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I am an electrical engineer currently employed in the defense industry. I have been a minor partner in a local business for the past eleven years, where I keep the books. I have followed and studied the stock market for over 20 years, developing a trading style which suits my personality. My... More
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  • 30 Stock DGI "Buy And Hold" Portfolio Vs. FSEMX - 2/1/1998 To 7/31/2013 3 comments
    Aug 23, 2013 9:02 PM

    There has recently been a vigorous debate in the comment section of one of David Van Knapp's (DVK) articles wherein one commentor named User 427801 has been insisting that simply buying and holding the ETF FSEMX, which he describes as being a "mid/small cap extended market fund", would best a Dividend Growth (NYSE:DG) based ETF.

    DVK's original article reviewed a few self proclaimed Dividend Growth ETFs and pointed out how they all produced much poorer returns than a well constructed portfolio of select DG stocks, which is an approach that a great many regular readers of the SA Income section follow.

    Several readers, myself included, attempted to persuade User 427801 that we believe a well built portfolio of DG stocks will outperform his ETF over an extended period, which he continues to deny. I gave an example of a small 10 stock portfolio which outperformed FSEMX since 2000 and was again denied for various reasons, chief among them the time frame of the comparison and a lack of stocks that would have been held before the 2008 market meltdown but performed poorly afterward.

    Since User 427801 didn't like my initial try I decided to repeat the exercise with a larger 30 DG stock portfolio which included some of the "loser" DG stocks that got beaten up in the 2008 market meltdown (financials, etc.) and over the entire lifetime of the FSEMX ETF (from 2/1/1988 to 7/31/2013). Here are my results:

    My 30 Stock portfolio consists of the following initially equal weighted holdings:


    The last five holdings (bolded and underlined) are my "stinker" stocks representing holdings that at one time may have been a good DG stock, but which fell on hard times and provided poorer performance afterward. Normally a DG investor would trade these stocks out of a portfolio soon after they stumbled and replace them with a better DG stock, but I have left them in for the duration just to make it a fully "Buy and Hold" exercise. Those 'stumbling' stocks represent 16.67% of the initial investment and are held more than 40% of the entire duration after they 'stumbled'.

    Notice that all of the DG stocks are steady performers and not the latest high octane growth stock. So that "mid/small cap extended market fund" should clean up, right?

    Not so fast . . .

    Here are the final results:

    Holding period 2/1/1998 to 7/31/2013, Initial investment of $10,000 per stock and $300,000 in FSEMX, all dividends DRIP'ed.

    FSEMX: Final value of $884,980. Total Return of 7.7% CAGR.

    30 DG Stocks: Final value of $1,214,900. Total Return of 10.0% CAGR.

    Anyone wishing to perform their own comparison, or double-checking mine, can use the same website I used to try out their own choices of stocks, funds, or ETFs:

    Comments are welcome. There's always something to learn from an exercise like this. I was actually surprised that putting 1/6-th of the initial portfolio into stocks that got whacked in the 2008 meltdown didn't drag the whole group down more (AIG lost over 92% of its initial value). Diversification certainly helps in that regard even when the poor performers continue to be held during the last 40+% of the time interval.

    FWIW, 22 of the 30 stocks individually outperformed FSEMX over its lifetime. I guess there's something loveable about those big, boring DG stocks after all.

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Comments (3)
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  • David Fish
    , contributor
    Comments (9320) | Send Message
    Just a technical point: I don't think that FSEMX is actually an ETF per se, but an open-end mutual fund, which typically has a symbol of five letters ending in X (for equity funds).
    24 Aug 2013, 03:55 AM Reply Like
  • Bob Wells
    , contributor
    Comments (7890) | Send Message
    Smarty ....


    Great exercise! I agree that everytime I take on a back test project like this one I learn something. Important to note that when you're retired and drawing income this under performance becomes huge particularly since your portfolio yields probably twice as much as his fund and had inflation beating dividend growth.


    Let's see....with the fund I get less performance. With the fund I pay
    fees. With the fund I sell shares equal to 4% plus inflation.


    With your portfolio I got better performance. Paid no fees. Sold few if any shares for required income.....


    Now tell me again which approach is better....


    Take care and thanks
    24 Aug 2013, 09:11 AM Reply Like
  • Smarty_Pants
    , contributor
    Comments (3254) | Send Message
    Author’s reply » "Important to note that when you're retired and drawing income this under performance becomes huge particularly since your portfolio yields probably twice as much as his fund and had inflation beating dividend growth." - Bob Wells


    Good point Bob. For completeness here are the yield numbers for the two approaches based upon current yields (I'm not going to bother looking up historic yield data):


    FSEMX yields 1.5%
    30 DGI stocks yield 3.53%


    Also note that neither my DG Stock performance nor its yield include the contributions of any stock spin-offs over the last 15 years. Off the top of my head I can think of these recent spin-offs:


    ABT spun off ABBV
    COP spun off PSX
    MO spun off KRFT and PM


    There are probably others as well, but I'm not familiar with them. These spin offs boost the CAGR and income as well, putting FSEMX even farther behind.
    24 Aug 2013, 01:03 PM Reply Like
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