In July 2017, I wrote what has turned out to be, in terms of page views, my most popular article ever for this platform. That article? 20 Top Stocks For A Monthly Dividend Portfolio. At the conclusion of the article, I revealed that I had 'put my money where my mouth was;' selling all dividend-focused ETFs I held in my retirement portfolio in favor of the 20 featured stocks plus an additional 2 "bonus stocks" I suggested.
Segue To 2019
Earlier this year, based on a review of some investing wisdom from John C. Bogle and Peter L. Bernstein, I offered Seeking Alpha readers my take on the perfect portfolio for the next 10 years. As is (I hope) the case with most investors, I continually strive to learn and grow. And, in the course of preparing these last two articles, I believe I did.
However, having completed the above 2 articles, along with follow-ups suggesting ETFs for the U.S. stock, international stock, and bond allocations in the 'perfect portfolio,' I was left with some nagging questions.
- How might what I shared in 2017 stand up if examined in the light of my more current writings?
- Should I have simply kept the ETFs I started with? What if I put the 22 stocks I selected, in the weightings in which I currently hold them, up against the S&P 500?
- To go a step further, what if I extended the backtest as far as I could backwards, even beyond the last two years?
To be honest, I was afraid to find out. But, I decided, I had to. Why? Because if there was a better way, I owed it to myself to make a change. After all, in the words of Peter L. Bernstein, featured in my article Bernstein And Bogle On The Search For The Perfect Portfolio:
Many aspects of investing are fun, but your future wealth isn’t a game. You should manage it in the most cold-blooded fashion.
And so, I did. But, before we get to the results, a slight detour is necessary. You see, I have made one (and only one) change to what I shared in 2017. I should first explain that, and then we will circle back for the results.
Replacing General Electric with CVS
Oops, I guess I gave away the secret pretty quickly, didn't I? But, that's what it was. In January 16, 2018, I sold my shares in General Electric (GE) and replaced them, starting on February 14, 2018, with CVS Health Corporation (CVS).
I held on to GE even through the dividend cut in late 2017. However, when news broke in early 2018 concerning a $15 billion shortfall in their insurance reserves, I decided to move on. Prior to that point, while I knew GE had issues, I believed management had a handle on them and that new CEO John Flannery would be able to turn things around. This shock caused me to very quickly rethink that view. Turns out, that rethink proved to be beneficial.
Ultimately, I replaced GE with CVS. I was intrigued by their planned merger with insurer Aetna. I liked the possible synergies, as well as the concept of opening 'mini health clinics' in the stores. I understood there was a level of uncertainty and risk involved, but I was thinking in terms of at least a 10-year time horizon, and I was OK with that.
Here's the interesting part of all of this. While, at least through today, I have come out ahead by making this move, neither option has been anything to write home about. Having sold all of my GE shares north of $18, I've enjoyed missing the subsequent ride down to under $7 at one point along the way to $9.57 as I write this. However, CVS has had its struggles as well, and on a share price basis I am down roughly 15% on the shares I hold (offset slightly by dividends received). (Real-time addendum: CVS is soaring by roughly 6% today as I write this on the heels of a strong earnings report.)
Why am I sharing all of this in such detail? Because I want you be clear that the results I will next share are reflective of all of it, including what in hindsight I can only admit were some of my less brilliant decisions. In some way, I hope that is encouraging to you.
Backtesting The Results
To perform the analysis, I had to first enter the relative weightings of each of the 22 stocks in Portfolio Visualizer. I decided to do so as of my published Q1 2019 peek into my personal holdings, so readers would have something to tie to. In addition to the high level summaries detailed in that article, I also maintain a subset on the same spreadsheet in which I track the relative weightings of just the 22 stocks. Here it is, sorted by weight from largest to smallest.
Source: Author-Generated Graphic
As can quickly be seen, while most of the 22 are relatively equally-weighted, ranging between 4-5% of the total, Apple (AAPL) and AT&T (T) are fairly heavily weighted. This is because I own these two in both my investment and retirement accounts. The other 20 are purely in my retirement account. I will also note that I added a small amount to CVS early in April, after this report was finalized, bringing it up to very slightly less than AbbVie (ABBV) and Wells Fargo (WFC).
