- Investigating several sources of retirement income.
- Comparing the DG50, DGP, and my income portfolios.
- How they stand-up against the S&P 500 index.
- Just how important is TotalReturn.
This article is a continuation of one I wrote last year comparing just the DG50 by Mike Nadel to the professionally managed funds VIG, VDIGX, & SCHD. This article was called The DG50: Repurposed as an Income Portfolio in Retirement and can be found here.
Here I will add in a portfolio by David Van Knapp, which he calls the DGP, to see how it would have fared over the last four years as an income portfolio. Then I will add in my own two income portfolios, which I call the DGI10 and TR7. My latest report on the DGI10 & the TR7 is here. Finally, in this part two, I will put up against these four real-life portfolios the winning professionally managed fund from the three studied in part one of this series, which turns out to be the Vanguard Dividend Growth Fund (VDIGX) and add in an S&P 500 index fund (VOO) just for good measure.
You can find Mike's own latest income review of the DG50 in this article. His data, of course, will be different than mine as he is not spending the income at this time. David's DGP data is much harder to come by, so I will explain that starting point in more detail below and any minor changes to it. David’s DGP portfolio also has no income being spent at this time, but the dividends are not automatically reinvested like Mike’s. David Van Knapp reinvests the dividends based on his criteria when the cash builds up to around $1000 in his account.
The purpose of the article is to satisfy the questions of some readers who want to know how much income these portfolios would generate if the income were spent. Satisfaction will not come from backtesting some theoretical portfolio, but by comparing in a forward-looking manner, the last four years of dividend income as if all the dividends were spent. Not exactly a "real portfolio test," at least for the DG50 and the DGP, because that income is not being spent. It is a real spendable income test for my own DGI10 & TR7 since I am spending the income. I will then contrast that to the professionally managed mutual fund, VDIGX, and the S&P 500 index VOO.
Before I go further, I want to thank Mike Nadel and David Van Knapp for their work in developing the DG50 and DGP portfolios.
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 details.
I will take the starting position of the DG50 at the 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 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 website, or my 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, which I used in part one, I pick out the clear winner, which is VDIGX, and add VOO as an index baseline. I chose a new starting portfolio value of $100,081 to align with my two added portfolios, which I call the DGI10 and TR7. All dollar amounts were scaled up to the new starting value. The scale factors were 3.8407 for the DG50 and VDIGX from last time, while the DGP got a scale factor of 1.2169.
For the DG50, 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. That left the starting portfolio for January 2016 with the original DG50 stocks with the minor change of KRFT to KHC.
For the starting positions of David's DGP, since this data isn't available at this time, here is what it looked like at the time according to his article at the Daily Trade Alert:
The changes to the above numbers were based on what I saw David do with the DGP during 2016. The changes were adjusted up by the scale factor of 1.2169 and were as follows:
Sold 38.942 shares BBL for $758.32 + 840.90 cash from 2015 to buy 64.185 shares CISCO (price $24.76). This sale was on 2/12/16, so it missed any 1 st quarter dividend by BBL or CISCO. About 5/3/2016 SJR was traded for Southern Company (SO) by selling
105.874 shares SJR for $1941.26 to buy 38.167 shares SO (price $50.60), which included a total of $20 in commissions.
Around 11/1/2016, I rolled the spin-off of HCP, which was QCP into 3.92 more CISCO (CSCO) shares, making the total share count 68.105 for the year 2017 and beyond. No other changes were made other than allowing for the 2:1 stock split of Alliant Energy (LNT), which occurred on 5/30/2016.
In the next section, I will show some asset allocations and Stock Sector details of each of the five active portfolios.
Asset Allocations Today
For the DG50:
Source: Morningstar.com - DG50 Portfolio
Source: Morningstar.com - DG50 Portfolio
Source: Morningstar.com - DGP
Source: Morningstar.com - DGP
Source: Morningstar.com - DGI10
Source: Morningstar.com - TR7
Source: Morningstar.com - VDIGX
From the above data, you can see that the stock style diversification for the DG50 and DGP are similar with a large tilt toward value stocks versus growth stocks. The actual "tilt" number is 3.7:1 for the DG50 and 3.1:1 for the DGP. For my two portfolios, the DGI10 has no growth stocks at all, while the TR7 has a value tilt of about 2.1:1. 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 at other times it might favor growth stocks. Knowing how the five portfolios differ in style and asset allocation 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 five portfolios is decidedly in the large-capitalization camp, except for the TR7, which has over half its allocation in mid-cap and small-cap ETFs.
So given all the above, what does it mean? None of the comparison portfolios is an exact match to any of the others. However, since this is a study of dividend income, let's keep this in the back of our mind as we continue. Let's continue by studying income generated and spent in retirement from the above five portfolios. My goal is to see how these portfolios stack up as an income generator in retirement by looking at one measure of what I would call the quality of this income. By quality, I mean, does the payment of the income deplete your capital. If the income is so high that the value of your portfolio is declining over several years, then this is not good from a sustainability viewpoint. Something will eventually have to give; otherwise, you will run out of money. When I originally designed the somewhat unique aspect of my DGI10 & TR7, I wanted to know what I might expect over 15 years of following the RMD tables, so I ran a few simulations which you can read about in the article titled Traveling the RMD Journey in Retirement. The DGI10, being designed as a pure income portfolio, my goal was to keep capital appreciation at a minimum to maximize the income. For the TR7, I was more concerned with the total return than the income.
Though the DG50 was started on December 16, 2014, I have begun this comparison from the first trading day of 2016 to allow for comparisons with both my DGI10 & TR7 in this part two of the series. Below are the tables and data that I have gathered for the four complete years of dividends to the end of December 2019. Some trends are starting to emerge, but the game is far from over after just four years.
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. Even in the case where Mike compared the DG50 to VDIGX on a total return basis over the whole four 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.
One of the most important lines in the above chart is the last line. The last line contains what I call the Quality Factor of your income portfolio. It is a calculation that adds together the dividends received and the final portfolio value. This would be the same portfolio total that would exist if you did not spend the dividends and let them sit in cash. Let us take a look at more details to see how the Quality Factor and Total Return are related:
I will leave it to each investor to determine if any of these investments suit their own investment plan.
It is important to understand how the total return of the investments you put in your retirement account affect your retirement and the money left over for your heirs. As I am already retired, this article is particularly relevant to me. What it confirms is that the total return is directly related to the income you can generate in retirement. The math tells us that the income will be the same for the same total return, whether you sell shares to generate it or get the income directly from dividends. In fact, if you want to see that math worked out here are two articles I wrote last year demonstrating it, called Is There Magic in Dividends and A Dividend, What is it Good For.
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 due diligence or professional financial advice.
This article was written by
Analyst’s Disclosure: I am/we are long VOO VDIGX D MO NRZ O OHI PM SO WFC WPC WY. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.