Dividend Growth Investing (DGI) vs Index Trackers

Index Trackers

When I initially looked into the different methods of investing in the stock market back in 2012, I came to the conclusion that Index Trackers were the safest and easiest option for me to start with. They’re operated by computers rather than ‘active’ Fund Managers, and this lack of human contact results in far fewer trades, less speculative action, and much lower fees. 

The Index Trackers follow the a particular Market up and down. They will rarely boast the highest returns, but they’re unlikely to also have the most significant loses. Their performance is standard, yet consistent. You could do far worse in the world of investing!  

There are literally hundreds of companies that offer them in almost every Index on the planet. They also provide them across multiple markets like the whole of Europe, Asia or even the world. 


Index Tracker Disadvantages

It would be unfair to suggest that the Index Tackers are faultless. They aren’t universally liked and they have some disadvantages.

If you have a Tracker for the FTSE 100 and the index goes through a rough patch (like we had in Sep/Oct), the entire investment will be impacted. Active investors can change where their money is invested and in during the down periods they can choose to invest in more defensive companies, in a different Index altogether or even put their money in cash.

Active investors can increase or decrease the weight of particular companies within an index like the FTSE 100. For example, they could minimise or eliminate a company like Tesco and increase a holding in something like Ashtead Group. This type of flexibility can generate more income in the successful companies and reduce or remove the loses of the lower performing ones. It isn’t unheard of for a companies share price to grow by 200%-1000% in 5 years. This rate of return is much more unlikely with an Index Tracker. 


Enter Dividend Growth Investing

Although I was aware of the pitfalls to Index Trackers I still felt they offered a better package overall for me so I initiated funds into a FTSE All-share and a US Equity Tracker in June 2012 and January 2013 respectively. 

I continued to learn about other forms of investing and I eventually came across DGI. The results that some people were achieving by using this approach were astonishing. The returns were higher than what were being produced by my trackers by a significant level and it made me think (dangerous!) “Was there something in this DGI?”

I decided to give DGI a go in November 2013 and I set this Blog up to track my progress in March 2014. If you look at my current Portfolio you’ll see what a mixed bag of results I have so far. Investing in the stock market for 1 year is a very short time indeed, and if you speak to most investors, they’ll recommend doing so for at least 5+ years. I believe the success of my purchases are yet to come to fruition, and in the next 3-4 years I’ll have a better understanding of how my decisions have turned out. I’ll be particularly interested on how I compare to a FTSE Index tracker over the same time frame too. 


Individual Shares – Return on Investment

I recently took the time to review how a selection of companies have performed over the last 5 years to see how an investment in November 2009 would look now. My aim was to find out how individual companies compared to Index Trackers, especially within the same Index. I found the results very interesting and I thought it would be worthwhile sharing them with you. Before I do, I’ll briefly explain what the numbers and columns within the table represent. 

The results below were all calculated manually by me (I back my accuracy but I don’t guarantee anything!). I looked at the share price of each company 5 years ago and what it was on the close 14th November 204. I filtered the companies within the FTSE 100 in order of how much the share price had increased over 5 years from top to bottom (this doesn’t include dividend payments). I listed the ‘rank’ of that company on the far left column under the heading ‘FTSE 100 Position‘. 

I calculated how many shares I would be able to buy with £1,000 based on the share price of each company 5 years ago. I have written that number in brackets next to the company name. For example, Ashtead Group were priced at 80p a share 5 years ago. I divided 80p by £1,000 and got 1250 shares. (For simplicity I didn’t include broker fees or stamp duty to purchase a company – If you’re interested this should be approximately 1.5% of £1,000)

On 14th November 2014, Ashtead shares were worth 1066p. A £1,000 investment 5 years ago would now be worth £13,325! 

I have listed the value of what a £1,000 investment would be worth now in the column headed ‘Investment After 5 Years‘.

