Sunday, October 6

Week 118 - Growing Perpetuity Index (Updated)

Situation: In one of our first blogs (see Week 4), we created the Growing Perpetuity Index (GPI). Our reason for doing so was because we needed a benchmark fund for comparison, one that embodies our investment theme. We have continued to follow the companies that were selected for the GPI and Total Returns were updated in Week 66. Since then, we have set a standard benchmark for use in comparison for all of the metrics used in our Tables, and that is the Vanguard Balanced Index Fund (VBINX) In the VBINX, 60% is allocated to a large-capitalization stock index and 40% to an investment-grade bond index. Its lowest value point occurred during the “” recession (10/9/02). For this week’s blog, we’ll use that date to calculate long-term total returns (Column C of the Table). Data are current through 10/4/13.

The Growing Perpetuity Index is composed of 12 companies that are listed in the 65-stock Dow Jones Composite Average (DJCA) and meet the following 4 criteria:
   a) dividend yield no less than the yield on the lowest-cost mutual fund that mimics the S&P 500 Index--the Vanguard 500 Index Fund (VFINX);
   b) 10 or more consecutive years of annual dividend increases;
   c) S&P stock rating of A- or better;
   d) S&P bond rating of BBB+ or better.

After analysis, we found there were 15 such companies, and we chose 12 for our Growing Perpetuity Index. Those 12 companies are listed at the top of the accompanying Table, ranked in order of Finance Value (long-term reward minus risk in Column E). That composition of companies will remain stable as a feature of our blog, even if one or more companies leave the DJCA. The 3 companies that we’ve left out (in order to limit the index to 12 companies) are Southern Company (SO), CH Robinson Worldwide (CHRW) and Caterpillar (CAT). Complete data for those companies is shown in the BENCHMARKS section at the bottom of the Table. We have also included data for Microsoft (MSFT) and Union Pacific (UNP) because these companies will soon meet GPI criteria.

Bottom Line: This 12 stock index has a remarkable history of outperformance, which was a key reason why we started this blog in the first place. Strong and stable companies that have multiple sources of income and clean balance sheets are simply in a better position to reward investors with annual dividend increases and stock buybacks. 

Worried about your savings plan for retirement? History shows that you can set up 12 dividend reinvestment plans (DRIPs) to support equal and automatic monthly additions to each of these stocks then get on with your life. The chance that this portfolio won’t outperform the S&P 500 Index over rolling 5-yr periods is less than 50:50. AND it does so with less volatility (i.e., the index has a 5-yr Beta of 0.7 vs. the S&P 500 Index’s 1.00). AND it pays a higher dividend (2.5% vs. 1.9%).

Risk Rating: 4

Full Disclosure: I add to DRIPs in WMT, JNJ, KO, PG, NEE, IBM, and XOM each month.

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