ACN - Our U.S. Stock Portfolio Performance For 2023 And Longer-Term Market Beat

2024-01-21 07:00:00 ET

Summary

• The U.S. market exceeded expectations in 2023, delivering a 26% return for the S&P 500 and a 75% return for the Magnificent 7 tech stocks.
• Momentum and sentiment played a significant role in the market's performance, with a strong first half leading to a strong finish.
• Our U.S. dividend growth portfolio underperformed the S&P 500 in 2023, with a 15.3% return compared to 26.1% for the index.
• From inception in 2015, we still have a sizable beat over the market.

2023 was the year that fooled most everyone. While analysts predicted flat or negative returns for 2023, the U.S. market had a mind of its own delivering 26% for the cap-weighted S&P 500 ( IVV ). The growth-oriented Nasdaq 100 ( QQQ ) posted 55%. And of course, it was technology stocks and the Magnificent 7 that did most of the heavy lifting. It's quite likely that you did not beat the market in 2023. While we were in that same camp, we had a very solid year in 2023 thanks to some modest tech exposure. Our U.S. stock portfolio continues to beat the market from inception - early 2015.

A strong first half of 2023 led to a strong year and a strong sprint to the 2023 finish line. Momentum and sentiment can be a powerful market event.

And it was a year in which AI and tech stocks made all of the headlines. Seven stocks delivered most of the returns for the S&P 500.

This year, the Magnificent 7 was up a massive 75% while the remaining 493 companies were up just 13%. Combined, the S&P 500 was up 25%, more than doubling the S&P 493's total return. For much of the year, the other 493 stocks were in a negative position. A year-end rally brought them into positive territory.

The Magnificent 7 are Apple Inc. ( AAPL ), Microsoft Corp. ( MSFT ), Alphabet Inc. ( GOOG ), Amazon.com Inc. ( AMZN ), NVIDIA Corp. ( NVDA ), Meta Platforms Inc. ( META ), and Tesla Inc. ( TSLA ) – this group has grown in market capitalization by US$4.7 trillion in 2023 alone.

If you didn't own the Magnificent 7 and other tech in 2023, you probably underperformed. But I would suggest that is not a problem. If you're a value investor or a more conservative retiree, you would likely not have sizable positions in stocks that are undoubtedly very expensive.

For the record, we (for my accounts and my wife's accounts) hold Apple and Microsoft. We also hold Berkshire which has a massive position in Apple. QUALCOMM ( QCOM ) also had a standout year.

Our U.S. dividend growth portfolio

In early 2015, I started an "experiment" on behalf of Seeking Alpha readers. I purchased 15 of the largest-cap dividend achievers from the Dividend Achievers Index ( VIG ). At the time, I also had 3 stock picks.

Here's the original article from 2015 - Buying dividend growth stocks without looking . I trusted the index methodology and large-cap bias. So while I "didn't look", the index sure did.

Quality plus large-cap focus

The NASDAQ Dividend Achievers Index is a list of companies that have increased their dividends for 10 years or more. The Achievers Index also applied a proprietary dividend health screen that was developed in concert with Vanguard. In that, it was a rules-based index. From September 2021, the Vanguard ETF has tracked the S&P U.S. Dividend Growers Index. The index no longer includes quality screens. On quality, the Seeking Alpha tools can lend a helping hand.

The experiment was with real money - in fact, our entire U.S. dollar amount was moved into these 18 companies. The investment thesis was based on many years of research - observing the performance of the largest companies with quality and wide moat characteristics.

Incredibly, the original top ten Dividend Achievers from 2008 outperformed the market through the financial crisis.

The dividend growth mix has outperformed the S&P 500 while delivering better risk-adjusted returns. The 3 picks take the portfolio over the top.

The 15 companies that I added are 3M ( MMM ), Pepsi ( 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 ).

We also have 3 U.S. stock picks by way of Apple ( AAPL ), Berkshire Hathaway ( BRK.B ), and BlackRock ( BLK ).

United Technologies merged with RTX ( 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 in 2021, the 3 stocks have greatly outperformed the market and the dividend achievers (now called the dividend growth index). Given the spinoffs, the U.S. portfolio now stands at 20 stocks.

The U.S. portfolio 2023 returns

The portfolio delivered 15.3% compared to the 26.1% return for the cap-weighted S&P 500. Keep in mind that I am greatly overweight Apple and Berkshire, with a slight overweight position in BlackRock. Apple and Berkshire are 3x overweight, while BlackRock is 1.5x overweight.

The rest of the stocks are in equal-weight fashion.

The stocks have not been rebalanced, I let them run.

Here's the chart ...

And here are the stocks for 2023

Just like the markets, the portfolio leaned heavily on the tech stocks.

From the time of the United Technologies spin-off in 2021, the total portfolio has danced back and forth between outperformance and underperformance vs the market.

