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I thought I’d take a look at DesertDave’s “secret” and stock portfolio. Fair enough, I think, as it’s repeatedly posted.

[…]like I've said many times before, my "secret" is to buy stocks that have been paying increasing dividends for at least 25 years.
Our stock holdings have been static for several years now as we've been reinvesting dividends in the companies that paid them.

I get why—in retirement, or not—some people are attracted to dividend growth stocks if they need, or want, dividend payments in cash to pay bills. Other than that, focusing exclusively on dividend growth stocks and reinvesting the dividends makes little strategic sense because over the longterm the dividend growth investor is unlikely to best the market (beat the S&P 500); this, at least is what I thought.

So, I decided to run some numbers to check it out. DesertDave constantly lists his stock holdings so I looked at the 17 he says he has at least 1,000 shares of.

I have no way of knowing when DD bought his shares, or what he paid, so my number crunching is based on the returns of an equal weight portfolio of these 17 stocks over the last decade. I compared the returns of the S&P 500 (with dividends reinvested) to the returns of the 17 stocks DD lists (with dividends reinvested).

If you invested $100 in the S&P 500 ten years ago you would now have $256.

Here is how DD’s 17 stocks stacked up.

$100 invested in XOM would now be $121
$100 invested in CVX would now be $187
$100 invested in T would now be $179
$100 invested in BKH would now be $213
$100 invested in ED would now be $299
$100 invested in NI would now be $518
$100 invested in NWN would now be $190
$100 invested in WRE would now be $138
$100 invested in WGL would now be $387
$100 invested in XEL would now be $327
$100 invested in DUK would now be $240
$100 invested in SO would now be $200
$100 invested in KO would now be $198
$100 invested in BNS would now be $218
$100 invested in ATGFF would now be $93
$100 invested in TMP would now be $165
$100 invested in ENB would now be $219

Of the 17 stocks 13 trailed the S&P 500 for the last 10 years (3/10/’08 - 3/10/’18) and 4 beat.

Assuming that DD’s portfolio was equally weighted it would have trailed the S&P 500 by 12% over the period.

Again, it’s how much you pay and when you buy. But there’s scant evidence that a portfolio of dividend growth stocks is likely to best the market. In this particular exercise the market won.

So DD’s “secret”? There seems to be no secret. My conclusion: expect average, or below average, total returns from a buy-and-hold dividend growth portfolio even when reinvesting all the dividends.

Should most investors take Warren Buffett’s advice and have their money in a S&P 500 index fund? Maybe, but now the index is pricey and individual stock picking could be potentially more profitable provided the focus is on price, company dynamics, and profitability. As for those stocks that many investors favor for their dividends rising interest rates are likely to be a headwind as bond yields become more attractive to the income crowd.

Yet, if you rely on dividends to live on and would like a pay raise every year then a basket of dividend growth stocks makes some sense. That is if you are hesitant to make your own dividends by taking some profits.

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