PM - The Ultimate Buffett-Style 5% Yielding Dividend Aristocrat Portfolio

2023-07-11 07:15:00 ET

Summary

• The economic data is showing that a recession is almost certainly coming, but it now appears to be most likely to start in the first half of 2024.
• Impatience, and fear of missing out, have caused many investors to forget the painful lessons of 2022, chasing momentum despite insane valuations in some stocks.
• Wall Street isn't a game won by the smartest but by the most prudent and patient.
• Here are the seven most profitable Buffett-style "wonderful companies at fair prices" wide-moat aristocrats you can safely buy today.
• They yield a very safe 4.2% and have a 13.4% long-term return and income growth consensus forecast.
• Combined with the best hedging strategy of the last 50 years, you can boost safe yield to almost 5%, while enjoying 70% smaller declines in recessionary bear markets than the S&P 500. It's the ultimate Buffett-style high-yield aristocrat portfolio for what's coming next.

This article was published on Dividend Kings on Monday, July 10th.

---------------------------------------------------------------------------------------

• Profitability Powerhouses: Dividend Aristocrats Edition

Last week, in part 1 of this series, I showed why the recession that most people and economists and CEOs, and even Warren Buffett, have been expecting for almost one year is likely going to arrive in the first half of 2024.

I also showed you why market timing is the most dangerous thing you can do, risking 2/3rds of the market's long-term returns, and even worse when considering inflation.

I explained how legendary value investor Joel Greenblatt considered return on capital his gold standard proxy for quality and moatiness, the cornerstone of his 40% annual returns over 21 years at Gotham Capital.

Today I want to show you, step by step, how to quickly and easily build the ultimate Buffett-style "wonderful companies at a fair price" wide moat aristocrat portfolio.

One that yields a mouth-watering but safe, 4.7% and is perfectly positioned for the coming recession, whenever it finally arrives;)

Step 1: Finding The Best Buffett-Style Wide Moat Aristocrats

Valuation always matters, and when the market is melting up, that's especially true.

Here is how I was able to find the seven best Buffett-style wide moat "wonderful companies at fair prices" dividend aristocrats.

I used the Dividend Kings Zen Research Terminal, which runs on the DK 500 Master List, which includes the world's best blue-chips.

• all dividend aristocrats
• all dividend champions (including foreign aristocrats)
• all dividend kings
• all 13/13 Ultra SWANs (wide-moat aristocrats and future aristocrats)
• 40 of the world's best growth stocks.

In one minute, it's possible to screen the dividend champions for the seven best good value wide moat aristocrats likely to match or beat the S&P 500 (SP500) over the long-term.

7 Buffett-Style Dividend Aristocrats

I've linked to articles providing more information about each company.

• Altria ( MO )
• SEI Investments Company ( SEIC )
• Automatic Data Processing ( ADP )
• T. Rowe Price ( TROW )
• AbbVie ( ABBV )
• Philip Morris International ( PM )
• General Dynamics ( GD ).

Fundamental Summary

• discount to fair value: 14.6% vs. 12% S&P overvaluation
• quality: 97% 13/13 Ultra SWAN dividend aristocrats
• safety: 97% very safe (1.15% severe recession cut risk)
• yield: 4.2% vs. 1.7% S&P and 3.6% SCHD
• Growth Consensus: 9.2% vs 8.5% S&P 500
• Total Return Potential: 13.4% vs 10.2% S&P 500
• The 13-year median return on capital: 251% vs 15% S&P 500.

Joel Greenblatt considered return on capital the ultimate proxy for moatiness and quality. Under that standard, these aristocrats are nearly 3X higher quality than the average aristocrat and 17X higher quality than the S&P 500.

They yield a very generous and very safe 4.2%, and analysts expect long-term total returns of 13.4%.

(Sources: FactSet Research Terminal, Morningstar.)

That's a better return potential than almost any popular ETF, including the Aristocrats and the Nasdaq.

Historical Total Returns Since 1990

These Buffett-style aristocrats are market-beaters running circles around the S&P across every long-term time frame.

