The Strategy

I like investing and having control over my assets, but like many others, I do not have the time to spend hours analyzing individual stocks.  So I look for a simple, easy to understand, low maintenance strategy that, hopefully will provide me with capital protection primarily, potential for future income, and perhaps even some growth.  At my stage of live, capital preservation is my main objective.  I don’t have enough time left to recover from catastrophic losses and I don’t need huge growth to meet my financial objectives.

James O’Shaughnessy provides investing strategies for those wanting to do their own investing.  One of his major strategies calls for investing in strong companies with high dividends and high dividend growth.  His analysis has shown that this strategy beats the market, consistently over time.  He uses Value Line, a fee based investment service, to assess companies.

1)    Strength – O’Shaughnessy recommends only investing in the strongest companies.  This addresses the objective of capital preservation.  If you screen stocks traded on the NYSE, using the A++ rating, the highest strength rating, you will find a universe of only about 50 some stocks.  This is no guarantee that these companies won’t go bad (witness Citi Bank and Bank of America and others), but it certainly improves your odds of getting long lasting companies.

2)    Dividends – O’Shaughnessy looks for companies that have a reasonably high dividend.   The thinking is that the higher the dividend the more value there is in the stock. This is like the “Dogs of the Dow” strategy, but with a bigger universe of stocks.  Still if you only take the top dividend payers, say greater than 2 ¼ %, you end up with a list of only about 30 stocks.

3)    Dividend growth – O’Shaughnessy looks for companies that have consistently increased their dividends over a long period of time.  This strategy allows for your return on your original investment to grow, which is better than an equivalent GIC that has a fixed annual return.

Using this strategy, I analyzed 30 stocks that meet these criteria.  There are a couple stocks that don’t quite fit, because their dividend growth is small, but I have included them anyway.

The first 10 years of the new millennium have been referred to as the lost decade.  Returns over that period of time were dismal.  If you invested a dollar in the year 2000 into the S&P, you would only have about 90 cents at the end of 10 years.

I have used the start of May in my analysis.  I took the stock prices as of May 10, 2011 and compared them to May 1, 2010 (one year earlier), May 1, 2006 (5 years), and May 1, 2001 (10 years).  I made the assumption that you purchased 100 shares of each of these 30 companies.   This starts you with a total investment of about $147,000.  I compared this against taking the same $147,000 and investing in an ETF that tracks the DJIA and the S&P 500.

Your broad, 30 stock investment would now be worth over $180,000.  Now that only works out to about a 3% annual compound growth rate, which is nothing to write home about, but it is on the plus side – not too bad for the “lost decade”.  However when you also consider that these are dividend stocks, you would have received an average of over 3% in dividends each year, your annual returns are now over 6% over a 10 year period of no growth.  You would have annual income of nearly $6,000 from dividends.

If you invested in a Dow Jones ETF, your $180,000 would only be worth $171,000 and the S&P would be less than $158,000.  You have beaten the market and produce an acceptable return, with little effort, low risk, in a period of time when most people were losing money in the market.

If you take those 30 stocks and eliminate 10 with the lowest dividend growth rate and purchase 100 shares in each of the remaining 20 companies, you would have invested just over $93,000 and end up with over $116,000, again only about a 3% annual compound growth rate, but also a healthy dividend return giving you about 6% per year.

Compare this to the DJIA which would give you $109,000 or the S&P producing $101,000. The O’Shaughnessy strategy still outperforms.

This commentary is only meant to provide information, not advice.  Each individual needs to determine their own financial goals, risk profile and select a strategy that works for them.  This strategy works for me.  My current portfolio is similar, but not identical to this.  I have some stocks left over from a previous strategy, and I also have several Canadian companies that do not get screened in using Value Line.  I will do a similar analysis on my own stocks and provide those numbers in a follow up message.


About borgford

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2 Responses to The Strategy

  1. Flatfoot says:

    I must thank you for the efforts you’ve put in penning this blog.
    I’m hoping to see the same high-grade content by you in the future as well.

    In truth, your creative writing abilities has encouraged me to
    get my own blog now 😉

  2. borgford says:

    Thanks for your encouraging words.

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