so the DG50 ended up with RTX, CARR and OTIS. When the costs of Raytheon, Carrier and Otis in the table above are added together, it equals the $458.24 that I spent on the original United Tech position. Combined, the 3 brought in $940.39 in the 4/4/23 sells -- a 105.2% total return on the original UTX buy.
• With the additions of Carrier and Otis, the DG50 actually had 52 positions its last few years. That probably sounds weird ... but no weirder than the Big Ten Conference having 14 (and soon 16) teams.
• On Jan. 6, the portfolio received cash in lieu of shares from General Electric's spin-off of GE HealthCare Technologies ( GEHC ), and that's included in the DG50's overall total return.
• Six stocks (PM, COP, O, GE, MO, DE) had ex-dividend dates shortly before I sold them, so the account still received those payments. The table shows that, too.

I've talked a lot about total return in this article even though many (perhaps most) DGI practitioners care primarily about dividends. For those investors, please see my 2022 recap ( HERE ), which is all about the portfolio's income growth.

Lessons Learned

Experience is the greatest teacher. And having experienced the Dividend Growth 50 for 8 1/2 years, here are three of the biggest lessons I'll take from the project:

1. BUY AND MONITOR

As with most public portfolios, rules were established for this one. And the very first rule listed was this:

All income will be reinvested into the companies that paid the dividends. Otherwise, there will be absolutely no buying or selling. This will be a passive portfolio - classic buy-and-hold.

I wanted to be able to do apples-to-apples comparisons, and I simply wanted to see what would happen if investments were left alone to grow and contract on their own. (Another rule did give me a little leeway in the event of mergers, spin-offs and other corporate actions, so there were a few very small transactions.)

In retrospect, I'm glad I instituted that guideline because it made the comparisons relatively easy and it kept me from injecting my own biases and emotions in the running of the portfolio.

Still, the limitations were obvious. I have owned many DG50 components within my own personal portfolio ... and although I am a reluctant seller, I did jettison some of those stocks when trouble seemed imminent. Most notable was Kinder Morgan, as I sold more than half of my position after considerable debate.

The list of stocks I dumped from my personal portfolio over the years also included laggards and/or dividend-cutters such as General Electric, Walgreens Boots, Dominion Energy, Omega Healthcare and Kraft Heinz. Had DG50 rules permitted me to sell them, the portfolio would have performed even better.

That exemplifies why many DGI practitioners prefer the term "buy and monitor" to "buy and hold." If an investor is convinced that trouble is brewing, holding just for the sake of holding doesn't seem prudent. Learning how to spot red flags is an important part of investing.

2. CLUNKERS AREN'T KILLERS

As the DG50 total return table shows, six stocks suffered losses ranging from the -12.6% of Wells Fargo to the -61.3% of General Electric. Those clunkers should have been sent to the scrapyard!

Another dozen didn't even return 80% over 8 years, well short of the S&P 500 Index's performance.

However, the diversified DG50 also included seven companies from five different sectors that returned more than 250% -- led by Microsoft, the portfolio's all-time total return champion at +622%. With another 10 stocks also beating the market, the overall portfolio not only survived but thrived.

There's no such thing as a perfect investor. Warren Buffett, Peter Lynch and plenty of other greats have owned clunkers. I certainly have owned my share of 'em, and I bet every investor reading this right now has had some, too.

But clunkers need not define or crush a portfolio -- a point that my regular work with the DG50 drove home.

3. DIVIDEND GROWTH INVESTING IS TOTAL RETURN INVESTING

Total return encompasses capital gains and dividends. The income from dividend-growing stocks, especially when reinvested, produces a compounding effect that can fuel outstanding gains.

For example, dividends have played a major role in "boring" construction-equipment companies, utilities, coffeehouses, chocolate purveyors and insurance providers beating the S&P 500 Index over the last decade.

Nevertheless, some Seeking Alpha readers consider DGI to be a poor strategy, and they'll use back-testing to show how investors could have done "better" with so-and-so mutual funds, or such-and-such ETFs, or X, Y and Z stocks.

I won't even bother going into my spiel about different investors having different goals, risk-tolerance levels, life circumstances, tax situations, etc. Nor will I linger on the obvious: Anybody can find something better (or worse) than something else using the benefit of 20/20 hindsight.

All I'll do is let the DG50 speak for itself as an example of "real-time-testing": After 8 1/2 years, the DG50, even with the limitations of its strict rules, matched the S&P 500 Index for total return. And the portfolio achieved that while generating significant, growing income.

Heck, had I decided to keep this project going, its annual income stream likely would have more than doubled in 10 years.

A Fond Farewell to the DG50

Over all these years, I never once suggested that folks should have put their hard-earned money into the portfolio's 50 stocks back on Dec. 16, 2014. From the start, the DG50 was a real-time project, a real-money learning tool, and a launching pad for conversations about DGI concepts and the investing process.

I doubt others got as much out of the Dividend Growth 50 project as I did -- I mean, the portfolio appreciated by tens of thousands of dollars! -- but I do hope that some of the DG50-related topics discussed over the years have proven valuable to my fellow investors.

This doesn't mean I'm done writing for Seeking Alpha. I can't say when I'll be back, but there are always a few ideas bouncing around inside my cranium.

Until next time ... thanks for following this project, everybody, and happy investing!

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