Here’s an embarrassing confession: Despite having identified myself as a dividend growth investor for years, last week, for the first time ever, I calculated the dividend growth rate of my portfolio! The calculation for 2015 took me two tries and about 15 minutes to get to a number that I thought looked reasonable. My result of 6.1% (the dollar weighted average growth rate of dividend increases for my 26 holdings YTD in 2015) prompted two immediate reactions. Firstly, with at least three upcoming increases (Pfizer, Enbridge, and Enbridge Income Holdings) expected next month, I was elated that my dividend growth rate was already over 6%. Multiplying the growth rate by my forward dividends yielded a happy dance inducing result. The second result of my calculation was a simple question – why have I waited so long to do this calculation?
The answer to the simple question above is somewhat complex. If you read any of my quarterly goal updates in 2015, you’ll notice that my main focus is on forward dividend income. Forward dividend income is derived from taking the number of shares of a company I own and multiplying it by the company’s current dividends per share. Many of my brilliant readers will quickly note that the product of the above equation, when subsequently added for each of my holdings, results in a figure that assumes dividends will stay static over the next twelve months. What a horrible assumption! Although I tolerate two REITs in my portfolio who have kept their payout constant over the last year, if any of my other holdings decided to keep their dividend constant without a very good reason, they’d likely find themselves looking for another shareholder. The other downside of focusing on forward dividend income is it might lead me to seek higher yielding securities at the expense of sacrificing future dividend growth. For instance, basing my decisions only on forward dividend income could result in justifying a purchase of a high yielder like AT&T while writing off a possible dividend growth poster child like Visa, Ross Stores, or Apple.
On the other hand, focusing solely on dividend growth would result in the opposite scenario: sacrificing income for future income growth. A portfolio full of rapid dividend growers does not interest me as I’d question if management of such companies can sustain double-digit dividend increases for an extended number of years. For example, if a company with a dividend yield of 1% grows its dividend at 20%, it will take nine years before the dividend yield on cost would equal 5.2%. In the same nine years, a dividend payer with a yield of 5%, growing their dividend at a paltry 2% would achieve a 6% yield on cost.
In the past, I’ve focused on the dividend yield of my portfolio; another imperfect measure. Dividend yield ebbs and flows with market movements and is mostly out of the control of the investor. I’d argue it’s not even possible to tell what kind of year you had based on the dividend yield of your portfolio. In my experience, dividend yield is more likely to tell you what kind of year the market had.
Another dividend blogger once wrote a detailed article of why he used total return to assess the performance of his portfolio. Although I’d agree that total return is an excellent indicator of how well your portfolio performed over a specific time period, I question its relevancy to income focused investors. Ultimately, dividend investors want to know how much cash their portfolio generates, and are much less interested in the capital gain/loss component of their total return. Being somewhat limited in my technical skills, my thought is that calculating an accurate total return would be a nightmare for dividend investors, who regularly receive dividends, make contributions to their portfolio, and re-invest in additional shares of companies. Maybe there’s a short-cut to calculate total return that wouldn’t require me plugging in reams of data into a spreadsheet once a year?
As I look forward to 2016, I don’t know what metric I’ll focus on. So far, I’ve decided toexpand beyond one metric as I don’t feel any single value tells me enough about my portfolio. This leads me to an obvious question to my readers:
What metrics do you use to track the success of your portfolio?