Dale's Super 7 Dividend Aristocrat And Achievers Portfolio Core

by: Dale Roberts


I am not leaving indexing behind, I am about to embark on the strategy of index skimming in the attempt to reduce fees.

I will eventually add nearly 20 of the top 20 holdings from the Vanguard Dividend Achievers ETF - VIG.

In our largest discount brokerage account, I will start by adding 7 of the top ten holdings from Vanguard's VIG.

Does that make me a stock picker? You be the judge.

The goal will be to grab ahold of dividend growth's potential to beat the broad market with much lower volatility.

I am about to essentially leave indexing behind, at least as it relates to my discount brokerage accounts at TD Waterhouse. I will continue to invest most of our new monies in the lowest fee managed index portfolio available in Canada - the Tangerine Balanced Portfolio. We have a generous matching RSP retirement plan at Tangerine (where I am employed as an Investment Funds Associate), and I use the Balanced Portfolio for Tax Free investments.

Now make no mistake, I am not about to embark on individual stock analysis and stock selection; I am moving to index skimming to lower the fees that I pay, even though the fees on the Vanguard Dividend Appreciation Fund (NYSEARCA:VIG) has a crazy low Management Expense Ratio of 10 basis points, one-tenth of one percent.

As I suggested in this article most of an index's potential can be captured with 12-18 holdings. Many studies suggest that when we get into about 30 holdings we are capturing nearly 100% of that index. In the end we are all largely indexers, but stock pickers don't like to hear that kind of talk. From there it comes down to patience and not messing things up with too much trading.

I began tracking the top ten of VIG in this article here. Incredibly the top 10 had an impressive market beat out of the gate. From May of 2006 the Vanguard VIG top 10 still has a considerable beat of the broad market S&P 500. But there's the potential to underperform and outperform the underlying index due to the low number of holdings. That concentration is what allows for that market beat, combined with the fact that the dividend growth "strategy" has been shown to outperform the broad market in many periods. The outperformance of dividend growth does not always appear and is not a guarantee moving forward. All said, many investors certainly like the potential to outperform the market, with the accompanying lower volatility of dividend growth Aristocrats and Achievers.

The eventual goal is to hold (starting at equal weight) 20 or more of the top (largest cap) Dividend Achievers within VIG. As per my recent articles and evaluation, the top 20 has delivered a recent beat of the underlying index ETF. More articles to follow on that recent event and history. In an attempt to keep trading fees down, I will initially purchase 16-17 companies.

That said, the companies will be held in three separate accounts as on the discount brokerage side we have my personal RSP (Retirement Savings Plan) account, my wife's RSP account and a spousal RSP account where I am the contributor but my wife is the annuitant or legal holder of the account.

I will start the process by adding 7 companies to my personal RSP account. They are simply the 7 largest cap holdings of VIG at February 2015 with one minor exception. Here are those 7 companies.

Pepsi (NYSE:PEP), Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT), Johnson & Johnson (NYSE:JNJ), CVS HealthCare (NYSE:CVS), Qualcomm (NASDAQ:QCOM) and 3M (NYSE:MMM). Of course 5 of those companies are Dividend Aristocrats and 2 of those companies have a dividend growth history below that 25 year mark. CVS has increased its dividend payments from 2004, Qualcomm has increased its dividend payments from 2005. Both of those Achievers have very aggressive dividend growth in the plus 20% range over the last 5 years.

Now I did overlook IBM (NYSE:IBM) and Exxon Mobil (NYSE:XOM) for now and went to the next pick of 3M as I hold Berkshire Hathaway (NYSE:BRK.B) in another account that is loading up on IBM. The portfolio is already covered with a lot of Canadian energy. XOM and IBM will certainly be added to my personal portfolio at a later date.

In that same RSP account that Super 7 will join my only U.S. pick, Apple (NASDAQ:AAPL). Now we have a Dividend Great 8 that offers some lower volatility (history) but with some impressive growth history and potential.

Here's the Super 7 through the recession from January 1 of 2008 through December 31, 2009. Total return calculations are courtesy of low-risk-investing.com. The x axis represents duration in months, the y axis represents total return.

Yes of course, past performance does not guarantee future results. Past trends may not even materialize in the future. It should be acknowledged that the actual top 10 list in 2008 included General Electric (NYSE:GE) and (NYSE:AIG).

We can see much lower volatility for the Super 7 with a maximum drawdown below 25%, while the markets fell by 55% from peak to trough.

But that Super 7 did not give up much by way of growth in a raging bull market. Here's those 7 companies from January 1, 2009 through to December 31, 2014. The portfolio's total return was 149.6%, under-performing the SPDR S&P 500 ETF's total return of 157.9%. It is incredible how close just 7 companies can track the broad market index.

