Is Your Money Hard at Work?

Does your money deserve some recognition on this Labor Day weekend, too? I'm a big fan of making your money work hard each and every day, and believe certain dividend-paying companies are a big help. As we head into the long weekend and reward ourselves for our efforts, it makes sense to look at my own investments over the past year and see just what my money has been doing and what role dividends played.

A framework
Across my accounts, I invest about 80% of my funds in companies I estimate are selling for 65% of their actual value (using discounted cash flow, dividend discount, and other valuation models), leaving some room for additional growth. With the rest of my money, I focus on slightly more speculative investments. These aren't momentum plays, because I still believe they are undervalued, but the odds of success tend to be a bit lower in exchange for a larger payoff if a company succeeds.

In my IRA, I focus on dividend payers, because of the tax advantages for dividends. Because the lion's share of my money is in my IRA, this means a large part is invested in attractively valued dividend payers. Some of the best performers of the past year include American Eagle Outfitters (NASDAQ:AEOS), Canon (NYSE:CAJ), BB&T (NYSE:BBT), and Income Investor selection Enterprise Products Partners (NYSE:EPD). And, like everyone else, I have my laggards, which include NTT DoCoMo and OSI Restaurant Partners (NYSE:OSI). In fairness, I fully expected these two would take a bit longer to develop, but the results are what they are.

Catching up using dividends
I imagine you're dying to see the results by now, and they're in the table below. Note that these results were calculated to take into account cash contributions during the year, so that these contributions would not inflate the performance and appear as gains (for those who are curious, I used the XIRR function in Microsoft Excel).

While I don't view a one-year time frame as either a success or a failure, it's hard to say that the results in the past year were anything but tepid. In my defense, I didn't adjust the index returns for frictional costs or for the fact that my accounts have been about 20% in cash over the past year. What is a bit interesting, however, is how large an impact dividends made. Perhaps more interesting is that many of the companies I hold have announced respectable increases in their payouts in the past year, and that should only further accentuate the returns from dividends in my IRA.

Looking back and looking up
I'm not thrilled with the performance, but I have little reason to complain because many of the positions in my IRA fall into the large-cap value bucket. In comparison, my non-IRA accounts are nearly a decade old and have more seasoned investments. Large caps, as many investors know, haven't exactly lit the world on fire over the past couple of years. But the softness in large caps has allowed me to build up positions I'm comfortable with, and some well-known smaller companies with strong dividend growth, such as Paychex (NASDAQ:PAYX) and Tiffany (NYSE:TIF), have been flirting with price levels that are attractive in the long term. That leaves me with a few reasons to be optimistic about how the next few years will turn out.

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At the time of publication, Nathan Parmelee had positions in American Eagle Outfitters, Canon, Enterprise Products, OSI Restaurant Partners, and NTT DoCoMo, but had no financial interest in any of the other companies mentioned. American Eagle Outfitters is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.