We have recently reviewed a number of stock portfolios to create a set of references for comparison. There are several approaches to long term investing and it is our goal to provide quantitative insight into the different types of portfolios. In this article, we are going to start comparing the performance of a set of long term buy and hold stocks with a reference ETF portfolio.
The stock selections are based on long term blue chip stocks that deliver dividends and consistent results leading to increasing company value reflected in the stock price. We are not looking for stocks that might peak soon because we want to buy and hold. Against that, we are comparing a globally diversified set of ETFs that also provide dividends for income as well as increasing value as the markets rise -- note that ETFs are index based instruments so are not selected on the basis of a winning company.
The stock selections which have been individually reviewed are:
The Street 10 Dividend Stock: Miriam Reimer of theStreet.com listed 10 companies raising their dividends at the end of April 2011. This is a portfolio that we started tracking.
- Hewlett Packard (NYSE:HPQ)
- Silver Wheaton Corp (NYSE:SLW)
- Oracle (NYSE:ORCL)
- Fifth Third Bancorp (NASDAQ:FITB)
- Qualcomm (NASDAQ:QCOM)
- Walmart (NYSE:WMT)
- Staples (NASDAQ:SPLS)
- Bank NY Mellon (NYSE:BK)
- Gold Corp (NYSE:GG)
- Procter and Gamble (NYSE:PG)
Ten Dividend Stocks From Seeking Alpha readers: Seeking Alpha readers challenged the Street.com's list and came up with their own which we have also started tracking.
Fund in this portfolio
- Coca Cola (NYSE:KO)
- PepsiCo Inc (NYSE:PEP)
- Johnson Johnson (NYSE:JNJ)
- Wal-Mart (WMT)
- Altria Group (NYSE:MO)
- McDonald's Corp (NYSE:MCD)
- Procter and Gamble (PG)
- Abbott Labs (NYSE:ABT)
- British American Tobacco (NYSEMKT:BTI)
- JPMorgan Chase & Co (NYSE:JPM)
- PepsiCo Inc (PEP)
- Procter and Gamble (PG)
- TJX Companies, Inc. (NYSE:TJX)
- Public Service Enterprise Group Inc (NYSE:PEG)
- Medtronic Inc (NYSE:MDT)
All of these are high quality stocks and there are some repeated choices (PG, PEP, WMT). All of these selections are likely to provide stable portfolios for the long term investor. We contrast this with an ETF portfolio that doesn't select a company but selects asset classes.
|Fund in this 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)|
This dividend bearing portfolio has U.S., international and emerging market equities as well as real estate. Note that while there is a fixed income portion, to make a fairer comparison, we will exclude them for this comparison although we would recommend at least 20% of the portfolio be dedicated to fixed income assets.
- P 10 Dividend Stocks From Seeking Alpha Readers - Total of $10K invested equally in each stock
- P 5 Stocks for the Next Three Decades - Total of $10K invested equally in each stock
- P The Street`s 10 Dividend Stocks - Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Risk Profile 0 - Above funds using TAA (50% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Risk Profile 0 - Above funds using SAA (25% for each of the four asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Risk Profile 0||20%||158%||17%||91%||15%||77%|
|P 10 Dividend Stocks From Seeking Alpha Readers||27%||277%||10%||47%||11%||54%|
|P 5 Stocks for the Next Three Decades||14%||133%||5%||21%||7%||32%|
|Retirement Income ETFs Strategic Asset Allocation Risk Profile 0||20%||180%||8%||23%||6%||20%|
|P The Street`s 10 Dividend Stocks||26%||136%||6%||14%||3%||7%|
This list is sorted in descending order of the five year Sharpe ratio - i.e. what has given the best risk adjusted returns over a five year horizon. We have been seeing big annual leaps in portfolio values through the recent bull market but the question is whether now if we will seem them in these more challenging times. This is where a strategy, not just a selection. is important.
If we compare the top two long term performers, we see that using a momentum-based approach delivers both the best returns and the best risk adjusted returns. This is a proven, long term strategy that requires monthly or quarterly review. The dividend stock portfolio from the Seeking Alpha readers is second across the board with the caveat that it has done very well in the past year. This is for those who want to select stocks of good companies and stay with them. This requires less intervention unless and until there is a significant change in the fortunes of the company (News Corp. anyone?).
A long term portfolio with a strategy that is understood and followed is the best way to go about long term investing. There isn't only one way and you can see the range of returns from selecting a long term set of companies or a strategy based on market indices with ETFs.
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: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.