Newsflash: The Dividend Aristocrats Found The Lost Decade

There are many people who continue to hold a jaundiced view of stocks because they were traumatized by the last two recessions. Precipitous drops in equity prices drove them to distrust stocks and stock markets. However, I believe that most of the negative sentiment is a function of what I would describe as vague ideas about what really happened. A lot has to do with many investors failing to recognize, or make the important distinctions, that were the true causes of our last two market crashes.

The first market collapse (late summer 2000) was first a function of significant overvaluation, especially regarding the technology sector, followed by the mild recession of 2001. The second market collapse was the result of a greedy and fraudulently induced, and consequently, more serious recession dubbed the great recession of 2008. Therefore, at least in my opinion, the two huge drops in stock values were not really the result of a weak economy, as many people think. The first was the result of an extremely inefficiently behaving stock market, and the second, the result of a greedy financial sector induced by poor government policy.

Nevertheless, these two major catastrophic events have shaken the confidence of many investors. What bothers me about this is how it is driving people away from investing in our country’s finest companies at precisely the time when I believe that it makes more sense to do so than it has in many years. Most importantly, the conditions that existed when these two market collapses occurred no longer exist. Nevertheless, investors and pundits alike, continue to look for reasons why a market collapse will soon reoccur. Their views are based on a pessimistic view of equities, and I believe an exaggerated view of the risk profile of stocks that was caused by the trauma.

Personally, I abhor pessimism, because I believe it is both an erroneous and dangerous mindset for investors to possess. In a F.A.S.T. Graphs™ research tool reviews the performance of the Dividend Aristocrats since December 31, 1999. Astoundingly, only 3 of the 51 Dividend Aristocrats underperformed the S&P 500. Furthermore, only 7 of the 51 companies would have failed to generate the 3% compounded annual return necessary to combat inflation and taxes. Moreover, the majority of the Dividend Aristocrats have lavishly rewarded their dividend buy-and-hold bulls (optimists). As you review the list, note that every company from Procter & Gamble (PG) and above outperformed the S&P 500, inflation and taxes.

Table One: Top 15 Dividend Aristocrats Since 1999
Our first table lists the top 15 Dividend Aristocrats in order of highest performing to the lowest. Sherwin Williams (SHW), the best performer averaged over 16% returns per annum, with Becton Dickinson & Co. (BDX) rounding out the top 15 by averaging a 10.1% compounded annual return.

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As you review the records of these first 15 Dividend Aristocrats, keep in mind that this is during one of the worst 13-year periods of price performance in stock market history. For added perspective and insight and just following this first table, I provide the complete earnings and price driven F.A.S.T. Graphs™, plus performance tables on these two Dividend Aristocrats.

There are at least two very interesting takeaways that the 13-year earnings and price correlated graph on Sherwin-Williams reveals. First of all, Sherwin-Williams was not overvalued at the beginning of calendar year 2000. This validates a point that I’ve often written about that states that in every market, whether bull or bear, the scrutinizing investor can always find good stocks at fair value to invest in. Second, I would like to point out that I believe that Sherwin-Williams is currently significantly overvalued, which greatly contributes to its outperformance.

There was no “Lost Decade” for shareholders of Sherwin-Williams Company since 1999. Not only did they receive significant long-term capital appreciation, they were rewarded by strong growth in their dividend income. Finally, what follows is a napkin calculation of Sherwin-Williams’ return after inflation and taxes:

$576,154.38 capital appreciation – 33% inflation = $386,203 + $56,287 of total dividends paid - 15% tax = $47,844 = $329,916 total cash return (The figure needed to beat inflation is approximately $133,000).

Becton Dickinson is also interesting in at least two ways. First, it represents another example of a company that was fairly valued at the beginning of calendar year 2000. However, it was overvalued in 2008, which contributed to their large drop in stock price during the great recession. But even though they have not returned to their previous high price of $93.24 in 2008, fair value at that time was approximately somewhere between $65-$70 per share. In other words, Becton Dickinson