Most companies will pay dividends, and I wanted to include these payments in the total return. I added up all the dividends paid in the last 5 years and multiplied that by the number of shares I would have for each company with the £1,000 investment. To clarify, Ashtead paid out 28.40p in dividends during that period. I multiplied that number by the 1250 shares I would have purchased. The monetary total is under the column ‘Dividends Received‘ (£355 in Ashtead example). 

The ‘Combined Total‘ column is the total return on investment (ROI) of the share price change and dividends received added together. I represented the 5 year change as a percentage under the ‘5 Year % Change‘ column. I finally divided that 5 year % change by five to get a one year ROI average (‘Ave 1 Year Change %‘ column).

I started by reviewing the headline positions in the Top 100 to see who was there and what the investment would look like.

Enough of my explaining…… Let’s get comparing!

FTSE 100 Company Name Investment Dividends Combined 5 Year % Ave 1 Year
Position (Shares bought in 09) After 5 Years Received Total Change Change %
1 Ashtead Group (1250) £13,325.00 £355.00 £13,680.00 1268% 253.6%
5 ITV (1960) £4,019.61 £307.72 £4,327.33 332.7% 66.55%
10 Persimmon (217) £3,223.91 £37.98 £3,261.89 226.2% 45.24%
20 Compass (247) £2,570.37 £235.39 £2,805.76 180.6% 36.12%
25 Prudential (164) £2,377.67 £215.91 £2,593.58 159.4% 31.87%
33 Johnson Matthey (64) £2,007.06 £166.08 £2,173.14 117.3% 23.46%
50 Vodafone* (730) £1,642.34 £379.02 £2,021.36 102.1% 20.43%
66 M&S (269) £1,268.82 £223.27 £1,492.09 49.2% 9.84%
75 RBS (267) £1,000.00 £0.00 £1,000.00 0% 0%
90 Intu Properties (219) £745.61 £167.54 £913.15 -8.7% -1.74%

*Does not include income from Verizon sale

If you take the most average performer, in position 50 – Vodafone, you can see that they managed a 102% ROI in 5 years (in reality it was significantly higher with the sale of Verizon). Not bad for the middle of the pack!

3/4 of the way down in position 75, Marks and Spencer manager a 49% increase over 5 years, when averaged out comes to just under 10% a year. A 10% ROI is still very strong when you consider alternative investment options. 

In the top quarter at position 25, Prudential would have returned £2,593 on a £1,000 investment, which is a 159% increase over 5 years or averaged out at 31.87% per year. 

I actually enjoyed the exercise of calculating the returns, but I didn’t encounter many of the companies that I own. I was also intrigued by a few companies that are popular among DGI’s so I decided to hand pick a range of 15 more in the same format as above.

FTSE 100 Company Name Investment Dividends Combined 5 Year % Ave 1 Year
Position (Shares bought in 09) After 5 Years Received Total Change Change %
7 Ass. British Foods (120) £3,651.08 £171.52 £3,822.60 282.3% 56.45%
11 Next (50) £3,196.44 £284.00 £3,480.44 248% 49.61%
18 Legal & General (1149) £2,781.61 £366.99 £3,148.60 214.9% 42.97%
28 Reed Elsevier (214) £2,224.36 £235.29 £2,459.65 146% 29.19%
40 United Utilities (211) £1,852.01 £351.67 £2,203.68 120.4% 24.07%
41 BATS (50) £1,844.72 £308.50 £2,153.22 115.3% 23.06%
44 Reckitt Benckiser (33) £1,764.42 £201.63 £1,966.05 96.6% 19.32%
46 AstraZeneca (36) £1,714.49 £293.76 £2,008.25 100.8% 20.17%
57 SSE (92) £1,435.54 £364.32 £1,799.86 80% 16%
58 BAE systems (312) £1,437.50 £286.73 £1,724.23 72.4% 14.48%
59 Unilever (55) £1,434.49 £148.78 £1,583.27 58.3% 11.67%
67 Royal Dutch Shell B (56) £1,262.78 £383.49 £1,646.27 64.6% 12.93%
72 GlaxoSmithKline (80) £1,162.27 £282.40 £1,444.67 44.5% 8.89%
76 Rio Tinto (32) £971.59 £134.33 £1,105.92 10.6% 2.12%
82 HSBC (135) £859.65 £177.12 £1,036.77 3.7% 0.74%

