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The Dividend Growth Index – Q4 2011

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 first quarterly update since we launched the project in September 2011.

Dividend Growth IndexWhat is the Dividend Growth Index?

Back in September 2011, the Dividend Guy came up with an excellent idea. Rather than his usual stock picking contest, which he did anyway, he decided to setup a dividend index created by eight dividend investors. The idea was that eight dividend investors, who happen to write dividend investing blogs, would pick three stocks each. We would keep track of our companies and the index over the long term. At the end of each quarter we would update readers on our companies, and provide a brief report on the DGI. The value of following an index over a long term period and comparing to benchmarks, in my opinion far outweighs the results of a short-term stock picking contest. While no prizes are to be won,  and the Dividend Guy isn’t paying me to write this post, the real prize is being involved in the project.

For an in depth introduction to the DGI (Dividend Growth Index) I refer you to my first post, Introducing the Dividend Growth Index, and the Dividend Guy’s original post Dividend Growth Index.

How Are We Doing?

For the three month period ending December 31st 2011, the TSX returned -1.2%, the DOW returned 13.4%, and the S&P 500 was up 10.6%. For the same period, the DGI (Dividend Growth Index) returned a positive 15.6% (according to the Passive Income Earner). To keep it simple, these returns do not include dividends reinvested.

I realize a 3 month summary is a mere blip for tracking investment performance, and in a sense completely pointless. But since we started the DGI three months ago, we are off to a good start. Most of that good luck can simply be attributed to timing. We happened to start the Dividend Growth Index right at the bottom of a market correction that started after May 2011.

If this were a stock picking contest, the Passive Income Earner would be the clear winner. His three picks are up 24.5% with his picks of AFL, CNR.TO, and CNG.TO. PIE had a strategy in place when he selected his stocks, using the 10-10 Rule

My Three Stock Picks

My three long-term stock picks for DGI were: Husky Energy (HSE-T), PepsiCo (PEP-N), and Staples (SPLS-Q). I covered my reasons for these three picks in my second DGI post, Stock Picks for the Dividend Growth Index.  For the three months ending December 31st, 2011, my three stock picks returned 8.9% (9.43% including dividends). Not as good as PIE, but then he’s been dividend investing longer than me ;)  Dividend Growth Investor and Dividend Mantra also did well with their picks. Dividend stocks were certainly the winners throughout 2011. Whether that trend continues into 2012, remains to be seen, and the DGI will be a great indicator of that trend.

Here’s how my three picks are doing and where I think they stand heading into 2012:

Husky Energy (HSE-T)

Husky Energy has been one of my favourite stock picks since I started writing about the company back in December 2010, in My Stock Picks for 2011. Even Young & Thrifty chose Husky recently for her HOT Stock Picks for 2012. Husky currently trades at $24.78 per share, with a dividend yield of 4.8%, a dividend payout ratio of 51.5%, and a debt-to-equity ratio of 23.2.  The fundamentals for Husky continue to remain solid.

Husky has been doing what successful companies should be doing, reinvesting their profits and working capital into their infrastructure. In a recent press release of their 2012 Capital Expenditure Program, Husky states the following:

“Approximately 60 percent of the Upstream gross capital expenditure program is directed towards the Company’s growth pillars. Investment in the Sunrise Energy Project more than doubles to $610 million as construction activity ramps up and the project advances towards planned first production in 2014. Just over $1 billion is budgeted for the Asia Pacific Region as fabrication of deepwater and shallow water facilities for the Liwan Gas Project accelerates. Liwan remains on target for first production in 2013/2014.”

As Husky mentions, the benefits of these projects will come to fruition in 2013 and 2014. I believe Husky represents good value for investors at current price levels. If your looking to add oil and gas producers to your portfolio, then Husky (HSE-T) may fit the bill.

PepsiCo Inc. (PEP)

PepsiCo had a hard time in the first half of 2011, with a rise in commodity prices affecting their bottom line.  A less than stellar earnings report on July 21st, 2011, sent PepsiCo shares down from $68.49 to $63.86 by July 27th, a decline of over -6.7% in a few days.  For value investors, looking to add to their positions, that obviously represented an excellent buy opportunity, though share prices remained flat.  However after Q3 results, PepsiCo appeared to be back on track.

PepsiCo is currently trading at $66.74 per share, with a dividend yield of 3.10%, and a dividend payout ratio of 51.6%. However the debt to equity ratio for PepsiCo remains very high at 111.87. The amount of debt for Pepsi is not comforting, but a company like PepsiCo has more than enough resources to meet its obligations. As long as the debt continues to be paid off and doesn’t increase substantially, then Pepsi should do well in 2012. I currently consider PepsiCo a better value play than Coca-Cola (KO).

Staples Inc. (SPLS)

Staples Inc. was a surprise pick for many readers, and I considered it a good value play. I had been following this company for months in 2011, and eventually put my own money on it – Why I Bought Staples Inc.  I found that Staples was the dominant player in the office sector, dwarfed its competitors, and had low debt. It appeared to be a well managed company stuck in a retail slump. It’s main competitor Office Depot (ODP-N), which had high debt, had already started closing its Canadian retail locations. I felt that Staples had an economic moat in the office supplies sector, which made it a solid bet.

