A 5 Dividend Stock Portfolio: How Does It Stack Up?

Includes: JNJ, KMB, MAT, MCD, SYY
by: MyPlanIQ

Matt Koppenheffer has previously listed five stocks for long term dividend-based performance. As we continue through these choppy waters, dividends are increasingly important to generate income even while valuations fluctuate.

He is now suggesting another set of dividend royalty -- stocks that you can hold for the long term and that will deliver an income stream through good and bad times. We will measure the performance of this new selection and compare it with his last set that he recommended a couple of months ago.
We have evaluated a number of stock portfolios that have different properties. The goal is to find a portfolio that can be held for the long term and will deliver risk adjusted returns. It's important to look at the volatility as much as the returns. When things are going well, we may want to chase the growth but as soon as there is a downturn, the unpleasant grip of fear can make itself known.
We also want to compare this with a portfolio of Dividend bearing ETFs that are spread across multiple asset classes. This brings a wide degree of diversification and dividends for income which will reduce the volatility without sacrificing too much performance. Of course when it is so broadly diversified and matched to market indices, you don't see the spikes either way.
We will enter this portfolio and compare it with his previous selection of what he considered five stocks for long term dividend performance.


Johnson & Johnson (NYSE:JNJ)
McDonald's (NYSE:MCD)
Kimberly-Clark (NYSE:KMB)
Sysco (NYSE:SYY)

We will also compare this with our ETF dividend portfolio benchmark:


Fund in portfolio

REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)
Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Fool's 5 Dividend Payers to Save your Portfolio 20% 203% 13% 63% 13% 69%
Retirement Income ETFs Tactical Asset Allocation Risk Profile 0 20% 158% 17% 91% 15% 77%
Fool's 5 Dividend Payers That Are No Gamble 19% 179% 13% 52% 3% 7%
Retirement Income ETFs Strategic Asset Allocation Risk Profile 0 19% 180% 7% 23% 6% 20%

When we look at the table we first of all note that Matt's first set of stocks have delivered better historical returns than his second. In fact, when you look at the risk adjusted returns (Sharpe ratio), the second portfolio is getting better but it is not catching up with his first portfolio so there has to be some compelling reason to change other than returns.

We also note that the ETF portfolio delivers good results are well. Note that our normal recommendation would be to hold 20-40% of the value in fixed income which reduces returns but also reduces risk. This is the same portfolio with 40% dedicated to fixed income and the equity based assets reduces proportionally.

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Strategic Asset Allocation Moderate 15% 190% 6% 30% 5% 26%
Retirement Income ETFs Tactical Asset Allocation Moderate 14% 180% 11% 96% 11% 80%

This shows the same ETF portfolios with 40% in fixed income. You can see the lower returns but generally higher Sharpe index.

Three Month Chart

click to enlarge

One Year Chart Three Year Chart Five Year Chart

The graphs reinforce the fact that over the long term, this new portfolio is a considerable gamble -- gambling that recent performance will continue and will overtake the historical strong performance of the others. Although all of the stocks are blue chip choices, this is not a bet I would make.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: Author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.