The first one I checked was GlaxoSmithKline, as it was my first DGI investment last November and it’s well known as being a trusted DGI stock. It’s 5 year progress is pretty low on the top 100 scale (72), yet it managed a 44.5% ROI over 5 years, which is averaged out at 8.89% per year. 

SSE is another company I own, they’re still in the bottom half (57), and they resulted in a 80% ROI over 5 years, averaged out at 16% per year.

The returns from some of these companies were staggering. Legal & General for example, who are outside of the top 15, would have returned 43% per year for 5 years resulting in a 215% total ROI. Wow!

Are there any shares in the chart that you’ve owned for this 5 year period?


Individual Shares vs Index Trackers

The returns from a large proportion of the companies within the FTSE 100 are very high (over 10% a year). So, how would a range of Index Trackers compare against them?

I decided to compare one company for a variety of Index’s to keep some consistency and I could think of no better Index Tracking company than Vanguard. I looked at the return on a £1,000 investment for 4 different Index’s – US Equity, UK Equity, Developed World Equity excluding UK, and Global Small Cap. I chose the ‘accumulation’ option for all four, and like the shares above, I decided not to include the fund charges/commission. 

The fees between the Index’s varied quite a lot (300% in some cases) so I decided to display them in the far right column under ‘Fund Fees (%)‘. If you consider the fees, the Global Small Cap index would have a lower ROI than the UK Equity in the table below. 

Vanguard Index Trackers Investment 5 Year % Ave 1 Year Fund
After 5 Years Change Change % Fees (%)
US Equity Index (Acc) £2,188.00 118.8% 23.8% 0.1
FTSE Developed World ex-UK Equity Index (Acc) £1,767.00 76.7% 15.3% 0.15
Global Small-Cap Index (Acc)* £1,740.00 74% 14.8% 0.38
FTSE UK Equity Income Index (Acc) £1,721.00 72.1% 14.4% 0.22
*Fund started in January 2010
I checked the FTSE UK Equity fund first, as this one would be directly comparable to the individual shares in the first two tables. At 72% over 5 years, it would put it in line with BAE Systems (in Table 2) which was positioned at 58. 

What does this mean? 

The FTSE Equity Tracker performed just under the average level of the individual shares. 

STOP THE PRESS! 

OK admittedly, I don’t think my findings are going to win me a Noble prize or change the world. To be honest, I’m not surprised at all. I think the dividends from the individual companies alone would edge a few extra percentage points over a tracker. 

It is worth noting that it did have a better return than a lot of familiar dividend paying companies like GSK, Rio Tinto, Unilever, Royal Dutch Shell B, and HSBC to name a few. 

The results were much like my description at the very beginning of the post – Standard, yet consistent. You’re not going to go too far wrong with an Index Tracker, and you’re going to pass a few people on the way. 

Let’s look at the Trackers in the other Index’s. The US Equity was the best performing one I came across at Vanguard (119% in 5 years). This outperformed the bulk of the companies in the FTSE 100, and would have been somewhere in the 30-40 region in the FTSE top 100 charts. This is very impressive, yet it did make me question how the US Equity Tracker would have compared to the individual shares in the US. Would it be in the bottom half like the UK Equity fund? Either way, lets give credit where it’s due, a 24% annual ROI is exceptional. For those of us that don’t live in the US, this tracker gives us vast exposure to a large number of companies without having to know the intricate details of each one. 

