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Capital Appreciation or Dividend Growth?

publication date: Jan 12, 2020
author/source: Brian Nelson, CFA

Image source: David Mulder

By Brian Nelson, CFA

Hope you are doing great! We had one question why we didn’t include an evaluation of the six ideas that were closed in the Dividend Growth Newsletter portfolio during 2019. Of course, these ideas matter, but let’s walk through why.

For example, one dividend growth idea that was closed during 2019 was Xilinx (XLNX), with the stock ending 2018 at a close price of $85.17 (it opened 2019 at $83.39) surging to $116.55 by February 14, 2019 (the low on the session of its close date) for a ~37% gain in a very short time (excluding the $0.36/share dividend it paid along the way).

Xilinx was a huge winner in the Dividend Growth Newsletter portfolio from a capital appreciation standpoint over a month and a half in early 2019. So, why aren’t we pounding our chest saying how this was an awesome idea? Well, we left things like this out of the Dividend Growth Newsletter portfolio evaluation, as championing this excellent total return idea in a dividend growth setting makes little sense to us. If investors want total return, the Best Ideas Newsletter portfolio is where we’re targeting such a goal.

Furthermore, we don’t think it makes much sense to compare the performance of dividend growth ideas closed during the year with total returns of the index for the year, as many will almost certainly do (given the table layout), if only accidentally. Xilinx’s ~37% gain in just a few weeks was far better than the market’s during the whole year, and significantly better than any dividend growth index like the SPDR S&P Dividend ETF (SDY) by almost a factor of two times, again for the index’s whole year.

But that would not be the end of the discussion.

There would then be follow up questions for how the index performed over the time of these closed ideas being held, and then we’d dedicate even more of our time to this when these companies are already behind us. For the holding period of Xilinx during early 2019, for example, the outperformance over the holding period was a factor of 4-5 times, as the SPDR S&P Dividend ETF advanced just 8.4% (The S&P 500, as measured by the SPY, advanced at a similar pace of about 9% during the holding period).

“Xilinx crushed the market over its holding period of a matter of a few weeks during 2019” is not something that we think dividend growth investors are focused on, or even care to hear.  

For starters, a capital appreciation focus is tertiary to both a capital preservation and dividend growth focus in the Dividend Growth Newsletter portfolio, so we’d not only be doing extra work on closed ideas already behind us, but then we’d also be presenting them to members in a way in which nobody should be evaluating them. If investors are looking for capital appreciation or total return, then the Best Ideas Newsletter portfolio is best, and as you are aware, the Best Ideas Newsletter portfolio crushed the market during 2019.

If investors are looking for dividend growth, the Dividend Growth Newsletter portfolio is best. We certainly focus on undervalued dividend payers in the Dividend Growth Newsletter portfolio, but if you want total return, then the Best Ideas Newsletter portfolio is where we’re focused on that. We’re not looking to beat the market or any benchmark in the Dividend Growth Newsletter portfolio, but rather we’re focused on dividend growth potential with a keen eye toward undervalued equities to support capital preservation.

If we start comparing our dividend growth ideas to total return benchmarks or really any benchmark, for that matter, it does not make sense to us (dividend growth, by itself, should not translate to outperformance). If investors want total return or to outperform dividend payers, we did that handily in the Best Ideas Newsletter portfolio during 2019 because that newsletter portfolio is focused on total return outperformance, not dividend growth.

In short, while we could have made the Dividend Growth Newsletter portfolio evaluation very complex, we think it is much easier for members to follow along and get a feel for how well the dividend growth ideas have been doing the way we’ve presented it. We’d like to have programs that measure our portfolios in real-time, but it is prohibitively costly at the moment, so each update is done by our team and takes away from other areas that could be more value-add to members. This is in part why we’ve moved to weighting ranges.

Clearly, as shown by how we omitted such a great performer like Xilinx from the evaluation, we’re trying to present our performance fairly and encourage readers to evaluate our performance and our portfolios how we think they should be evaluated. More and more, however, we are receiving questions that are pushing us more and more to consider alternative business lines where actual performance of managed portfolios can be assessed. We will have a survey coming out along these lines very soon.

Thank you!


Tickerized for ideas in the Dividend Growth Newletter portfolio. Valuentum is not a money manager, not a broker, and not a financial advisor. Valuentum is a publisher of financial information. The Dividend Growth Newsletter portfolio is not a real money portfolio. Trading is simulated, and performance is hypothetical. Past performance is not a guarantee of future performance.

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