• 19.4% annual income growth over 31 years
• 13.4% annual income growth consensus in the future.

They are income growth powerhouses, and the yield on cost for anyone buying them in 1991 is 608.1%.

• $1000 invested in 1991 is paying $6,081 per year in exponentially growing dividends.

Ok, that's wonderful but what about the recession?! What about the massive decline in stock prices that history, analysts, and common sense say is not just likely but would be "historically unprecedented" if it didn't arrive within the next year?

S&P 500 Bear Market Bottom Scenarios

(Sources: Bloomberg, FactSet, DK S&P 500 Valuation Tool.)

Well, if you're worried about your ability to sleep well at night and not become a forced seller for emotional or financial reasons, then consider turning these Buffett-style aristocrats into a ZEUS Portfolio.

ZEUS: The Ultimate Ultra SWAN Portfolio For Any Economy

Here is an introduction to the Dividend Kings Zen Extra Ordinary Ultra Sleep Well At Night portfolio strategy, or ZEUS.

• Preparing For Recession Part 34: The Long-Term Recession Optimized Retirement Portfolio .

According to Nick Maggiulli, CIO and Chief Data Scientist for Ritholtz Wealth Management, since 1970, the best long-term asset allocation for strong returns and low volatility was 67% stocks and 33% hedges.

• including the stagflation hell of the 1970s.

7 stocks aren't unsafe, but it is highly concentrated, and the allocation to tobacco is 30%, more than most people are comfortable with.

So for a max yield Buffett-style aristocrat portfolio, I would use a 33% allocation to Schwab U.S. Dividend Equity ETF™ ( SCHD ) to offer diversification while maintaining the same long-term return potential.

• SCHD Vs. SCHY: One Of These Is The Best High-Yield ETF .

VYM, Vanguard's high-yield ETF, is a decent alternative.

And for the hedging bucket, I recommend long-duration bonds and managed futures, the best hedging strategy of the last 50 years.

Vanguard Long Duration Treasuries ( EDV ) or Pimco 25+ Year Zero Coupon ETF ( ZROZ ).

• 6 High-Yield ETFs For Up To 60% Gains In The Coming Recession .

KFA Mount Lucas Index Strategy ETF ( KMLM )

• Three 9+% Yielding ETFs I Own, And So Should You .

Just how effective is it to combine long-duration U.S. treasuries with managed futures?

The average gain is the mirror image of the S&P 500's decline. And when 33% of your portfolio goes up as much as the S&P goes down, a 67% stock and 33% hedged portfolio suffer a 50% smaller peak decline than the overall market.

ZEUS High-Yield Buffett Aristocrats vs. 60/40

• 33% SCHD or VYM
• 16.6% EDV or ZROZ
• 16.6% KMLM
• 33% highest profitability aristocrats (4.8% each).

Now we have a diversified and prudently risk-managed portfolio, with exceptional long-term fundamentals and a safe yield of almost 5%.

(Sources: FactSet, DK Research Terminal.)

Compared to a 60/40 and even the S&P 500, this ZEUS high-yield Buffett-style aristocrat portfolio is far superior in every fundamental way.

Historical Total Returns Since December 2007 (Start Of The Great Recession)

The annual volatility of this ZEUS Buffett-style high-yield aristocrat portfolio is just 10%, less than the 60/40 retirement portfolio and far less than these top profitability aristocrats on their own.

In the Great Recession, their peak bear market decline was 42% less than the S&P's, and that was the 2nd worst market crash in U.S. history.

Analysts expect this ZEUS portfolio to deliver around 11% long-term returns, which is similar to its average five to 10-year rolling returns.

Returns that consistently run circles around a 60/40.

ZEUS High-Yield Buffett-Style Aristocrat Peak Bear Market Declines

(Source: Portfolio Visualizer Premium.)

This portfolio's average peak bear market decline is just 12%, with a median decline of 10%.

That's a 70% smaller median decline than the S&P 500 and just half the decline of a 60/40 retirement portfolio.

