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Summary

  • The passive investor who has no interest or desire to actively manage their portfolio is what the ETFOP is all about.
  • The active portfolio manager who wants to navigate their own course, select their own positions and move in and out as needed is what the BTDP is all about.
  • July began to show the cracks in the passive approach and is now disputing the argument that simply investing in ETFs will do as well as actively managing individual stocks.

In my previous update, I noted that I was surprised to see that the ETFOP held up just as well as the BTDP, more or less, and it looked like it was going to be a horse race.

Toss that out the window for now. It has been my opinion that a dividend income portfolio managed by an active investor will do better than the passive, disinterested investor. The argument is that the ETF managers can do just as well if not better than the non-professional individual investor, with far less work, risk, and effort.

While the less work and effort part is absolutely correct, the risk part is now showing itself to be more than just disconcerting. Risk, not in the sense of risky stocks, as each of the ETFs in the ETFOP has the exact same stocks as the BTDP, but an income AND total value return risk. That risk will lead to less income and less wealth.

The ETFOP Passive Update

The ETFOP currently consists of the following ETFs: Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM), SPDR Dividend ETF (NYSEARCA:SDY), WisdomTree LargeCap Dividend ETF (NYSEARCA:DLN), Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD).

The reason these ETFs were selected for this portfolio was because it held the very same dividend growth stocks as our stock portfolio. Each has excellent diversification, great allocations, and are managed by the wisdom of professional portfolio managers.

Here are the top 10 holdings in each ETF:

VYM Top 10 HoldingsDLN Top 10 HoldingsSCHD Top 10 Holdings
StockAllocationStockAllocationStockAllocation
XOM5.64%XOM3.41%XOM4.51%
MSFT3.98%AAPL3.35%MSFT4.50%
GE3.59%MSFT3.14%JNJ4.37%
JNJ3.48%T2.83%KO4.20%
WFC3.36%JNJ2.38%CVX4.17%
CVX3.04%CVX2.33%PG4.13%
JPM2.95%GE2.29%INTC3.56%
PG2.92%PFE2.13%PEP3.56%
PFE2.76%WFC2.09%WMT3.50%
T2.48%PG2.00%HD3.35%
SDY Top 10 HoldingsVIG Top 10 HoldingsCombined Top 10
StockAllocationStockAllocationStockAllocation
HCP2.92%ABT3.94%XOM17%
T2.52%PEP3.93%CVX13%
NNN2.45%PG3.84%MSFT12%
ED2.33%WMT3.78%JNJ11%
PBCT1.88%KO3.60%PG11%
MCD1.68%UTX3.59%T8%
FRT1.66%XOM3.56%KO8%
KMB1.65%CVX3.41%PEP7%
SYY1.61%MCD3.33%WMT7%
LEG1.59%MMM3.07%GE6%

As you can see, each of these highly rated ETFs consist mainly of dividend champion stocks, that have increased dividends consistently over the years. The combined holdings makes up the total allocations of the top 10 holdings, and was the foundation for building the BTDP with the same exact stocks and close to the same allocation, as the ETFOP.

Here are the July results for the ETFOP:

ETF ONLY PORTFOLIO
SymbolSharesYieldDividendYrly IncomeShare PriceTot. CostTot.Value1-AugDiv/Cash
VYM3502.80%$1.85648$62.442185422782$65.09$0
SDY3502.30%$1.70595$73.182561325822$73.77$0
DLN3502.40%$1.64575$66.712334924399$69.54$0
VIG3502.00%$1.49522$75.442639926345$75.27$0
SCHD3502.70%$1.00350$36.611276413132$37.52$0
xTotals2.44%x2690x109979112480x$0

The first area that should be noted is that no dividends will be paid in August (the far right column) and even though most of the dividend champions have increased (and paid) their dividends, none of the ETFs has reflected that, at least for now.

My question is: Where is the money? The annual income is at $2,690 and the total value of the portfolio is up about 3% since we began this experiment. The proponents of the passive approach might argue that these numbers are fine for them, since they simply set it, and let it do its "thing".

Fair enough, since there is something to be said for placing virtually no effort into managing your money, and still coming out ahead.

But at what cost (or risk)?

The BTDP Active Update

The newly updated and re-balanced BTDP consists of the following stocks: AT&T ((T)), Exxon Mobil ((XOM)), Johnson & Johnson ((JNJ)), Coca-Cola ((KO)), Procter & Gamble ((PG)), Altria (MO), McDonald's ((MCD)), Chevron ((CVX)), Apple ((AAPL)) General Electric ((GE)), Ford ((F)), Microsoft ((MSFT)), Wal-Mart ((WMT)) and Pfizer ((PFE)), Annaly Capital (NLY), American Capital (AGNC), and BGC Partners (BGCP).

This was the first month that I was actually active with this portfolio. With some simple trimming and reallocating, I was able to add 3 dividend opportunity stocks to increase my yield, as well as my income, and it hardly cost any money out of pocket (less than $1k).

You can refer to this article for those details.

I believe that a great ETF manager would do the active managing for the passive investor, right? After all, there are fees that are included in these ETFs that are paid out of the pockets of the investor. That being said, and since I am only doing some basic portfolio management, what chance do I have against these highly compensated professionals?