If you think Staples is a small time, pencil and paper store, then think again. Staples is valued at over $10 billion dollars, operates in 26 countries, and has annual sales of nearly $25 billion. It has its debt management well under control with a debt to equity ratio of only 26.7. It is currently trading at $14.45 per share, a dividend payout ratio of only 29, and a dividend yield of 2.9%.

While the margins may be razor thin in the Office Supplies sector, as in some other retail sectors, I believe Staples has solid management which will see it through both the hard times and good times in 2012. I’m looking forward to seeing the numbers in January, post Christmas, to see where Staples stands financially.

The Other Seven Amigos

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


Readers
, What’s your take on the Dividend Growth Index? What do you think of the Ninja’s long-term stock picks for DGI?

Disclaimer

I am long on Staples Inc. (SPLS-Q). The Dividend Ninja is not a professional financial advisor or an investment dealer. This website does not offer professional or financial advice, or a buy recommendation, and is intended to provide general information 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.

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13 Responses to "The Dividend Growth Index – Q4 2011"

  1. I went to staples and bought two little storage ottomans and a filing cabinet for xmas present for my mother. I’m pretty happy with my finds lol

    I hope I just helped with your share prices of Staples!

  2. Oh PS I’m totally buying HSE for my TFSA this year ;) I can’t ignore the lust for it any longer!

    I am drooling like a Husky for HSE.TO
    lol…

  3. Rock the Casbah says:

    Greetings Ninja. Hope you and your family/ friends had a good Holiday. Thanx for the update on the Divy Growth Index. As a shareowner of PEP, I’m curious as to your thoughts on the rumours of a Pepisco split n it’s potential impact (if it occurs). Also, not to change the subject but any thoughts on Rogers (RCI – N)? I own Telus and am thinking of initiating a position in Rogers as well.

    P.S. To help my PEP stock and better your standing in the DGI, I’m trying to convince D. Mantra to switch from Coke to Mt. Dew. LOL.

    Thanx n Cheers.

    • Hey Casbah,

      Happy New Year to you as well! All the best for 2012 :)

      I like Rogers Communications (RCI), and it is a core holding in my portfolio. Although the fundamentals of Telus are better, Rogers is solid. Even amongst constant cellular competition, it is holding it’s ground very well. Here is an article I presented on the Telecoms, I think you read it already:

      http://www.dividendstocksonline.com/2011/09/the-canadian-telecoms/

      Yah the possible Pepsi split. I don’t like it when companies do this. It usally means one division does well and the other doesn’t (take Encana and Cenovous as an example). The only reason a company does this, IMO, is becuase they want to get rid of a losing division. I thought Pringles were pretty popular LOL.

      btw
      I’m not going to talk the Mantra out of anything, that boy knows what he is doing – KO is solid ;)

      Cheers

      • Rock the Casbah says:

        Thanx (as usual) for the input Ninja.

        I hear ya on company splits. Abbott is a core holding in my portfolio and I don’t like the fact that it is splitting. I realize the rationale is to “unlock shareowner value” but I believe that if a stock is truly undervalued it will eventually return to its true value given time. As Benjamin Graham said “In the short run, the market is a voting machine; it the long run it is a weighting machine”. In the meantime, income investors can collect the divys and take advantage of the undervalued stock to add more at a good price.

        I think this trend towards splitting companies might be advantageous to stock “traders” with a short term outlook (unlock shareowner value quicker to dump the stock at a higher price and move on) but I’m skeptical of much positive benefit for income investors w/ a long term horizon. My two cents anyway.

        Specific to Pepisco, I think that as long as Indra Nooyi is CEO, the company will most likely stay intact as she is committed to the synergy of one company. But it seems the board is split (no pun intended). I think she has a solid long term vision for the company but many often focus solely on short term gain.

  4. AverageJoe says:

    I love your index. What a cool idea. Nice returns!

    Staples was completely off my radar before you picked it. I’ve always found the stores drab and the help not that well trained…it seems they gain by competition that’s even worse!

    • AverageJoe

      Thanx for dropping by! I’m always interested in a company that leads the competition in it’s sector. I’m also intrigued with its focus on keeping low debt, and that it can succeed in a low margin environment, and still pay a reasonable dividend. The fundamentals look good ;)

      You don’t always have to like a company to invest in it. I know Rogers Communications has terrible customer service, but I like the stock and the dividend yield. :)

      I find the service at Staples excellent up here in western Canada, but not everyone finds the same across the country. I think that is the nature of the retail sector these days. I especially find this at BestBuy where the service is absolutely terrible – I suspect low wages and management style is the key.

      Cheers
      The Dividend Ninja

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  2. [...] like Encana (ECA), which is solely focussed on natural gas production. In my previous post on the Dividend Growth Index, I discussed how Husky has been reinvesting their profits and working capital into their [...]

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  4. [...] investing, but never seemed to actually buy. It was one of my 2011 Stock Picks, I chose it for the Dividend Growth Index, and again recommended it in my 2012 Stock Picks. Now I’m an owner in this company, and plan to [...]

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