We continue to experience the new normal of constant volatility and low growth. It remains important to maintain focus on an investment strategy and not be spooked into making emotional moves. Morgan Housel of the Motley Fool looks companies that are likely to weather these storms well while delivering dividends that beat most bonds.
The S&P 500 roughly has an earnings yield of 8%. 10-year Treasuries yield 1.5%. The discussion between bonds and stocks continues with lively pace but having an increasing slant toward safe companies with strong dividends makes a great deal of sense.
Housel's three stocks and one ETF selection are as follows:
- Johnson & Johnson (JNJ), which has a dividend yield of 3.9% and a stellar record of dividend payouts.
- Paychex (PAYX), the payroll processor, which has a 4.4% dividend yield. The company is not in the same class as JNJ but is deeply embedded into U.S. companies.
- Pfizer (PFE), which now yields more than 4% as well. This is a company with limited growth prospects but is generating cash now. Drugs are needed whether it's a bull or a bear market.
- Vanguard Dividend Appreciation ETF (VIG). I have long been an ETF advocate and most of my investing is in ETFs. I am increasing the amount in stocks, but the benchmark comparison is an ETF portfolio and VIG is one of the benchmark ETFs.
I am going to compare the three stock selections with VIG and our dividend-bearing ETF portfolio. This will give us a comparison of diversification within a particular asset class (U.S. dividend stocks) and with other asset classes including real estate, emerging markets, international stocks, and some bonds.
| Asset | Fund in This Portfolio |
|---|---|
| Real Estate | (ICF) iShares Cohen & Steers Realty Majors |
| Cash | CASH |
| Fixed Income | (TIP) iShares Barclays TIPS Bond |
| Emerging Market | (VWO) Vanguard Emerging Markets Stock ETF |
| U.S. Equity | (DVY) iShares Dow Jones Select Dividend Index |
| U.S. 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 |
- Dividend Stocks to Consider -- Total of $10,000 invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes; funds selected based on price momentum)
Portfolio Performance Comparison
| Portfolio/Fund Name | 1 Week Return* | YTD Return** | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | 0.3% | 4.4% | 8.7% | 95.7% | 13.1% | 114.7% | 7.0% | 55.8% |
| Dividend Stocks to Consider in Turbulent Times | 1.9% | 9.4% | 14.9% | 82.2% | 13.7% | 88.0% | 2.4% | 9.5% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 0.2% | 5.8% | 2.5% | 19.0% | 11.1% | 94.1% | 1.8% | 7.9% |
| VIG | 0.8% | 6.1% | 4.1% | 19.3% | 14.3% | 84.6% | 2.0% | 6.8% |
*Not annualized
**YTD = Year to Date
Given that this selection of stocks is fire and forget -- no rebalancing is performed -- it certainly performed reasonably over all time horizons compared to the benchmark. The tactical asset allocation wins in the longer term, but it requires monthly adjustments (or quarterly if monthly is too much).
Three-Month Chart
One-Year Chart
Three-Year Chart
Five-Year Chart
I don't like the fact that there are only three stocks in the selection. That is too little diversification for my taste. However, as proxies you have a dividend aristocrat, a company with growth potential, and a cash cow that may have trouble in the long term but will generate income over the next few years.
Building a portfolio around those choices looks like a good starting point to me.
You can find more analysis here.
Disclaimer: 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.
