Week 205 - Barron’s 500 Dividend Achievers with Improving Fundamentals

Situation: We recommend Vanguard Group mutual funds for retirement investing. Specifically, their S&P 500 index fund (VFINX) hedged 50:50 with their investment-grade intermediate-term bond index fund (VBIIX). That investment has paid ~7.7%/yr over the past 20 yrs (5.4%/yr after correcting for inflation of 2.3%/yr). Similar index funds are among the options available in almost any 401(k) plan. Why are Index funds better than “managed” funds? Because they can’t zig when the economy zags. However, Vanguard Group also markets managed funds that have performed well. One such fund that we like is Vanguard Wellesley Income Fund (VWINX) which is 55% bonds, 45% stocks, and handily beat a group of above-average hedge funds during the Lehman Panic. It has returned 8.4%/yr over the past 20 yrs. The benchmark we like to use is the Vanguard Balanced Index Fund (VBINX) which is 60% stocks, 40% bonds, and has returned ~8.2%/yr over the past 20 yrs. There’s just one problem: After you retire, these 3 choices for your retirement years don’t produce a lot of income from dividends and interest. You’ll be lucky if those quarterly payments keep up with inflation. In other words, you’ll have to sell shares periodically to maintain your spending power. That is bound to make you wonder whether or not you’ll outlive your nest egg.

Mission: Come up with a list of companies that have improving fundamentals and a 10+ yr history of increasing their dividend annually (companies that S&P labels Dividend Achievers, see Week 168). We’re looking for well-run companies that have grown their dividend more than twice as fast as inflation over the past 20 yrs, meaning 5%/yr or better.

Execution: To find companies with improving fundamentals, we depend on the Barron’s 500 List, published each year in May. In a now-standard fashion, the 2015 list gives a letter grade to the 500 largest companies in the US and Canada by using 3 equally-weighted metrics:
   1) median 3-yr return on investment (ROIC),
   2) the most recent year’s ROIC relative to the 3-yr median, and
   3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.” 

To find companies that have grown their dividend annually for at least the past 10 yrs, we refer to the holdings of PFM, which is an Exchange-Traded Fund that invests in every company on Standard & Poor’s list of Dividend Achievers.

To construct this week’s Table, we combine the two lists. Any company with a 2015 Barron’s 500 rank that is higher than its 2014 Barron’s 500 rank we consider to have “improving fundamentals.” If such a company is also a Dividend Achiever, it will appear in our Table, with certain notable exceptions. A company is excluded if its S&P bond rating is lower than BBB+ or its S&P stock rating is lower than B+/M. A company that has a 20-yr dividend growth rate less than 5%/yr is excluded. Companies with fewer than 20 yrs of being listed on either the New York or Toronto stock exchange are excluded.

Additional data is provided in Columns K and L of the Table referencing the BMW Method (see Week 199), where Standard Deviations of trendline price appreciation over the past 20 yrs are listed, as well as the extent of loss that would be incurred if prices fell by 2 Standard Deviations. 

Bottom Line: We’ve found 20 Dividend Achievers that have exhibited improving fundamentals over the past 3 yrs (see Table), as assessed by three metrics used to assemble the 2015 Barron’s 500 List. Their average dividend growth rate over the past 20 yrs beats inflation by ~10%/yr (see Column H in the Table). The top 9 companies in the Table outperformed our key benchmark, the Vanguard Balanced Index Fund (VBINX). VBINX is a version of the S&P 500 Index that is hedged 40% with investment-grade bonds. There is an online Dividend Reinvestment Plan (DRIP) or Direct Purchase Plan (DPP) available for all 9 of those stocks (see Column O of the Table), available either through computershare or Wells Fargo. 

Risk Rating: 4

Full Disclosure: I dollar-average into NKE and NEE, and also own shares of ITW, PEP, BDX, and INTC.

NOTE: metrics are brought current for the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark VBINX at Line 29 in the Table.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com