SACC - Presently I'll Take My Portfolio Of Investment Grade Bonds Over High Yield Dividend Stocks
Summary
- As a portfolio of high yielding dividend stocks and ETFs are all the rage, I took the time to calculate the total return of 52 high-yield dividend names.
- This hypothetical high yield dividend portfolio experienced a -15% total return, in 2022.
- I would argue my 26 company investment grade bond portfolio is vastly superior, and with rates drifting higher, now is a good time to put money to work in bonds.
Unless I'm traveling, have a family commitment, or there is some extraordinary event, if it is a weekday, I'm closely monitoring the market and my portfolio of stocks. I'm also following upwards of two hundred companies, from afar. As part of my core process, throughout the day, I spend a lot of time on Seeking Alpha. SA is a tremendous resource for tracking live press releases, especially during pre-market and after hours, as that is when the news tends to hit the wires. In addition, the SA news team also does a great job of reporting breaking, actionable, and often market moving news. Therefore, as I spend so much of my day on Seeking Alpha, by default, I start at the home page, and this forces me to see the Trending Articles list.
Remarkably, day after day, week after week, three themes seem to constantly bubble up to the surface and are almost always trending: articles about high yield dividend stocks, articles about whiz bang technology stocks, and articles about market timing.
As I don't spend much time and rarely commit my 'risk capital' in the technology space, I pay very little attention to whiz bang tech stocks. I've written a fair amount, and recently, about why I think market timing is a terrible idea and why most market timers are wasting their bandwidth and probably underperforming the indices, notably over intermediate to longer term periods of time. So lastly, this leaves articles about high yielding dividend stocks.
Incidentally, these articles tend to have the word 'retirement' in the titles, the word 'millionaire', and the subtext suggests this is the best pathway to generating safe, reliable, steady, and, ultimately, superior risk adjusted returns. Many articles even go as far as to suggest a diversified portfolio of high yield dividend stocks is the best way to generate income, live a low stress life, sheltered from Mr. Market's ups and downs, and all of those scary news headlines.
Lo and behold, in 2022, I decided to go back and stress test these claims. In fact, I took a broad sample of fifty two high yielding dividend stocks (or they were at the time of recommendation, but a few have subsequently cut their dividends) and I took the time to calculate the total returns.
As it turns out, on a total return basis, so inclusive of those heralded and shiny dividends, on an equal weighted basis, this sample portfolio of fifty two stocks had a 2022 total return of -15%!
Enclosed below is the comprehensive list of stocks, so readers can take the time to review. I invested the three or four hours to dig through and calculate the total returns by hand, and let me tell you, this was not an easy feat. That said, I wanted to do it right, so doing it by hand was the best way to ensure accuracy.
When I sliced and diced the data, twenty one out of the fifty two stocks had a negative total return of 20% (or higher), in 2022. On the outperformance side, the top five names did great, but the list quickly trails off. By the time we get to the eighth, ninth, and tenth best performers, the total returns might make you yawn.
2022 Total Returns (Best Performing)
- Energy Transfer LP ( ET ): +67%
- Global Partners LP ( GLP ): +58%
- Antero Midstream ( AM ): +32%
- British American Tobacco p.l.c. ( BTI ): +24%
- Imperial Brands PLC ( IMBBY ): +22%
- Enterprise Products Partners L.P. ( EPD ): +18%
- Crestwood Equity Partners LP ( CEQP ): +14%
- Ares Capital ( ARCC ): +6%
- Altria Group, Inc. ( MO ): +4%
- Omega Healthcare Investors, Inc. ( OHI ):
2022 Total Returns (Worst Performing)
- Industrial Logistics Properties Trust ( ILPT ): -84%
- Diversified Healthcare Trust ( DHC ): -77%
- DigitalBridge Group, Inc. ( DBRG ): - 67%
- Uniti Group Inc. ( UNIT ): -56%
- Chimera Investment Corp ( CIM ): -55%
- Medical Properties Trust, Inc. ( MPW ): -48%
- Algonquin Power & Utilities ( AQN ): -46%
- Algonquin Power & Utilities Corp. ( AQNU ): -38%
- Sachem Capital Corp. ( SACH ): -35%
- Independence Realty Trust, Inc. ( IRT ): -33%
- NewtekOne, Inc. ( NEWT ): -31%
- Cohen&Steers Quality Income Realty Fund ( RQI ): -31%
- iShares Mortgage Real Estate Capped ( REM ): - 27%
- Healthcare Realty Income Trust Inc. ( HR ): -24%
- Pimco Dynamic Income Fund ( PDO ): -23%
- RLJ Lodging Trust ( RLJ ): -23%
- Oxford Lane Capital ( OXLC ): -23%
- Liberty All-Star Equity Fund ( USA ): -22%
- Annaly Capital Management ( NLY ): -21%
- Two Harbors Investment Corp. ( TWO ): -20%
- Enviva Inc. ( EVA ): -20%
When I reviewed the list, what jumps out at me is energy did extraordinarily well, in 2022. However, let's be objective, Energy Select Spider Fund ( XLE ) had a 63.4% total return. So, if you wanted a 15% or 20% overall portfolio weighting, in the energy sector, as you loved the fundamentals, entering 2022, XLE outperformed all of the high yielding names, with the exception of Energy Transfer. Secondly, on the plus side of the ledger, tobacco, given its highly defensive nature, was a port in the storm. A lot of money was happy to defensively hide in the tobacco sector, earn a yield, and wait out the storm of 2022.