The Developed World excluding UK and Global Small Cap Index’s were much more in line with the UK Equity fund with 77% and 74% ROI respectively over 5 years. It looks like the UK and the rest of the developed world are greatly in the shadows of the US over the last 5 years. They both provided a return that is just under the FTSE 100 average company, but they were once again steady and consistent gains.


Who Wins – DGI or Trackers?

It’s clear that greater gains and greater losses can be made from buying individual shares. So should you invest in them over Trackers? Well, it depends on what you’re looking for. The sure and steady gains of a Tracker or the potential peaks and troughs of individual companies. 

Are you willing to run the risk of potentially losing more money in order to get a greater reward?

As I’m still young, and I have 30+ years left in the stock market. I’m comfortable taking on those bigger risks for the bigger reward. Which side of the fence do you sit on?

If you’re new to investing, older in age (and therefore have less time to invest in the stock market), or you’re more risk adverse, you might be better placed with investing in a selection of Index Trackers. You can choose to invest in individual companies when you’ve developed your understanding and knowledge of the stock market and the companies within it.


Growth & Value Investing

The process of producing these numbers has highlighted a clear message to me.

The Growth of a Share price has a far greater impact for ROI than Dividends

That Noble Prize doesn’t seem any closer to my fireplace! 

It may seem obvious to some, and yet again I wasn’t too shocked by this outcome. I was more taken back by the level of its significance though. The biggest dividends I came across were from Vodafone (£379.02), who I mentioned earlier were ranked 50/100. Their ROI was 102% over 5 years. 

Out of the companies I checked that paid dividends during the 5 years, Persimmon had the lowest monetary return at £37.98, yet they returned 226% on the initial investment. This is twice as much as Vodafone.Now that’s impressive! 

Should I ditch the DGI and focus on Growth Investing instead?

The difficulty in Growth Investing is finding a company that will increase like Persimmon or Ashtead. No one can categorically predict the future. How can you know for sure that you won’t invest in another Tesco or Intu Properties? I think there are individuals out there that can be correct a lot of the time, but not right every time. 

My thoughts on Growth Investing did bring me back around to Value Investing and my final take home message. Let me just start clearing my fireplace……

If you’re able to buy a quality company that is consistently increasing profits, earnings, and dividends year after year, at a time when the stock market has undervalued it, you can increase the chances of a receiving a higher ROI by buying more shares in a company than you would have if the share price was higher (or overvalued). The share price will have more room to grow, and you will benefit from more dividend payments.

I didn’t learn anything too groundbreaking during my time filling in these tables, but it did re-affirm my commitment to using DGI as my vehicle to Financial Independence. It has also helped to reinforce how dependable Index Trackers are, and why so many experienced investors like Warren Buffett recommend them for most people.

I hope you found these results as interesting as I did. Please let me know your thoughts. 

Here’s to the next 5 years!


Are the results in line with what you expected? Have you benefited from any of these large increases? How do you feel about Index Trackers and Individual Shares now? Do I deserve a Noble Prize?

0 Comments

  • Anonymous

    Reply Reply 18th November 2014

    Nice article Huw

    Why stick to just one when you can have all three. I believe there is a place for all three of them. As you say Index Trackers can offer diversification into other markets such as US, Asia, Emerging Markets etc. They can also offer reasonable dividend payments. L&G UK 100 Index Trust is currently yielding 3.6% with a TER of 0.06%.

    As I approach FI I am moving more towards Dividend Growth as it gives me the steady income I desire without having to sell any of my stocks or funds.

    My current holdings are Growth Stocks 41% (10%), Index Trackers 37% (30%) and Dividend Growth 22% (60%). Fluid target is in brackets.

    Richard

  • weenie

    Reply Reply 18th November 2014

    Interesting post, Huw – thanks.

    From the start you have made with your DGI, it looks like you can go all the way with your winning strategy, eg like Dividend Mantra et al!