Remember how much 2022 sucked? Well, this portfolio fell 4% in 2022, one-fourth as much as a 60/40 and 80% less than the S&P.

That's the power of ZEUS, the king of Ultra Sleep-Well-At-Night high-yield portfolios.

Bottom Line: This Is How To Build The Ultimate Buffett-Style 5% Yielding Dividend Aristocrat Portfolio

The stock market can be frustrating at times, but guess what? It's always been that way.

The main purpose of the stock market is to make fools of as many men as possible" -Bernard Baruch.

Market timing is great in theory - and nowhere else. The fact that the recession now appears to be 12 months behind schedule has thrown a lot of people for a loop.

The fear of 2022 has been replaced with the fear of missing out in 2023, and all the painful lessons of last year have gone straight out the window.

As someone who has been investing for 24 years, I've seen a lot of craziness in the stock market, and the economy.

What I've learned, the hard way, is that the maxim "time in the market beats timing the market" is 100% true. That's also backed up by dozens of studies from all over the world, spanning centuries.

Do you know what the secret to true happiness with your portfolio is? It's the same secret that the Finnish people have used for 500 years to become the happiest people on earth, for six consecutive years.

“Sisu” is a concept and way of living interwoven into Finnish culture for more than 500 years. It has no direct translation, but it is focused on determination and fortitude . It's about having the grit to push forward in the face of adversity and near-impossible odds." - CNBC (emphasis added).

Tesla (TSLA) is up 50% in a month? Who cares.

NVIDIA (NVDA) is up 30% in a day? Don't chase that bubble.

The recession always seems to be three months away? Recessions always arrive on their own schedules, in their own good time.

Do you know what works in a recession? Quality dividend growth.

Do you know what works outside of a recession? Quality dividend growth.

If you want to know where to find amazing companies that are cash minting machines, at reasonable prices then take a look at:

• Altria
• SEI Investments Company
• Automatic Data Processing
• T. Rowe Price
• AbbVie
• Philip Morris International
• General Dynamics.

If you're looking for the ultimate in dividend dependability and Buffett-style "wonderful companies at fair prices," you can't go wrong with these seven names.

Fundamental Summary

• discount to fair value: 14.6% vs. 12% S&P overvaluation
• quality: 97% 13/13 Ultra SWAN dividend aristocrats
• safety: 97% very safe (1.15% severe recession cut risk)
• yield: 4.2% vs. 1.7% S&P and 3.6% SCHD
• Growth Consensus: 9.2% vs 8.5% S&P 500
• Total Return Potential: 13.4% vs 10.2% S&P 500
• The 13-year median return on capital: 251% vs 15% S&P 500.

These are the seven most profitable wide moat aristocrats you can safely buy today.

And if you're looking for maximum safe yield and rock-bottom volatility in recessions?

(Sources: FactSet, DK Research Terminal.)

There is no better 5% yielding Buffett-style wide moat aristocrat portfolio you build than combining these aristocrats with the world's 100 best high-yield blue-chips and the best hedging strategy of the last 50 years.

There are no certainties on Wall Street; it's all probability curves.

That's why the market does crazy stuff so often, surprising even market veterans.

But if you follow six simple rules, you'll be as close to a guarantee of retiring in safety and splendor as you can get on Wall Street.

1. What are your long-term goals?
2. What is the minimum amount of risk you need to take to reach those goals given your income and savings?
3. What is the optimum asset allocation for reaching those goals with the least amount of stress
4. What ETFs or funds best suit your core portfolio needs?
5. What hedges (if any) best suit your needs?
6. What blue-chip stocks can boost your portfolio fundamentals with minimum risk?

These guidelines might not be sexy; they are simple, at least in theory.

Simplicity Is the ultimate sophistication" - Leonardo da Vinci.

But it doesn't take genius or complexity to retire rich; just focusing on safety and quality first, and prudent valuation and sound risk management always.

For further details see:

The Ultimate Buffett-Style 5% Yielding Dividend Aristocrat Portfolio