This Portfolio of 14 Stocks Is Crushing the S&P 500

 | Mar 14, 2018 | 12:47 PM EDT
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I've long been enamored by companies that raise their dividends and buy back stock at the same time, and a portfolio of 14 such names that I put together last April is crushing it so far. It's up about 25% in less than a year vs. 18% for the S&P 500 during the same time frame.

Now, there are theoretical reasons why raising dividends and/or buying back stock (let alone doing both) make no economic sense. But I believe that's a very powerful combination for investors over time.

It's not just about dividend yield itself, or the "bird-in-the-hand" concept that cash dividends represent. Rather, it's about the growth of dividends.

After all, companies occasionally "massage" or outright fabricate earnings, but dividends can't lie -- what you see is what you get. So, raising a dividend can serve as a good indicator of a company's health.

And in my view, management teams that continue to increase dividend payouts are displaying a level of confidence. Likewise, companies that announce and then follow through on stock buybacks are also sending a potentially positive message. I believe that putting the two together can really bear fruit for investors.

Last April, I endeavored to put this theory to the test by building a portfolio of names that have been both buying back stock and increasing dividend payouts.

The criteria that I used:

  • $2 billion minimum market cap;
  • 2% minimum dividend yield;
  • A three-year average of 5% of more in reductions to shares outstanding due to buybacks;
  • A 5% minimum compound annual growth rate for dividends over the past five years.

All told, just 14 stocks made the cut:

  • Ameriprise Financial (AMP)
  • Assurant (AIZ)
  • Boeing (BA)
  • Brinker International (EAT)
  • Corning (GLW)
  • Harley-Davidson (HOG)
  • Legg Mason (LM)
  • Motorola Solutions (MSI)
  • Travelers (TRV)
  • Valero Energy (VLO)
  • Wendy's (WEN)
  • Wyndham Worldwide (WYN)

As noted above, the portfolio is up about 25% vs. 18% for the S&P 500 only 11 months in. The group also currently yields 2.6% in dividends, and all but of the three names are in positive territory since I created the portfolio.

3 Lagging Stocks

The portfolio's worst performer is Harley-Davidson, which has fallen by about 25% as sales stagnated and management's 2018 guidance underwhelmed investors. HOG is also now worried about President Trump's recently announced steel tariffs, which will raise its materials costs. Still, Harley recently increased its quarterly dividend by half a penny to 37 cents, while management also announced a 15-million-share buyback.

The only other portfolio members that are in negative territory are Assurant, which is down 3% in the past 11 months, and Brinker International, which has lost 8% lower.

3 Big Winners (And Lots of Higher Dividends)

The portfolio's biggest gainers are Boeing, which is +90%, Kohl's -- up 70% -- and Valero Energy, which has gained 50%.

But perhaps the most interesting development is the fact that all companies in the portfolio increased their dividends over the past year.

Even more compelling is that the average dividend increase was 12.5%, while 10 of the 14 boosted payouts by 10% or more. Legg Mason raised its dividend the most (27%), followed by Wendy's at 21% and Boeing with a 20% increase.

I'll address the buyback issue as it applies to this portfolio in a future column.

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