    However, as you point out, time is a factor – I've been on this planet longer than you have (!) so I have less time in terms of how long I have to invest, plus I don't feel I have the time to conduct indepth research to find another Ashtead Group! With that in mind and if I don't include my BTL property, I have most of my investments in index trackers. Until recently, most of my money was invested in actively managed funds until I switched most (though not all) of them.

    I've never been a person of extremes, either high or low, I'm ok with a happy medium so trackers suit me! That's not to say that I wouldn't like a taste of great investing performance, hence as you know, I've started to buy a few shares but this will never make up the bulk of my portfolio. Also, my remaining actively managed funds have the potential to 'beat the market' – who knows?

    I'm not risk averse (too much of a gambler in me!) but time isn't on my side, so unless I have come into unexpected money, I'm not likely to take too much of a risk on my own hard-earned cash!

    I do feel that if I stick to my asset allocation and my portfolio mix, I'll get a decent enough return on my investment.

  • Huw Davies

    Reply Reply 18th November 2014

    Hi Richard,

    I hope you're well! Thank you very much.

    You make a great point, why should you choose chocolate cake over vanilla ice cream, when you can have both.

    I too plan on investing in Trackers next year, especially for Index's that I know less on – Like the Rest of the developed world (excluding UK), Small Cap Companies and Emerging Markets. I plan on primarily focusing on Dividend stocks like you as I prefer the income over buying and selling.

    It's good to know you enjoyed the work I did. It took me a while to put it all together in the end. Thanks again for stopping by.

    Huw

  • Huw Davies

    Reply Reply 18th November 2014

    Thanks Weenie!

    I think I still have some time to prove myself as a legitimate DGI. I leaning more and more each month and I'm sure in time I will become more successful. Thank you for the support though!

    I completely understand where you're coming from to be honest. Miss FFBF is older than me, and she's not at all interested in investing. I've suggested that she consider Trackers over anything else due to their stability, consistency and low maintenance. Like you say above and I mention in the Post, you could do far worse than invest in trackers and there's nothing wrong with steady gains over time!

    I have no doubt that you're on the the right path to benefit from a nice ROI. Look at what we've both achieved in a year, and think what might be possible in 5!

    All the best!
    Huw

  • Tawcan

    Reply Reply 21st November 2014

    Very interesting post and great analysis. Index investing is great for most people out there if you just want to do passive investing. I like dividend investing because I can see progress when I receive dividend each month. Growth investing is tough as you need to do a lot of analysis to find the right growth stock. The important thing is to invest in stocks and not have your money in GIC's and having inflation eating into your money's real purchasing power.

    The best approach is probably a combination of all 3 approach, a bit of index, a bit of dividend, and a bit of growth… or you could just invest in BRK.A or BKR.B. 😀

  • Huw Davies

    Reply Reply 21st November 2014

    Hi Tawcan,

    I'm glad you liked the information. I think you're spot on with that summary too.

    I like DGI because it covers involves income and growth investing. Why not benefit from a healthy bit of exposure in all three!

    Thank you for stopping by.
    Huw

  • Pulling Myself Up

    Reply Reply 22nd November 2014

    Individual stock picking CAN outperform over the long term IF you are willing to put in extra time studying and learning. If the extra work is worth it or not is another question. The average investor should stick with indexing because they just aren't gong to put in the time and energy to pull it off.

    Personally I enjoy stock picking and it gives a big edge. You can get a 4% active yield safely if you put in the time. That compared to the 2% for SPY means you need x2 the portfolio size for indexing as you do with stock picking.

  • Huw Davies

    Reply Reply 23rd November 2014

    Hi PMU,

    Thanks for stopping by and sharing your thoughts.

    I'm with you, and enjoy researching and stock selection. The returns are greater but so are the potential downsides. I see no reason to why people can't do a bit of both too.

    I also agree that most people new to investing should stick to index trackers until they understand more about stock selection and individual shares. I was also happy to take the leap a little early because I was 30, and I have plenty of time left to invest in the stock market.

    Cheers
    Huw

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