Here's how the 22 stocks look entered into Portfolio Visualizer, but displayed alphabetically. If you care to, you can cross-tie the relative percentages. I promise you, they tie. This selection becomes Portfolio 1 in the analysis.
Source: Portfolio Visualizer Backtest
Some details on the analysis, before we go any further. At the outset of the article, I said that I would take it back in time as far as I could, so I could get an idea of how my selections had performed over an even longer span of time than just the period I have held them. Turns out, the backtest was able to go back as far as January, 2014, limited by the available data for AbbVie. In the backtest, all portfolios were rebalanced annually and all dividends were reinvested. The total period covered by the backtest, then, is 5 years and 3 months, from January 2014 - March 2019. Interestingly, if you look at roughly the midpoint of 2017, when I began my portfolio, the 3 are very close to each other, meaning a large portion of any outperformance has actually happened since that time.
I put my 22 stocks (Portfolio 1) up against two other portfolios. Portfolio 2 is 100% SPDR S&P 500 ETF (SPY). Pretty straightforward, eh? Portfolio 3 is an interesting variant I set up to simulate a 50/50 portfolio of my 22 stocks combined with the 50% allocation to long-term U.S. Treasuries suggested in the 'perfect portfolio' article linked in the 2nd paragraph of this article. I did this by first cutting the allocation for each of my 22 stocks exactly in half. For example, AAPL's allocation, as opposed to 7.30%, became 3.65%, and so forth. I then filled the remaining 50% with iShares 20+ Year Treasury Bond ETF (TLT).
Without further ado, here are the results.
If you trace the initial 2017 article back even further, you will find it has its roots in an article I wrote where I aggregated the results of the filtering criteria for five top-notch dividend-focused ETFs, and used that as my selection criteria. The end result has proved to be an interesting combination of higher-growth, but still mature, companies along with some companies that grow more slowly but pay fairly substantial current dividends.
As can be seen, the base results from that exercise have worked out quite well. I might note that, compared to those 5 ETFs as well as SPY, which are all market-cap weighted, my personal weightings lean a little closer to equal-weighted.
Compared to the S&P 500, this portfolio has outperformed in basically every respect. With an ending value of $17,865 from our hypothetical initial balance of $10,000, the portfolio outpaced the S&P 500 by some $898. More than that, however, it has done so with less volatility. In particular, the comparative 'worst year' and 'max drawdown' numbers are worth a second look. All of this results in higher values for both the Sharpe and Sortino ratios.
Next, however, let's look at the results for Portfolio 3, based on concepts from the 'perfect portfolio' series of articles. You may find this comparison of great interest. Over 5 years and 3 months, Portfolio 3 only trails SPY by some $955. But trace your eyes across the rest of the line. Look at all the risk/reward comparatives. Finally, look at the Sharpe and Sortino ratios.
What do these mean? In short, that the amount of reward in Portfolio 3 is superior to the other two portfolios when the amount of risk assumed is factored into the equation.
Let's bring this all full circle. I went through this entire exercise for a reason. At some level, this article synthesizes an article I wrote in 2017, and which it appears I can hold forth proudly today, with the learnings from Bogle and Bernstein that went into the 'perfect portfolio' series. How so?
In that, while it is great to look backwards, it is far more important to look forward. As both Bogle and Bernstein featured, the constant of history is surprise, and the truth is that no one can predict what will come next with 100% certainty. If one accepts the truth of those statements, the next questions become: How do I structure my portfolio to deal with this? What is my level of risk tolerance? What unexpected surprise might cause me to become weak in the knees and do something stupid, from an investing standpoint?
I'm happy with the 22 stocks I selected for the dividend-focused portion of my portfolio. However, in my later 50s, I am starting to look more closely at the end of my working career, and whether my portfolio's risk/reward ratio is appropriate for the road ahead.
I hope all of this has given you something to think about.
As always, until next time, I wish you . . .
Disclosure: I am/we are long AAPL, ABBV, CVS, T, WFC, TLT. 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.
Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.