And here's the Great 8 (now including Apple) in the Bull Run from January 1 of 2009 to December 31, 2014. The portfolio's total return was 238%, outperforming the SPDR S&P 500 ETF's total return of 157.9%.

Now of course it will become a US component or core that is very consumer centric, even more exaggerated than the underlying total VIG. No worries there, I like the potential of the consumer staples and consumer discretionary sectors to outperform through a market correction. From Standard and Poor's here the S&P 500 consumer staples sector (NYSEARCA:XLP) performance vs the S&P 500 (NYSEARCA:SPY) from January of 2006 through March of 2015.

That sector concentration is also of little concern given that the total holdings within that brokerage account include a few Canadian ETFs and two companies that I simply could not bring myself to sell when I moved to indexing several years ago. Those two companies are TransCanada (NYSE:TRP) and Enbridge (NYSE:ENB). Those two companies have fortunately delivered an incredible market beat over the last decade. According to low-risk-investing.com, from January 1 of 2005 to December 31, 2014 those 2 energy plays have a total return or 329.8%, outperforming the SPDR S&P 500 ETF's total return of 108.2%. They will be forever holds, as is the most advisable strategy. Telus (NYSE:TU) and Bell Canada (NYSE:BCE) were also added as I begin to strip out the Canadian Index top holdings.

The Canadian ETFs of course are heavily weighted to Canadian financials and energy, so shoring up a Canadian market weakness (of a weak consumer sector) is fine by me. The portfolio also holds 50% bonds comprised of a corporate bond ladder ETF plus US and Canadian high yield bond ETFs. The bond component yields nearly 5%. All portfolio income is directed toward equities.

Dividend Achievers from VIG will be added to two other discount brokerage accounts and those companies are United Technologies (NYSE:UTX), Walgreens (NASDAQ:WBA), Medtronic (NYSE:MED), Lowe's (NYSE:LOW), Abbott Laboratories (NYSE:ABT), NIKE (NYSE:NKE), Colgate-Palmolive (NYSE:CL), Texas Instruments (NYSE:TXN), Monsanto (NYSE:MON), Occidental Petroleum (NYSE:OXY), Fed EX (NYSE:FDX), Caterpillar (NYSE:CAT) and EOG Resources (NYSE:EOG).

Aristocrats within that group are Walgreens, Medtronic, Lowe's, Abbott Labs and Colgate-Palmolive.

I will add one more stock pick to my personal account (I do allow myself some fun with a stock pick or three) with the addition of BlackRock (NYSE:BLK). My recent stock picking activity has delivered a very considerable market beat, I'll continue to roll the dice here and there until my luck runs out. Article to follow on BlackRock, and my luck.

Final thoughts.

For those who might consider a dividend growth index skimming strategy, the total amount of research time required? Well, how long does it take you to read 15 or 20 company names?

Amount required to spend on books and website tools = $0.

Added value of books and website tools = 0. In fact, they are a cost.

The key in the end might come down to how passive can you be when you follow or mimic a passive index? The key to success in investing appears to be the ability to buy and hold and not react when the markets correct. The greatest risk and threat to an investor is himself or herself.

I will buy and hold unless the company is removed from VIG. The proprietary financial health screens do appear to have added value recently, evidenced by the removal of Dividend Aristocrats such as McDonald's and Chevron. Any company that cuts or freezes its dividend will also be removed, of course.

All told it's a very simple strategy that, of which, I think Mr. Ben Graham would approve. He suggested that we the more cautious and unsophisticated investors simply buy companies that had a long history of paying dividends. That dividend history does most of the work, no analysis required. Remember the no-thought, no analysis Dividend Aristocrat index has a wonderful history of beating Mr. Market. See the Sure Dividend site for more on that.

In fact detailed analysis and 'thinking' seems to lead to underperformance according to my observations of the stock pickers on Seeking Alpha. I'll continue to follow the indexing route suggested by Mr. Graham and his most famous student (and my business partner), Mr. Warren Buffet.

As I have written in a few articles ... Investing, it ain't Rocket Surgery.

Thanks for reading. Happy Spring :) Always know your risk tolerance level, and perhaps consider some international diversification.

And be careful out there ...


{Well this just in, when I did re-check the updated holdings from the Vanguard site, I did see that Exxon Mobil and Occidental were not listed as holdings}. I had previously suggested the possibility of XOM being removed by the financial screens... and there you go. That is more than interesting. There are other interesting additions to the top holdings. This event will not change my initial 7 selections, but it may impact my future selections. Article(s) to follow.

Disclosure: The author is long SPY, EWC, EFA, BRK.B, AAPL, VIG, ENB, TRP, BCE, TU, KO, PEP, QCOM, MMM, CVS, WMT, JNJ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dale Roberts is an Investment Funds Associate at Tangerine Investment Funds Limited. Dale's commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process. The views expressed are personal and do not necessarily represent those of Scotiabank.