The Dividend Growth Index – Q1 2012

For those readers who are new to the Dividend Ninja, I wanted to introduce you to the Dividend Growth Index (DGI). For those who are already following, this is the second quarterly update (for the 6 month period) since we launched the project back in September 2011.

Dividend Growth IndexA Quick Recap

Here are my previous posts on the Dividend Growth Index, including a detailed introductory post and my three stock picks. If you are unfamiliar with the DGI, then these three posts will give you an excellent background:


Back in September 2010, the Dividend Guy came up with the brilliant idea to setup a dividend index created by eight dividend investors, from the blogging community. The idea was that each of us would pick three stocks to contribute to the index. We would keep track of our companies and the index over the long term, and at the end of each quarter we would update readers on our companies. The Dividend Growth Index was intended to be a project to share with readers the power of investing in dividend stocks for the long-term, and the power of compound dividend growth, as opposed to a stock picking contest.

Benchmarking: How Are We Doing?

The Dividend Growth Index is an approximate split between U.S. Stocks on the NYSE and NASDAQ (60%) and the TSE (40%). Since the Canadian Dollar and U.S. Dollar are trading virtually at par this week, let’s just assume a currency neutral or zero dollar conversion rate – for simplicity sake.  (In reality there would probably be a 2% to 3% variation (or more), factoring in various brokerage exchange spreads.)

Stock markets have done well over the last 6 months, and dividend stocks have done very well indeed!  The Dividend Growth Index of 24 stocks returned 20.74% for the previous 6 months (returns are currency neutral and include dividends reinvested, as of March 30th, 2012).  That’s definitely and impressive return, but how did the DGI do in comparison to the benchmarks?

For approximate comparative purposes let’s look at four main ETFs: XIU and XDV in Canada, and VIG and SPY in the U.S.  For the same 6 month period:

  •  XIU returned  7.37%
  • XDV returned  9.66%
  • SPY returned 25.66%
  • VIG returned 21.50%
  • 60% SPY and 40% XIU returned 18.34%
  • 60% VIG and 40% XDV returned 16.76%

Holding SPY on its own would have been the clear winner here. However the Dividend Growth Index did very well compared to a blended ETF 60/40 approach.  As mentioned for simplicity, I’m using no currency conversion in the comparisons.

My Three Stock Picks

I’m pleased to be an owner for two of the stocks I picked for the Dividend Growth Index, Husky Energy (HSE-T) and Staples Inc. (SPLS-Q). These are two companies I have been watching for a long time, and which have solid fundamentals and balance sheets.  My third pick for the index was PepsiCo Inc. (PEP-N). For the 6 months ending March 31st, 2012, Husky returned 14.58%, Staples returned 24.75%, and PepsiCo returned 10.12% (all returns are in $CAN and include dividends reinvested, as of March 30th, 2012).  The combined return for my three companies in the DGI was 16.48% $CAN.  Markets have been doing very well during this 6 month period, albeit a blip in financial history, nonetheless these are impressive returns!

Husky Energy (HSE-T)

husky-night_station

courtesy of www.myhusky.ca

Husky is a $25 billion dollar company, with over $23 billion in annual revenue, and a profit margin of 9.52%. It has its debt well under control with a reasonable debt-to-equity ratio of 22.19. Husky has a generous dividend yield of 4.60% though there has not been much dividend growth. The annual dividend is $1.20 per share, with earnings per share of $2.40, which gives Husky a 50% dividend-payout-ratio. For more detailed information, view my recent post on the company and why I purchased shares, in Recent Buy: Husky Energy (HSE).

PepsiCo Inc. (PEP-N)

Pepsi has been the lowest return of my three picks, but a 10.12% return for one company in 6 months, is still a decent return. This company needs no introduction, it’s as well known as its main competitor Coca-Cola. The main difference between Coke and Pepsi of course, is that PepsiCo is a diversified consumer products company. Pepsi not only offers soft-drinks, but also a range of snack food under the Frito-Lay label and juice drinks under the Tropicana label. This diversity has led to rumours of a possible split back in November 2011. However the rumours were laid to rest, when CEO Indra Nooyi told CNBC this February there are no plans to split PepsiCo into separate soda and snacks businesses – although there was much internal discussion to that end. Also of interest is PepsiCo’s recent alliance with Tingyi Holding Co. in China. The alliance was approved by the shareholders of Tingyi in February and received regulatory approval on March 29th, 2012. This is an interesting move, which could definitely lead to a much needed increase in both earnings and growth for Pepsi throughout 2012.

