The purpose of this post is to present a simple comparison
of two income investing strategies. One
strategy is totally passive and employs two well respected ETF’s. The other strategy uses individual stock
picking. I call that strategy a “semi-active
managed” strategy. Every stock selected
in the semi-active strategy is held no matter what. All spin offs and splits are included in the
portfolio. In that way, it is
semi-actively managed as a long only portfolio with no trades.
Accumulate over five years
Beginning in November, 2010 and continuing for the next 12
months, I added one stock per week to the “semi-active” portfolio. I used my standard four criteria of dividend
yield 3% or greater, EPS (earnings per share) greater than dividend paid out,
history of dividend increases and D/E (debt to equity ratio) of 1 or less or
equal to industry standard. This is
called the 2011 model portfolio.
Simultaneously, I created two parallel portfolios using SDY
and VIG two ETF’s with similar goals to my portfolio. I added the number of shares of these two ETF’s
equal to the amount invested in a given stock.
For instance, the very first stock I picked was Microchip
Technology, MCHP. This stock was added
on November 12, 2010 at a basis of $33.55.
The post was published on November 14, 2011. http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html
Simultaneously, I started the SDY and VIG portfolios. I needed a bench mark against which to
compare my portfolio and I chose SDY an ETF that concentrates on dividend
income and VIG which concentrates on dividend increases. SDY on November 12, 2010 closed at
$51.37. I added 65.437878 shares of SDY
equal to the $3,355 invested into MCHP. VIG closed at $50.60 and I added 66.304 shares
also equal to the $3,355 invested into MCHP.
I continued these multiple channels of investing over five
years. The total basis is $710,000 in
all three portfolios M* (my stock picks), SDY and VIG.
Capital Gain Results
The table below shows the result of holding these three
portfolios as of midday (1:32PM Eastern time) on September 20, 2016.
You can see that all portfolios performed quite well. Picking stocks did beat both SDY and VIG by
between 8 and 10 percent. Actual dollar
difference is between $58,000 and $72,000 over the five years.
Will having an average of $65,000 more in your portfolio
make a difference in five years? Only
you can determine that. However, I find
solace and comfort in all three approaches.
I have often encouraged people who do not have the time to invest by
themselves and do know how to direct an investment adviser or cannot find one
they trust, to use these two ETF’s and now I feel good about the results.
Readers have to consider that these five years have been
very good to equity investors as well as bond investors. It was hard to lose money over these five
years.
As one of my former clients recently told me “I don’t expect
to beat the market, I just want to at least keep up.” All three portfolios “kept up.”
Dividend Increases
As I am an income investor first and foremost, I like
capital gains but I really like income increases. Trust me, your expenses will double every 20
years so if you expect to retire at 60 and live to be 100, your expenses will
double twice. Let’s see how these two
approaches did on income increases.
Comparing dividend increases is a complicated task. You don’t buy everything at the closing price
on 12/31 of a given year and then look at how that holding performed using
12/31 values of the next year. This is
how the experts track mutual funds etc.
You buy every week or every month sometimes you wait 90 days for the first
dividend. I tried to simplify the
process as you can see in the table below.
The table above shows that VIG is the winner on dividend
increases. SDY is the loser and M* came
in second. To be fair to SDY, I used
only dividend payments in this analysis.
Keep in mind that SDY also delivered some healthy capital gain
distributions in 2014 and 2015. My 2011
portfolio suffers because several stocks were bought out and that cash sits in
the portfolio (no transactions allowed in order to report good data) not creating
any income or capital gain.
Conclusion:
For me, I prefer using my four criteria (which I adjust and
update each year) to pick income stocks for the majority of my income investing
portfolio. However, in certain accounts
that have limited investment options like my Health Savings Account, I use SDY and
VIG in equal amounts for my investments.