On the underperforming side of the ledger, there were twenty one names that had a total return of -20% (or worse). Twelve out of fifty two stocks had a total return of -31% (or worse).
Look, there is no question 2022 was a super tough year to navigate. We experienced the highest inflation in forty years, interest rates rose dramatically, we had the Russia/Ukraine war, and starting valuations entering 2022 were high, as the S&P 500 ( SPY ) generated monster three-year compound returns from 2019-2021. That said, the suggestion or claim that a diversified portfolio of high yielding dividend stocks is the magic elixir to wealth, little to no stress, and a sleeping well at night portfolio hasn't been empirically proven out, at least it wasn't in 2022. And if we are talking about prior year periods, chances are the S&P 500 has probably outperformed. That said, I would love to see the empirical data, if another author is willing to spend a lot of time painstakingly compiling the empirical data.
In addition, the most puzzling part, at least to me, is that a high yielding dividend stock portfolio is marketed as a SWAN like portfolio. However, if you look at the volatility and dispersion of returns, these type of portfolios act and behave almost nothing like a diversified and high quality investment grade bond portfolio.
Speaking of a SWAN like investment grade bond portfolio, on October 5, 2022 and October 22, 2022, I created an actual high quality and diversified investment grade bond portfolio for my parents (age 72 and 74). I shared this portfolio, on SA's free site, in this article: My Gift To Retirees: Sharing My Recently Constructed $300K Investment Grade SWAN Portfolio.
As I said, this is 100% a Buy and Hold to maturity bond portfolio. And for perspective, I put $250K of capital to work, on October 5, 2022, when the 5-year U.S. Treasury was yielding roughly 3.88%. The last $50K was put to work on October 22, 2022, when the 5-year Treasury was yielding closer to 4.3%.
Although the 5-year yield got as low as 3.40%, fairly recently, as of last night's close, its yield was 4%. However, as this is a relatively shorter duration bond portfolio, as time elapses, the bonds maturity dates get closer, and the value of the bonds tend to slowly drift higher. Notwithstanding a dramatic leg up, in rates, from here, the path of least resistance is less volatility. Either way, we are earning a nice 4.25% cash yield, with a nice kicker, as the individual bonds approach maturity, as 26 out of 27 bonds, within the portfolio, were bought at a discount to par. Therefore, I literally spend almost zero percent of my time thinking about or worrying about this IG SWAN portfolio.
As you can see the 4.2% 10/17/2028 FedEX Corp ( FDX ) bond is up 5.1%, the Oracle Corp 3.25% 11/15/2027 bond is up 4.3%, the Lennar Corp. 4.75% 11/29/2027 bond is up 2.8%, the Parker-Hannifin ( PH ) 4.25% 10/1/2027 bond is up 2.6%, the NextEra Energy 4.625% 7/15/2027 bond is up 2.6%, the JPMorgan Chase ( JPM ), and the Realty Income Corp. ( O ) 3.65% 1/15/2028 bond are up 2.2%. These are just the mark to market change in the underlying value of the bonds. Of course, we are accruing interest on a daily basis and that interest gets paid in the form of semi-annual bond interest coupons.
Moreover, despite the 5-year U.S. Treasury yield, moving against me, by 12 bps, when the vast majority of the capital was deployed, back on October 5, 2022, there isn't one single bond, within the portfolio of bonds, that has a mark to market unrealized loss of more than 0.44%. And 26 out 27 bonds are flat or in the green.
Now, that is truly SWAN like!
Putting It All Together
As I constantly see three types of articles trending on Seeking Alpha's free site: high yield dividend stocks, whiz bang technology stocks, and market timing, I wanted to finally address the high yield dividend sector. Despite the painstaking effort, I took the time to review the 2022 total returns of a hypothetical portfolio of fifty two high yield stocks (and ETFs). Lo and behold, on a total return basis, so inclusive of dividends, this hypothetical portfolio, and I would argue the sample size is large enough to provide a good proxy, had a 2022 total turn of -15%. Twenty one out of fifty two stocks (or ETFs) had total returns of -20% (or worse). On the outperformance side, energy and tobacco led the way. That said, the Energy Select Sector Spider Fund or XLE, outperformed all but Energy Transfer.
Alternatively, and the timing is once again highly attractive, for retirees, as 5-year and 10-year U.S. Treasury yields have drifted higher, with the 5-year U.S Treasury yield of 4%, as of last night. So, if you're a retiree, and truly looking for a SWAN like portfolio then I would argue my bespoke investment grade bond portfolio is vastly superior to a portfolio of high yield dividend stocks.
For further details see:
Presently, I'll Take My Portfolio Of Investment Grade Bonds Over High Yield Dividend Stocks