JEPI - Safety Through Dividends During 2023 Market Volatility

Summary

• With a recession likely coming in 2023, I am looking to yield over 5% in dividends.
• I plan to hold my positions for the entirety of 2023 and possibly into 2024, depending on how much share prices drop.
• With the diversification between all the sectors, a recessional hit to the portfolio is likely to still outperform the market.
• The primary goal this year is for dividend reinvestments to scoop up more shares at a lower average cost.

Editor's note: Seeking Alpha is proud to welcome Andrew Tate as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »

2023 Portfolio Objectives

After last year, we all have seen the abundance of damage done to most investors' portfolios. My goal for this year is to yield a solid percentage in dividends and to choose stocks that have a steady increase of dividends, an appropriate five-year dividend growth average, and are for sale at a discount compared to one year highs.

With the goals listed above in mind, there are a select few companies that do not meet these parameters and are a higher risk/higher reward chance I am willing to take. All risk-based holdings are under 10% combined within my portfolio.

Entering the 2023 trading year, I have 43 companies (all dividend-paying) held within my portfolio. The current value is just over $11,190.

Portfolio Allocation

Each month of the 2023 trading year, another $400 will be invested into these 43 stocks. The total capital allotted to each is according to my target portfolio percentage. The percentage breakdown between each sector from smallest to largest is as follows: utilities 2.2%, basic materials 2.5%, energy 4.5%, communication services 4.7%, healthcare 6.1%, industrials 7.3%, consumer staples 7.6%, real estate 8.6%, technology 9.2%, financial services 12.5%, consumer cyclical 15.6%, and ETFs 19.2%.

The current annual yield is capturing $600 in dividends, which are all automatically reinvested. This diversification provides better peace of mind with a recession looming this year. My goal for 2023 is to capture an average of 5% dividends. I am not expecting much, if any, share appreciation, so I am primarily focused on the dividends. If shares do drop significantly, I will hold into 2024, or as long as necessary, until the share prices bounce back. Even if this happens, I am not opposed to the idea of my dividends reinvested at a lower share price and lowering my average cost per share.

As a bonus, as the dividends reinvest, the annual dividend payout will increase - assuming no dividend cuts happen.

Sector Performances in Q1-Q3 2022

• Energy: +30.71%
• Utilities: -8.58%
• Consumer Staples: -13.52%
• Healthcare: -14.15%
• Industrials: -21.72%
• Financial Services: -22.41%
• Basic Materials: -24.90%
• Consumer Cyclical: -30.32%
• Real Estate: -30.43%
• Technology: -31.93%
• Communication Services: -39.43%

Performance Breakdown

Through the first three quarters 2022, Energy finished at the top and ended the year in the green, but healthcare, consumer staples, and utilities still managed to beat the market while in the red. As a result, I believe these sectors are going to slow and realize losses that they might not have incurred in 2022. With that in mind, I have chosen to obtain larger holdings in sectors such as communication services, technology, real estate, and consumer cyclical.

I believe these stocks were a bargain compared to their highs, which allowed me to gather more shares with less capital. In my opinion, this led to minimal risk of long-term share depreciation due to my bullish hope for the market in the later part of the 2023 trading year.

Portfolio Holdings

Below is a list of the ticker symbol, yield, and annual dividend payout per share for each company I am holding:

In regard to portfolio allocation for each stock, the most important factor for me was the number of years of dividend increases, as well as the total percent each stock has fell from its one-year high. The price evaluation at the time of purchase allowed me to enter into these stable and profitable stocks at a discount. This gave me almost 100% certainty the shares will appreciate in time, back toward their 2022 highs.

Potential Risks

I believe this portfolio gives me the right diversification as well as a generous dividend yield to outperform a recession this year. If the underperforming stocks do not rebound in 2023, I am comfortable holding my positions into 2024 due to the high risk tolerance at my age.

I am satisfied with the entry prices for most of these stocks, as they are already down significantly from their one-year highs. This balance fits directly in line with my investment goal of both outperforming the market as well as seeing long-term appreciation.

Financial Situation

The stability of my income and the assumed risk based on my age provides me with the opportunity to make recurring investments without as many negative consequences from market volatility. These recurring investments are essential for the maximum potential long-term growth. I currently am not relying on dividends for income, so all of them can be reinvested, again maximizing portfolio and share growth.

When I retire, I will end dividend reinvestments and aim for an annual payout of $36,000 or $3,000 per month. Until then, dividends will continue to reinvest and my monthly contributions will continue to increase with pay raises, bonuses, etc.

Safety in Exchange Traded Funds (ETFs)

In the event an investor wants to position their portfolios to be a bit safer, adjustments can be made to the ETFs to individual stocks ratio. Personally, for my risk tolerance I prefer 18%-22% in ETFs and the remainder in individual stocks. When diversifying your portfolio, I recommend using the rule of 100 - subtract your age from 100 to see what percentage of holdings should be individual stocks. This calculation works perfectly for me because I have time to recover in the event that the market continues downward.

Top 3 dividend ETFs for 2023

1. JPMorgan Equity Premium Income ETF

This relatively new fund is incredibly attractive due to its monthly dividends. Since the inception date, JEPI is only up around 9%, but has continued to increase its dividend the past two years. Due to the high dividend yield, performance vs. the S&P 500 in 2022, and fair management cost, this is one of my strongest buys and one of the largest holdings within my portfolio at around 8%.

2. Schwab U.S. Dividend Equity ETF

SCHD took a slightly larger hit in 2022. While it still outperformed the market, it still lost around 2% more than VYM. The 3.40% yield makes this fund very enticing. With a low expense ratio of 0.06% and market outperformance last year, I believe this is a safe bet for 2023 to beat the market and pay a healthy dividend.

3. Vanguard High Dividend Yield ETF

Besides beating the market in 2022 (only losing a bit over 4% in value compared to the SPDR S&P 500 Trust ETF (SPY) losing just over 20%), VYM has maintained a growing dividend for the last 12 years, sitting at a healthy 3.01%. Due to its 0.06% expense ratio, it's an easy decision to invest some money into this relatively safe ETF for large upside potential.

Conclusion

While nobody can say for sure what the market will do this year, we have a pretty good idea that we will be heading into a recession.

The overall plan behind a strictly dividend-based portfolio is to ensure some positive gains are made. Ideally, this means at least breaking even at the end of the year while still outperforming the market as a whole. At the same time, dividend reinvestments, capturing more shares at a lower average cost, will be beneficial for long-term portfolio growth.

As the year progresses, I plan to post updates on the market value of the account as well as any changes I make in regard to portfolio allocation.

For further details see: