for The Southern Company for 2003.  This is more than twice the 1.9% yield on cost we saw for the S&P 500 in 2003.  Consequently, even though earnings growth was approximately half, The Southern Company generated almost twice the total cumulative dividend income than the S&P 500.

On the other hand, capital appreciation was much lower for The Southern Company at 4% versus 7.2% for the S&P 500.  Nevertheless, the dividend advantage generated a total return of 7% for The Southern Company versus 8.4% for the S&P 500.

So clearly, the S&P 500 did outperform on a total return basis.  However, it also significantly underperformed on a total dividend income basis.  So in this case you might say we have a tie.  We receive more spendable income with The Southern Company but more growth with the S&P 500.  But, along with the greater dividend income, we did get some growth.  This is not too bad coming from a slow growth high yielding utility stock.

Johnson & Johnson (JNJ)

With my next example I compare the blue-chip AAA rated Johnson & Johnson to the S&P 500.  The first thing I ask the reader to note is that Johnson & Johnson was significantly overvalued while the S&P 500 was fairly valued at the beginning of 2003.  Therefore, on a valuation perspective the advantage goes to the S&P 500.  Earnings growth was comparable with Johnson & Johnson growing at 8% versus the S&P 500 at 7%.  However, here is a classic example where overvaluation diminished results.

Due to the overvaluation mentioned above, Johnson & Johnson provided a yield on cost of 1.7% in 2003 versus 1.9% for the S&P 500.  Consequently, Johnson & Johnson would not have met the criteria of providing above-average dividend yield at the beginning of 2003.

However, due to the slightly faster earnings growth rate, Johnson & Johnson would have produced more cumulative dividend income than the S&P 500.  On the other hand, the overvaluation disadvantage caused Johnson & Johnson to underperform on a growth basis.

So to be clear, at the beginning of 2003, Johnson & Johnson would not have met the criteria of above-average yield at sound valuation.  Regardless, long-term performance with this blue-chip dividend growth stock was not all that bad.

Next I would like to level the valuation playing field a little by comparing Johnson & Johnson to the S&P 500 since 2006 when both were reasonably valued.  I will start with the S&P 500 below.  As you can see, earnings growth for the S&P 500 was 5.1% for this timeframe.

The starting yield on cost for the S&P 500 for 2006 would have been 1.9%.  Capital appreciation or growth came in at 5.9% and coupled with total dividend income the S&P 500 generated a total annual return of 7.1%.

In contrast, Johnson & Johnson produced earnings growth of 6.3% since 2006 which was higher than the corresponding growth of the S&P 500.  Both the S&P 500 and Johnson & Johnson are comparably currently overvalued.

However, in contrast to what we saw with the timeframe starting in 2003, Johnson & Johnson offered a yield on cost of 2.4% in 2006 compared to the 1.9% for the S&P 500.  Consequently, Johnson & Johnson at the beginning of 2006 met both criteria of sound valuation and above-average dividend yield.

Consequently, Johnson & Johnson produced significantly more cumulative dividend income than the S&P 500 over this timeframe, and it also generated a higher level of growth.  Therefore, Johnson & Johnson also outperformed the S&P 500 on a total return basis.  But, the key point is the reliability and predictability of the dividend income offered by this blue-chip dividend growth stalwart.

Summary and Conclusions

In closing, I find it nonsensical to debate the laurels of passive investing over active investing.  First of all, as I mentioned previously, I have yet to see a clear definition of what various studies consider active management.  But most importantly, the real question is whether or not a given investment strategy meets the needs, goals, objectives and risk tolerances of every investor.  Frankly, I do not believe that an index such as the S&P 500 is the appropriate choice for every investor.

On the other hand, there are also different ways to measure performance.  For example, the typical fixed income investor is rarely concerned with whether or not they beat the market.  Instead, they tend to be primarily interested in safety and income.  Therefore, I find it rather absurd to worry about whether or not you’re beating the market.  Instead, I think it’s more practical and relevant to worry about whether or not your portfolios are meeting your own unique goals, objectives and risk tolerances.

Disclosure:  Long KMB,JNJ,SO.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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