A Comparison
of two dividend strategies: 2013 Dividend Machine Strategy and low cost ETF
Strategy.
I started writing about my income investing theory
and experience in late 2010 after I retired as an investment advisor. One way to invest for income is to buy
stocks that pay dividends. Many investors use dividend income and dividend
growth strategies. Others like John
Bogle and Ben Stein support the thesis that a low cost ETF is a better and
easier strategy
The purpose of this article to report on how my 2013
Dividend Machine Portfolio performed as compared with a low cost dividend ETF.
DIVIDEND
MACHINE STRATEGY
I use four criteria to determine which dividend stocks
qualify as Dividend Machines. I created a portfolio of 52 stocks in 2011 and
48 stocks in 2012 using these criteria.
These portfolios have done well.
In 2013 I refined my four criteria a touch and have selected seventeen
stocks year to date using the same four criteria I used in 2011 and 2012 but
with a little more precision.
These four dividend machine criteria are: (1) earnings per share must be greater than
the dividend paid out in the most recent four quarter rather than just one
quarter, (2) dividend yield has to be at
least three percent; in 2013 I wanted stocks with a dividend yield closer to
four percent, (3) dividend has to have increased every year for at least five
years, in 2013 I wanted at least seven years, and finally (4) debt to equity
ratio (D/E) is 1 or less or equal to industry standards; no change from the
previous years.
ETF
STRATEGY
In order to compare my Dividend Machine Strategy
with a passive strategy using a low cost ETF, I decided to use the SDY. This ETF is designed to closely match the
returns of the S&P high yield dividend aristocrats. The expense ratio is .35%.
Each time I picked a 2013 Dividend Machine, I used
the same cost basis to buy SDY shares.
I used the low price of the day as the cost basis.
RESULTS
Seventeen Stocks selected over 2013 using my
Dividend Machine Strategy are listed below as well as the number of shares of
SDY purchased.
As of 11:50 AM on 10/25/2013, in the aggregate, the
2013 Dividend Machines are up 10.85%.
Based on annual yields, this portfolio pays 3.77% on the basis and 3.40%
on the current value.
The SDY portfolio accumulated a total of 1,189.14
shares. In the aggregate, these shares
are up 8.93%. Based on the SDY website,
the yield is 2.45%.
ADJUSTED FOR RECEIVED DIVIDENDS
If we hold these portfolios for a full twelve months
from our last buy, the yields of 3.40% from Dividend Machines and 2.45% from
SDY are accurate. However, you have to
own the stock or the SDY shares on the ex-dividend date in order to receive the
dividend. Stocks are not like bonds;
bonds pay interest every day you own them.
Stocks pay only on the dividend pay date to shareholders of records on
the ex-dividend date.
I live in the real world and I wanted to know which
strategy actually delivered more dividend income year to date.
The tables below present the results of this
comparison.
Dividend Machines paid a total of $1,579 year to
date for a yield on basis of 2.01% and yield on current value of 1.82%. SDY paid a total of $931 year to date for a
yield on basis of 1.18% and yield on current value of 1.09%.
CONCLUSION
I have never liked mutual funds. I do not like not knowing what I own. I don’t like not being able to sell covered
calls on my positions. I don’t like
layers of management and expenses.
ETF’s are lower cost versions of mutual funds and I must admit that I
have used ETF’s when I want to exposure to markets where it is difficult for
the ordinary investor to trade such as in Asia or South America or India. But for my money, I prefer owning individual
stocks.
I read John Bogle’s articles and Ben Stein’s books
and respect their expertise greatly. However,
my personal gut reaction as an investor and as a former financial advisor is
that owning individual, well selected stocks does work well for income
investors. In this comparison the
Dividend Machine Strategy delivered better results than the ETF Strategy.
A capital gain of 10.85% versus 8.93% is
significant. An annual yield of 3.40%
versus 2.45% is equally significant.
Actual income received of $1,579 versus $931 makes a difference in the
income investor’s cash flow.
Comparing my Dividend Machine Strategy with the SDY
ETF Strategy convinces me that a disciplined approach to income investing using
my four criteria is a very effective technique for income investors.
The
Money Madam
