Dividend Growth Index 2012 Q3 Update

Over the last 12 months, a group of 8 financial bloggers have formed and tracked an index of dividend stocks.

We each choose 3 stocks, for a total of 24 stocks in the index.

Dividend Growth Index Returns

Index 12 Month Returns: 22.2%

The best pick on the list was one of Wealthy Canadian’s, because it was bought out for a huge premium. Oddly, his blog no longer exists, so he has been replaced in the index by Susan Brunner, who holds FTS, TIH, and SAP in the index. Dividend Ninja used to hold SPLS in the index but it was replaced with JNJ after SPLS had a negative report, and the reduction in value is factored into the index.

My three picks apparently had the second best returns out of the group. To be clear, this was just luck for me. With only three picks each, one major piece of good news or bad news can determine a big difference in an investor’s returns. I selected Walmart (WMT), Novartis (NVS), and Energy Transfer Equity (ETE). I don’t make any short term decisions for stock price movements (and a year for me is short term), but I figured Walmart and Novartis would provide reasonable returns while Energy Transfer Equity would provide stronger returns. ETE and NVS met those expectations, whereas Walmart totally blew them away.

Over the last decade, Walmart’s stock was mainly flat. This was not because their performance was flat; they increased EPS and dividends every year for that decade. Rather, WMT stock was considerably overvalued a decade ago, and so the valuation continually decreased while earnings continued increased, resulting in a flat stock price. I determined that the valuation finally got to a point low enough where it was a decent buy and where the valuation should not continue to deteriorate, which implies the stock value should rise at the same rate as EPS.

Now, all sorts of things can happen over the short term, but the numbers made sense for that conclusion for the long term. As it turned out, my timing was extremely lucky for this virtual year, because WMT stock went way up right after I picked it.

Who knows what will happen next year, but it probably won’t repeat itself, and if it does, I’ll likely consider it overvalued. My only expectation is that the companies continue to perform well, and the stock prices can do whatever they want to in the short term but will ultimately follow the performance over the long run.

The list has performed fairly well as a group, and it’s meant to be a cooperative effort. A few picks with bad news have brought down the list and offset some of the biggest gainers, so the index has provided good returns while unfortunately under-performing the S&P 500 for this year.