GMET - Our Dividend Growth Portfolio Continues To Outpace The S&P 500

2023-07-19 22:56:03 ET

Summary

• In 2015, I purchased 15 of the largest cap U.S. dividend achievers, which have continued to outpace the S&P 500.
• The portfolio was designed to provide greater protection during recessions and severe bear markets, and began to pull away from the S&P 500 after the world changed in 2020.
• The portfolio is 55% U.S. stocks and 45% Canadian stocks, with modest allocations to bonds, cash, gold and bitcoin, and a few thematic plays in the electric vehicle and battery space.

In early 2015 I began an 'experiment' on behalf of investors on Seeking Alpha. I purchased 15 of the largest cap U.S. dividend achievers. Those 15 companies were added to 3 stock picks that were already held. The dividend achievers offered a quality skew as companies had to have increased their dividends each year for at least 10 years. The index at the time also applied a financial health screen. I skimmed (bought) 15 of the largest cap names, that can help find greater moats and added financial stability. Our dividend growth portfolio continues to outpace the S&P 500.

Here's the original post from 2015 - Buying dividend growth stocks without looking . While I did no additional research the index sure did. I was simply trusting the methodology that I had researched for many years. From that 2015 article:

I pulled the trigger and sold my VIG, and purchased 15 individual holdings from the top 20-25 of the index. I did no evaluation other than reading that list. The 15 companies that I added are 3M ( MMM ), PepsiCo ( PEP ), CVS Health Corporation ( CVS ), Walmart ( WMT ), Johnson & Johnson ( JNJ ), Qualcomm ( QCOM ), United Technologies ( UTX ), Lowe's ( LOW ), Walgreens Boots Alliance ( WBA ), Medtronic ( MDT ), Nike ( NKE ), Abbott Labs ( ABT ), Colgate-Palmolive ( CL ), Texas Instruments ( TXN ) and Microsoft ( MSFT ).

I also have 3 U.S. stock picks by way of Apple ( AAPL ), Berkshire Hathaway ( BRK.B ), and BlackRock ( BLK ). For the record, these stocks are held in my wife's accounts and my own accounts. And of course, Berkshire does not pay a dividend, but I see it as an essential holding for a retiree or near-retiree. It belongs to the dividend growth portfolio.

United Technologies merged with Raytheon ( RTX ) and then spun off Carrier Global Corporation ( CARR ) and Otis Worldwide ( OTIS ). We continue to hold all three and they have been wonderful additions to the portfolio. In fact, from the time of the spin-off, the 3 stocks have greatly outperformed the market ( IVV ) and the dividend achievers. Given that the United Technology stocks are not available for evaluation from 2015, I have run the performance update from 2015 with the remaining 14 dividend achievers, and the 3 picks.

I will then also address the (wonderful) performance of the United Technology spinoff group.

Keeping up with the markets in 2023

It is not easy to keep up with the U.S. market in 2023. Several growth stocks, deemed the Magnificent 7 are driving the market. If you don't have tech (and AI exposure), you are likely lagging the market returns.

Seeking Alpha write Michael James McDonald suggests that the Magnificent 7 are approaching price exhaustion .

These are the seven stocks:

1. Nvidia ( NVDA )
2. Meta Platforms ( META )
3. Tesla ( TSLA )
4. Amazon ( AMZN )
5. Google ( GOOG ), ( GOOGL )
6. Microsoft (MSFT)
7. Apple (AAPL)

Given that we own Apple and Microsoft we enjoy some exposure to this 'magnificent' group. Of course the MAG 7 gang is terribly expensive selling at a collective 40 times earnings. They will have to come up big time in this earnings season, if they're going to continue to float the market.

Given that I am semi-retired and my wife is in the retirement risk zone, we take the opportunity to sell into the rally to create retirement income. If someone wants to pay us more for less current earnings per share, step right up. It's an easy game in retirement.

As you'll see in the total return evaluation, we're not keeping up with the S&P 500 in 2023, but we're giving it a good go with some very generous returns. That said, the idea behind the dividend growth portfolio was not to beat the S&P 500, but to provide greater protection during recessions and severe bear markets. When the world changed in 2020, the portfolio began to pull away from the S&P 500 - by design. Here's a post that looks at the U.S. stocks in my retirement portfolio.

My crazy 8 stocks teach the market a lesson from 2020.

And now let's move on to the portfolio total returns update. Here's the 14 dividend stocks plus the 3 picks from 2015 to the end of June 2023. Apple and Berkshire are in overweight positions, more than double the portfolio average. The rest of the stocks are then equal weight.

And the individual stock performance

We can see that the tech and consumer discretionary stocks drove the outperformance. Abbott labs also pitched in.

The performance above includes annual rebalancing. I have let the stocks run. That has increased the outperformance by 1.5% annual. The beat is quite significant.

The United Technology spin offs

The United technology spin offs are available from 2021. Here's how the portfolio looks from that date, including the spin offs.

We can see that the portfolio has mostly outperformed the S&P 500 from 2021. The recent AI-inspired Magnificent 7 surge has moved the S&P 500 into a slight lead. Here's the wonderful CAGR performance of the spin offs.

• Carrier 13.26%
• Raytheon 16.13%
• OTIS 13.18%

They all trounced the market that delivered 8.55% annual for the period. I am more than happy that I stuck with all 3 companies. They also fill a portfolio hole with industrials and a defense manufacturer.

While we hold the portfolio for retirement and the potential of a defensive posture, we can see that the dividend growth and high quality approach might be appropriate for those in the accumulation stage.

I will be back on Seeking Alpha with an article that details how I would build the dividend growth portfolio in 2023. I look to the Schwab U.S. dividend ETF ( SCHD ), Vanguard's ( VIG ) and the high dividend ( VYM ), plus iShares ( XDU.U:CA ) for inspiration. And yes, I include some of our personal U.S. holdings.

The dividend growth portfolio for retirement

The above U.S. stock portfolio is just one part of the total portfolio, though it plays an important role. We are weighted at about 55% U.S. stocks and 45% Canadian stocks. We have modest allocations to bonds, cash, gold and bitcoin in the mix. Plus, we have a few thematic plays in the electric vehicle and battery space ( BATT ) and ( GMET ).

Retirees should consider if they are ready for anything. The world changed in 2020 with the first modern day pandemic. The investment world changed as well, and that has considerably more ramifications (and risks) for the retiree.

Accumulators can simply keep adding great companies or market ETFs. Lower prices are good when more long-term value comes along for the ride.

A retiree needs to protect their assets from everything from robust inflation and stagflation to deflation and rolling recessions or even a depression.

For retirement I like the idea of an all-weather portfolio . You'll see from that post, that we can strategically arrange types of stocks for economic environments. We can overweight consumer staples, healthcare and utilities stocks to add a more defensive posture. They can work in concert with bonds and cash. And using more defensive stocks might give you the opportunity to lighten up on the bond exposure.

The defensive stocks greatly outperformed a classic 60/40 balanced portfolio through the financial crisis.

But as our portfolio shows, it's a good idea to keep some growth in the mix. An accumulator might concentrate more on the growth prospects while a retiree might choose to play defense.

Keep in mind the above is not advice, but ideas for consideration. Be sure to know your risk tolerance level, tax considerations and how investments fit within the greater financial and life plan.

Thanks for reading. We'll see you in the comment section. I do address all questions or concerns.

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