Week 224 - Growing Perpetuity Index, v2.0

Situation: We started publishing this weekly blog over 4 years ago, believing that investors can safely profit by dollar-averaging online into stocks of strong companies. To simplify matters, we defined strong companies as those in the 65-stock Dow Jones Composite Average (^DJA) with a record of increasing their dividend each year for at least the past 10 yrs. S&P calls such companies Dividend Achievers, and there are 28 in the ^DJA. We call ^DJA the “Stockpicker’s Secret Fishing Hole” because it outperforms the S&P 500 Index (^GSPC) over two or more market cycles (compare Lines 30 and 32 in Column C of the Table) but contains only 1/8th as many stocks. 

Mission: For v1.0 of the Growing Perpetuity Index, we set up 4 criteria to find the highest quality companies in the ^DJA (see Week 4). Each selected company had to fit the following criteria:
   a) has a dividend yield that is no less than the yield for the S&P 500 Index (VFINX);
   b) is a Dividend Achiever;
   c) has an S&P stock rating of A-/M or better;
   d) has an S&P bond rating of BBB+ or better.
There were 14 companies that met our criteria. We wanted a Growing Perpetuity Index of no more than 12 stocks, so Southern Company (SO) and Caterpillar (CAT) were excluded from v1.0 (see Week 4).

Execution: In the 4 years since that blog was published, two additional companies have come to meet our criteria: Microsoft (MSFT) and a railroad, CSX (CSX). Now we’re setting up version 2.0 of the Growing Perpetuity Index to include all 16 qualifying companies (see Table).

Bottom Line: A perpetuity is a bond that never matures (i.e., it pays interest indefinitely). A growing perpetuity is a bond that pays more interest each year. Our Growing Perpetuity Index does that. It is a unique reference tool for retirement planning, a safe and effective tactic to have a source of income (quarterly dividend checks) that will grow faster than inflation (see Column H in the Table). Inflation has grown 2.1%/yr since the S&P 500 Index peaked on 9/1/00 (see Column C in the Table), but dividends for v2.0 of the Growing Perpetuity Index have grown ~5 times faster (see Line 18 under Column H). Looking at price appreciation over the past 20 yrs using the BMW Method, the aggregate of 16 stocks (see Line 18 under Column L) has appreciated 3 times faster than the S&P 500 Index (see Line 32 in the Table). All 16 companies have outperformed the S&P 500 Index over the past 20 yrs (see Column L in the Table). However, outperformance always comes with greater risk: The BMW Method’s analysis of price performance over the past 20 yrs predicts that the extent of loss for those 16 companies in a future bear market will be 10% greater than for the S&P 500 Index (compare Lines 18 and 32 in Column N of the Table).  

Risk Rating: 4

Full Disclosure: I dollar-average into JNJ, NEE, WMT, MSFT and XOM, and also own shares of MCD, IBM, KO, UTX, and MMM.

Note: Metrics highlighted in red indicate underperformance relative to our benchmark (VBINX); metrics are current for the Sunday of publication.

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