Tuesday, September 20, 2016

ETF versus Semi - Active Managed Income Portfolios

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.


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.

M* MoneyMadam