The DG50: Repurposed As An Income Portfolio In Retirement

|
Includes: SCHD, VDIGX, VIG
by: FinancialDave
Summary

This is an investigation of how the DG50 would have done as a source of retirement income.

Comparing the DG50 to other forms of retirement income.

Comparing asset allocations of these other forms of income.

In December of 2014, Mike Nadel put together a well thought out project known as the Dividend Growth 50. That project took the top recommendations of 10 Seeking Alpha contributors, and melded them into a static portfolio of 50 stocks with the dividends automatically reinvested. You can find Mike’s own latest review of the DG50 in this article.

In the last 4 years, I have written six different articles contrasting the Total Return growth of the DG50 to other investments. This is not another one of those. This is a request that comes directly from the Seeking Alpha audience.

Over the years, there have been a number of comments looking for what the income would have been in the case where you actually were spending the dividends from the DG50 in retirement. In the above latest article by Mike you can find this comment by PBS85:

“I totally get what you're saying. You'd like to see what was the dividend income percentage gain of the portfolio without reinvested dividends as another metric.”

The purpose of this article is to finally do just what the Seeking Alpha audience has been asking for over the last number of years. This will be done not by backtesting some theoretical portfolio but by comparing in a forward-looking manner the last 3 years of dividend income as if all the dividends were spent. Not exactly a “real portfolio test” but about as close to it as I can get. I will then contrast that to some other investments such as the Vanguard Dividend Appreciation ETF (VIG), Vanguard Dividend Growth (VDIGX), and the Schwab US Dividend Equity ETF (SCHD).

Before I go further, I want to thank Mike Nadel and the other contributors for their work in developing the DG50 portfolio and personally acknowledge Mike’s willingness to always reply with data when I am looking for it. I continue to be impressed by the collaborative spirit of the Seeking Alpha community.

Not to bury the lead but there does seem to be one income stream in the below chart that you might prefer if you were the one spending the income.

Let’s look at some ground rules before looking at the answer.

Ground Rules

I will take the starting position of the DG50 at 2015 year-end and lock in the share counts of the 50 stocks at that time. I will give the DG50 a slight advantage in year one by allowing dividends paid in January 2016 whose ex-date was in the previous year. Normally, you would not receive that dividend if you hadn’t bought the stock before the ex-date. The total amount of that extra income was about 3% of the total, if that matters to you.

Nasdaq.com was used as the source of dividend data. In a few cases, the dividend data there was not 100% accurate and I used other sources including the company’s own website, or my own data for stocks that I own. No share counts were changed from the opening number unless necessary due to some Merger and Acquisition activity. I will point out this activity below. In the case of VIG, VDIGX, and SCHD, I used as a starting value the average cost basis of the 50 stocks of the Dividend Growth 50 which was $521.15 on the January 1, 2016 starting date.

Starting Positions

The starting positions from 12/31/15 were taken from Mike’s article here. I made only two changes to those totals. One was I doubled the BAX shares to 14.694 and added $135 cash to essentially undo the spin-off and acquisition by SHPG of the BXLT shares. Later in the fourth quarter of 2016, I added $34.60 in cash which was the HCP spin-off of QCP. This leaves the starting portfolio for January 2016 with the original DG50 stocks with the minor change of KRFT to KHC.

Asset Allocations Today

For the DG50:

Source: Morningstar.com - DG50 Portfolio

Source: Morningstar.com - DG50 Portfolio

For VIG:

Source: Morningstar.com - VIG

For VDIGX:

Source: Morningstar.com - VDIGX

For SCHD:

Source: Morningstar.com - SCHD

From the above data, you can see that the stock style diversification for the DG50 and SCHD are quite similar with a very large tilt toward value stocks in relation to growth stocks. In fact, the actual “tilt” number is 3.27:1 for the DG50 and 6.0:1 for SCHD. As far as VIG goes, it is exactly equal between value and growth stocks, so no advantage one way or the other. The Vanguard Dividend Growth Fund (VDIGX), as its name implies, has a slight tilt toward growth on the order of 1.45:1.

Why is this data useful? It is useful because occasionally, the market favors Value and other times it might favor Growth stocks. Having two portfolios with similar asset allocations will help in comparisons, all other things being equal. One other interesting comparison from the above is the fact that the size factor of all four portfolios is decidedly in the large-capitalization camp.

So given all the above, what does it mean? In my opinion, none of the comparison funds are an exact match as a benchmark for the DG50, however since this is a study of dividend income, I would tend to lean towards the SCHD as a closer match because of its tilt more to value stocks. Only time will tell. This leads us to my purpose for this article, which is to study income generated and spent in retirement from the above four portfolios of stocks. My goal is not to study the DG50 as a vehicle for portfolio growth as it is being used by Mike, but to see how it stacks up as an income generator in retirement.

Comparison Data

Though the DG50 was started on December 16, 2014, I have begun this comparison from the first trading day of 2016 to allow some other comparisons in part 2 of this series. Below are the tables and data that I have gathered for the three complete years of dividends to the end of December 2018. I don’t expect anyone to conclude any long-term trends from these three years’ worth of data, but it is interesting.

As you can see from the above data there is certainly one portfolio that favors the person looking for more income in retirement and that is the VDIGX. In fact, even in the case where Mike compared the DG50 to VDIGX on a total return basis over the whole 4 years, VDIGX came out a slight winner and Mike’s comment was:

“… it’s an option for those who want to own DGI-type companies but don’t want to deal with individual stocks.”

I would add that it also seems to be a very good choice for the person wanting to spend the income as well.

Below is the opening chart of the above data with the labels added:

I will leave it to each individual investor to determine if any of these investments suit their own investment plan.

Conclusion

This study is only just starting and I hope to be able to continue it in the future as an example of some alternate strategies to get you spendable income in retirement. As I am already retired, this article is particularly relevant to me. One hundred percent stock portfolios such as these can be quite volatile, from a price perspective, but from an income perspective they can be much less so.

In part two of this series, which I hope to have out next month, I will compare another 3 ways to generate income in retirement including two real portfolios that I am using myself to generate income.

Each person must understand their needs and be able to choose the strategy that best fits their needs. Just because something works for one person does not make it suitable for the next. Often money may be tight during retirement, and which strategy you choose can make a difference. However, if the strategy is volatile beyond your tolerance level that in itself can sometimes make that strategy unsuitable for you.

You also must realize that past performance is no guarantee of the future, and in that regard, all the information presented here is past performance. The information provided here is for educational purposes only. It is not intended to replace your own due diligence or professional financial advice.

Disclosure: I am/we are long VDIGX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.