We'll take it considering portfolios have had to do battle with the FAANG stocks and then the Magnificent 7. The market delivered an average of 10% annual for the period. The spinoffs offered a nice beat. Given that, they offered a modest boost in returns over the last 3 years.

The U.S. portfolio from 2015

Here's the performance from the portfolio inception. Remember I am unable to include the spinoffs (they offered a very slight boost).

The total stock portfolio delivered 14.0% annual vs 11.8% for the S&P 500.

Here are the portfolio assets

The outperformance is courtesy of tech, including fintech pick BlackRock, plus Lowe's. Lowe's is a company that I could buy all day long as I often write.

I have held the picks for over a decade from 2014.

Defensive stocks

The defensive stocks for retirement have been solid, but solid underperformers nonetheless. And that's just fine. The portfolio was not constructed to provide a market beat (but the beat is gladly accepted). The U.S. stock portfolio is part of a total portfolio mix with the goal of providing reliable and growing income (dividends and capital gains) through a few market cycles - including through recessions.

From that article link, you'll see that the defensive sectors of healthcare ( XLV ), consumer staples ( XLP ), and utilities ( XLU ) were far superior to a traditional balanced portfolio through the financial crisis. In fact, using the defensive equity sectors moving through the financial crisis with a portfolio value compared to the balanced portfolio using bonds.

Our portfolio is still waiting to be tested

Our U.S. stock portfolio has not truly been tested since 2015. That said, it is nice to see that the outperformance arrived when the world changed in 2020 with the first modern-day pandemic and the economic and market stress that followed. It was a modest test, but the portfolio rose to the occasion.

Keep in mind that I also use a modest amount of bonds - long and short. Our Canadian stocks slant to defensive sectors and also provide very generous and growing income. Given that 8 of the 20 stocks are from defensive sectors (healthcare and consumer staples), our U.S. portfolio adds to our defensive equity tilt. Our defensives make up over 50% of the equity mix.

Given the incredible diversification from the conglomerate arrangement and massive cash pile, I would also consider Berkshire Hathaway a defensive holding.

My research leads to the conclusion that this is the optimal arrangement for retirement.

• Defensive stocks
• Quality skew for stocks
• Generous growing dividends
• Stock growth kicker
• Bonds and cash
• Inflation protection

Dedicated inflation fighters are an essential part of an all-weather portfolio .

While many on Seeking Alpha like a higher income approach, I'd offer a warning that those are the investors/retirees who were sent back to work or were forced to greatly reduce their lifestyle thanks to the financial crisis. The higher yield sector and specialty income sector got wrecked.

There is a false sense of security relying on income.

In my opinion, the above strategy is likely to again provide much more income in a reliable fashion through economic cycles.

If you are in the accumulation stage, remember that more money buys or creates more income. Go for growth, it is very beneficial to separate the accumulation and decumulation stages .

Building the portfolio in 2024

Readers have often asked me how I would build the portfolio in today's environment. Obviously, due to the fact that I've continued to hold our portfolio from 2015, I did not change my approach. Buy and hold has been the greatest lesson perhaps from this real personal portfolio exercise. When you buy enough high-quality companies, you don't have to judge and change course. On that, see Warren Buffett.

That said, I know that I would approach things differently if I were to start building a portfolio today. If I looked at the dividend growth index, I'd be considering these top 20 stocks in 2024. From the Vanguard site ...

• Microsoft
• Apple
• JPMorgan ( JPM )
• UnitedHealth ( UNH )
• Broadcom ( AVGO )
• Exxon Mobil ( XOM )
• Visa ( V )
• Johnson & Johnson
• Mastercard (MA)
• Home Depot ( HD )
• Procter & Gamble ( PG )
• Costco ( COST )
• Merck ( MRK )
• Pepsi
• Coca-Cola ( KO )
• Walmart
• Accenture ( ACN )
• McDonald's ( MCD )
• Cisco Systems ( CSCO )
• Linde PLC ( LIN )

I would buy that portfolio in a heartbeat. It's a group of high-quality larger-cap dividend growth stocks. There is a nice mix of offense and defense.

In mid-2023, I looked at the dividend achievers index plus constituents in the popular Schwab U.S. Dividend Equity ETF ( SCHD ) and Vanguard's High Dividend ETF ( VYM ). The idea was to build a portfolio that would bypass the overvaluation of tech stocks and the overall cap-weighted S&P 500 ( IVV ).

I then used the Seeking Alpha Quant Tools. I was able to consider the valuation and recent growth as key metrics. The result was this post ...

Building the dividend growth portfolio in 2023.

I wanted to keep the P/E ratio below 20. I stretched slightly above 20 on a few names if there was enough growth present. I gave more weight to the growth performance over the last 5 years.

I highlighted 10 conviction picks that stood above the crowd. From June of 2023, those conviction picks managed to beat the market. Again, that is quite the challenge given that the portfolio holds none of the Magnificent 7.

I will be back soon with an article that will take a closer look at the portfolio concept.

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