PEP - The Dividend Growth Portfolio 8 Years Later

2023-05-10 17:09:31 ET

Summary

• In early 2015, I bought 15 of the largest cap stocks from the dividend achievers index.
• The strategy was to create a more retirement-ready portfolio.
• The dividend growth portfolio delivered modestly on the goals - it has offered better risk-adjusted returns.
• When I factor in my 3 stock picks, the collective U.S. portfolio has delivered some nice outperformance vs the S&P 500.

In early 2015 I started an "experiment" on behalf of Seeking Alpha readers. I purchased 15 of the largest cap dividend achievers. At the time, I also had 3 stock picks. 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. The dividend growth mix has matched the performance of the S&P 500 while delivering better risk-adjusted returns. The 3 picks take the portfolio over the top.

This article looks at the early days of the portfolio. From that post...

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 ), 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 ).

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.

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 with the remaining 14 dividend achievers.

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

Also of note, Vanguard's Dividend Growth Index ETF ( VIG ) initially replicated the Dividend Achievers Index. They made a move to the Dividend Growth Index. The Dividend Achievers Index included a proprietary financial health screen, the Dividend Growth Index does not.

For investors interested in combining a dividend growth history with financial screens, you can look to Schwab's U.S. Dividend Equity ETF ( SCHD ). The Dividend Aristocrats ( NOBL ) focus on a very long-term dividend growth record (25 years or more) and that approach can certainly find that quality factor.

If I was building the dividend growth portfolio today, I would concentrate on those 3 indices and funds. On that front, I will be back with an article that offers 25 dividend growth stocks for consideration.

Dividend Growth Stocks vs the S&P 500

Here's the performance of the 14 Dividend Growth Stocks vs the S&P 500.

The Dividend Growth stocks and the market (S&P 500) have both delivered at 10.7% annually from 2015. That said, the Dividend Growth Stocks have delivered slightly better risk-adjusted returns. They began to outperform during the market stress of 2020 and beyond, that is a good sign.

When we factor in the United Technology spin-off performance, the portfolio mix tilts in favor of the Dividend Growth Portfolio.

Also, the 3 stock picks have greatly outperformed the Dividend Growth Portfolio and the market.

Here's the performance of the United Technology spinoffs from the date available, January of 2021. The spinoffs (in equal weight fashion) have more than doubled the rate of return of the market.

The returns of the individual stocks

The outperformance is driven by the tech and consumer discretionary stocks. Apple is a big contributor as well, as the stock is greatly overweighted.

That said, the defensives have pitched in by design when the markets were choppy. As we know the world changed in 2020 with the first modern day pandemic. The response to the pandemic then ushered in the first inflationary regime in many decades.

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

The United Technology spinoffs

The total returns are also enhanced near-term thanks to the dramatic outperformance of the United Technology spinoffs.

Here's the total returns from January of 2021.

We see that the group has outperformed the market, the Dividend Growers, and the 3 picks. Here's the returns for various timeframes, from January 2021.

The total portfolio

And here's the total portfolio vs the S&P 500. The 3 picks are overweighted.

The total portfolio outperformed the S&P 500 by 2.26% on an annual basis. That level of outperformance could certainly greatly boost the ability to fund retirement. The better risk-adjusted returns (less volatility/drawdowns) also boost the retirement funding potential.

As always, past performance does not guarantee future returns.

Sector allocation

Retirement funding is about 'grow and protect'. I've put that in quotes as I repeat that mantra, often. The level that you need to grow, and the level that you need to protect, will come down to your greater master financial plan. Some retirees need to maximize the growth (and hence maximize the retirement funding potential of the portfolio), other retirees have more than they need. The portfolio can then be more defensive.

You can see that there is ample growth thanks to tech and consumer discretionary. The defensive posture is considerably more than the market thanks to healthcare and consumer staples.

Here's the sector allocation for the S&P 500.

The defensive posture makes our portfolio a better retirement funding option in my view. I recently posted on the defensive sectors being much better than a traditional 60/40 balanced portfolio.

I like the idea of using the defensive sectors in concert with bonds and cash and gold ( GLD ). Using the defensive sectors (somewhat) as bond proxies we might be able to use less bonds and cash compared to a traditional retirement balanced portfolio.

The Canadian portfolio

The portfolio holes that you see within the U.S. stock portfolio are filled in by way of our Canadian stock portfolio - the Canadian Wide Moat Portfolio. That portfolio adds even more defense by way of telcos and pipelines. The Canadian portfolio also offers some generous yield and dividend growth. The Canadian banks offer the most impressive history of continuous dividends and dividend growth in the North American stock markets.

All said, I would suggest that Canadian readers consider the wider moat portfolio option in that post - that includes the grocers and railways.

The all-weather portfolio for retirement

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.

Keep in mind that stock markets don't work during periods of inflation. Given that, of course, the dividends don't keep up either.

That said, certain types of stocks work during bouts of serious inflation. Check out the outrageous dividend growth of our energy stocks . Yes, I think that a doubling of dividends in one year covers inflation.

For a retiree to be ready for anything, an all-weather portfolio is the way to go. We arrange our investment assets to ensure that the 4 possible economic conditions are covered. Something is always working, no matter what the economy and markets throw at us.

When we manage our own stock portfolio in retirement that gives us greater control. We can arrange individual stocks for specific economic outcomes.

Here's the stocks for the retirement portfolio .

Of course, we can also manage the economic risks by way of sector ETFs.

High yield warning

Avoid the high yield trap that is likely the most popular approach on Seeking Alpha - if we use the amount of articles posted as a gauge. I find that alarming. Thinking back to the great financial crisis, readers and retirees showed me that high yield suffered greatly. Many were sent back to work, or had to greatly scale back their retirement funding, aka retirement lifestyle. Be very careful when you seek to greatly boost yield.

There is no need to seek yield above all else. That is not where the safety is. Quite the opposite in periods of stress. We're already seeing that high yield stress on display today.

My total U.S. stock portfolio could have managed an 8% spend rate from 2015. The portfolio value would have also increased by 60%. Yes, that is an outrageously favorable period. But it demonstrates that there is no need to chase yield. Sector arrangement, plus grow and protect wins the retirement portfolio race.

I will be back with a dedicated article on that total portfolio spend rate history, and potential.

Thanks for reading. We'll see you in the comment section. And as always, this post does not constitute advice. Think of it as ideas and stocks for consideration. Do your own research.

Understand the retirement risks.

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