Well, let's take a look at the July update for our BTDP:

Buy The Dips Porfolio52 week low52 week highTarget PriceSymbolSharesOrigYieldDividendAnnual IncomeCost BasisTotal CostTotal Value31-JulTarget Price% To SellTarget Price% To SellAug Ex-D
AT&T$ 31.74$ 39.01$ 35.37T2005.60%$ 1.84$ 368.00$ 31.95$ 6,390.00$ 7,118.00$ 35.59$ 47.0025%$ 64.0050%
EXXON$ 84.79$ 103.69$ 93.41XOM502.80%$ 2.76$ 138.00$ 90.05$ 4,503.00$ 4,947.00$ 98.94$ 135.0025%$ 180.0050%
Johnson & Johnson$ 81.71$ 106.45$ 93.44JNJ1003.10%$ 2.80$ 280.00$ 86.78$ 8,678.00$ 10,011.00$ 100.11$ 129.0025%$ 174.0050%$ 70.00
COCA COLA CO$ 36.83$ 43.43$ 40.13KO2003.00%$ 1.22$ 244.00$ 37.21$ 7,442.00$ 7,860.00$ 39.30$ 56.0025%$ 75.0050%
Proctor & Gamble$ 73.61$ 85.82$ 79.72PG1003.10%$ 2.57$ 257.00$ 75.71$ 7,571.00$ 7,732.00$ 77.32$ 108.0025%$ 150.0050%
General Electric$ 21.11$ 28.09$ 24.61GE3003.60%$ 0.88$ 264.00$ 24.35$ 7,305.00$ 7,548.00$ 25.16$ 36.0025%$ 49.0050%
McDonald's Corp.$ 92.22$ 103.71$ 97.91MCD1003.50%$ 3.24$ 324.00$ 93.02$ 9,302.00$ 9,458.00$ 94.58$ 140.0025%$ 186.0050%$ 81.00
Chevron Corp$ 109.27$ 131.09$ 120.55CVX503.60%$ 4.28$ 214.00$ 111.14$ 5,507.00$ 6,472.00$ 129.44$ 166.0025%$ 222.0050%
Apple Computer$ 55.01$ 94.42$ 75.52AAPL752.25%$ 1.88$ 141.00$ 75.21$ 5,641.00$ 7,170.00$ 95.60$ 112.0025%$ 151.0050%$ 31.00
ALTRIA$ 33.12$ 38.58$ 35.85MO1005.20%$ 1.92$ 192.00$ 37.71$ 3,771.00$ 4,059.00$ 40.59$ 56.0025%$ 75.0050%
Ford Motor Co.$ 12.65$ 18.02$ 15.34F4003.20%$ 0.50$ 200.00$ 15.15$ 6,060.00$ 6,808.00$ 17.02$ 23.0025%$ 30.0050%$ 50.00
Microsoft Corp.$ 28.51$ 43.55$ 35.08MSFT2002.80%$ 1.12$ 224.00$ 40.16$ 8,032.00$ 8,632.00$ 43.16$ 60.0025%$ 80.0050%$ 56.00
WALMART$ 71.51$ 81.37$ 76.44WMT1002.50%$ 1.92$ 192.00$ 76.11$ 7,611.00$ 7,360.00$ 73.60$ 114.0025%$ 152.0050%
Pfizer Inc.$ 27.12$ 32.96$ 30.04PFE2003.20%$ 1.04$ 208.00$ 32.18$ 6,436.00$ 5,740.00$ 28.70$ 48.0025%$ 64.0050%$ 52.00
Annaly Capital$ 9.66$ 12.61$ 10.16NLY50010.70%$ 1.20$ 600.00$ 11.19$ 5,595.00$ 5,550.00$ 11.10$ 18.0025%$ 23.0050%
American Agency$ 18.84$ 24.58$ 21.84AGNC30011.30%$ 2.60$ 780.00$ 22.99$ 6,900.00$ 6,936.00$ 23.12$ 34.0025%$ 46.0050%
BGC Partners$ 5.11$ 7.72$ 6.42BGCP5006.30%$ 0.48$ 240.00$ 7.49$ 3,750.00$ 3,915.00$ 7.83$ 11.0025%$ 15.0050%
Div.&Cashxxx xxxxxx$ 2,623.00 $ 340.00
Totalsxxxxx4.46%x$ 4,866.00x$ 110,494.00$119,939.00xxxxx

Several areas of interest should be focused on:

  • In just the last month, the yield for our BTDP has gone from 3.60% to 4.46%, due to dividend increases for most of the stocks, as well as my managing of the portfolio.
  • The income generated from the BTDP also increased from $3,838 annually, to $4,866 currently, just from shifting money to some dividend opportunity stocks that offer me a higher yield. Of course the allocation for the riskier stocks is much less than the others, but active managers who take on more risk will need to manage that as well.
  • While the total return dropped for the month, overall, the portfolio has increased by just about 9% over the 5 months that we have been doing this "back of the envelope" experiment/challenge.

Some might say that it is still too early to tell, and I will agree to that, but 5 months is still 5 months, and most of the dividend champions have already increased their dividends. Where is the money in the ETFOP?

Ok, THIS month hopefully the gap will be narrowed, but the numbers are, what the numbers are.

1) ETFOP: 3% total value increase in five months, and $2,960 annual income.

2) BTDP: 9% total value increase in five months, and $4,866 annual income.

If you are an investor seeking "alpha", would you prefer being passive, or active? Where would you have preferred putting your money?

Yes, there are also the "active" ETF individual manager who might add, subtract and widen that type of portfolio, but that is not what this simple exercise is about.

It is about being passive versus being active, and how the two approaches actually work.

The Bottom Line

The cracks are beginning to become clear after 5 months and I am hoping that the passive investor is waking up to the FACT that a little effort can go a long way.

But hey, it's still early, right?

Source: Retirement Strategy: The ETF Only Portfolio Vs. Buy The Dips Portfolio: Update For July