Sunday, February 26

Week 295 - A Few A-rated Dividend Achievers Have Outperformed The S&P 500 Index Over The Past 25 Years While Taking Less Risk

Situation: The older you get the less you’re willing to gamble with your life savings. Here at ITR, we define gambling as investing in a stock that has a long history of price volatility exceeding that of the S&P 500 Index. Agreed, over 95% of stocks in the S&P 500 Index have greater volatility than the index itself. But a small number of the remaining 5% may have outperformed the index over a long period, say 25 years. Maybe some of those aren’t Utilities.

Mission: Use BMW Method statistics to measure the 25-year volatility of weekly price points for stocks issued by Barron’s 500 companies that have outperformed the S&P 500, specifically those that have a 10+ year history of annual dividend increases (Dividend Achievers), clean Balance Sheets, and S&P “A” ratings for both their bond issues and common stock.

Execution: We have analyzed this group of companies using our standard spreadsheet (see Table).

Administration: We have turned up 7 stocks that are less likely to lose value in a future Bear Market than the S&P 500 Index (see Column M in the Table).

Bottom Line: If you’re a stock-picker who doesn’t want to gamble, there are only a few stocks that are Dividend Achievers, have a clean Balance Sheet, have A-ratings from S&P for the company’s bonds as well as its stock, and meet our requirement of losing less (statistically speaking) than the S&P 500 Index in the next Bear Market (i.e., there are no red highlights in Column M of the Table). We’ve found seven that meet our requirements, meaning those should make you money faster and more safely than a low-cost S&P 500 Index fund like VFINX (see Line 16 in the Table). But read the fine print first:

Caveat emptor: Owning individual stocks is a gamble unless a) you own at least 30 stocks, and b) your picks reflect the impact of each S&P Industry on the economy. Otherwise, you’ll lose money at some point because of selection bias. To avoid that risk altogether, invest in stock index funds that cover the entire economy, e.g. the Vanguard 500 Index Fund (VFINX), the Vanguard Total Stock Market Index Fund (VTSMX), and the SPDR S&P MidCap 400 ETF (MDY).

Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, and own shares of HRL, MMM, TRV, and ABT.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 15 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr CAGR found at Column K ( Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 20 in the Table. The ETF for that index is MDY at Line 14.

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