Pepsi-cans

courtesy of gaurdian.co.uk

PepsiCo is a $103 billion dollar company, with over $66.5 billion in annual revenue, and a profit margin of 9.69%. Pepsi’s dividend yield is 3.10%. The annual dividend is $2.06 per share, with earnings per share of $4.02, which gives PepsiCo a dividend payout ratio of 51.2%. However PepsiCo’s debt load has been increasing. In the previous Q4 update, PepsiCo had a debt-to-equity ratio of 118, and only three months later that ratio has increased to 128, an 8.4% quarterly increase. For this reason alone, I will not buy PepsiCo for my RRSP. Compare this to its main competitor Coca-Cola (KO-N), which has a lower debt-to-equity ratio of 89.5 (which isn’t low either). However Coca-Cola has twice the profit margin at 18.4%, compared to Pepsi’s profit margin of 9.69%.  While a company like PepsiCo can maintain its debt obligations, its increasing debt load is nonetheless a red flag.

Staples Inc. (SPLS-Q)

Staples Inc.Many readers were surprised with my choice of Staples Inc. Here is an $11.5 billion dollar company, with low debt dwarfing its competition in the office retail sector. It also has its debt well under control with a debt-to-equity ratio of 29.03.  However profit margins are razor-thin in this sector. Staples profit-margin of 3.94% is definitely profitable but slim. After missing earnings expectations back in May 2011 with a plummeting share price, I felt Staples had excellent fundamentals, even with thin margins, and was a turnaround stock.  So far that assessment appears to be on track.

Of note this quarter, is that Staples has raised its dividend by 10% from 0.10 cents per share to 0.11 cents per share. Granted a penny isn’t worth much these days, but it is nonetheless still an increase. The dividend yield for Staples is currently 2.70%. The annual dividend is 0.44 cents, with earnings per share (EPS) of $1.38, giving Staples a dividend-payout-ratio of 31.88%. Last August, Staples (SPLS-Q) was trading as low as $11.94 USD per share, and is now trading at $16.12 USD per share.  I discussed Staples in depth, in Staples Inc. Value in Office Supplies? , and last August in Why I Bought Staples Inc.

The Other DGI Amigos (2012 Q1 Updates)

Here are the other seven bloggers making up the Dividend Growth Index, and a summary of
their 2012 Q1 updates:


Readers, What’s your take on the Dividend Growth Index? What do you think of the Ninja’s picks? What three companies would you choose if you joined the Dividend Growth Index today?

Disclaimer

I am long on Husky Energy (HSE-T) and Staples Inc. (SPLS-Q).  This article is not intended as professional financial advice or a buy recommendation, and is intended for educational and general purposes only. The Dividend Ninja is not responsible for the investment decisions you make. You should consult with a professional financial advisor before making any investment decisions. For more information you can read the Ninja’s full disclaimer and privacy policy.

6 Responses to “The Dividend Growth Index – Q1 2012”

  1. Andrew Hallam

    Apr 05. 2012

    Hey Ninja!

    Super post! I love the layout and the clarity. Keep it up!

  2. Nick

    Jun 15. 2012

    Currently I’m trying to decide which of the big 3 telecom companies of canada to buy as a long term dividend growth stock.

    I was wondering how you weight yield vs payout ratio?

    For instance, Telus has a lower yield (4.1) than Rogers (4.4) and Bell (5.3) but the payout ratio seems much more manageable.

    Telus is paying about 38% of its earning towards dividends compared with 75-80% for Bell and Rogers

    Would Telus be a better bet over the long term since it has more room to increase it’s dividend?

    Thanks

    Nick

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