Yup, always a good idea, right? Someone offers you a challenge and you then take a good portion of your retirement monies (aka future) and you buy a bunch of stocks without looking. And then, you continue to hold these stocks without looking. To add more fuel to the ‘what the heck are you doing?’ notion – you then add to the stocks when Mr. Market thinks they suck. So what happens when you buy stocks without looking? And …
It began on Seeking Alpha where I am a regular contributor. A reader, an avid stock picker, suggested that the Dividend Achievers fund was not very good and that many of the top holdings would not make it into his portfolio. I looked at the holdings, they looked great.
And I had been looking at and studying the fund and approach for a few years. I really liked what I saw. The ETF for the Dividend Achievers Index is Vanguard’s Dividend Appreciation fund. It is available from Vanguard US by way of ticker VIG. that is a US dollar fund of course.
This is a total return dividend growth fund. Companies must have increased their dividends every year for 10 years or more. It is also a smart beta index that applies quality screens. Given that parameter of course you’re also going to own many of the famed Dividend Aristocrats. Those are S&P 500 member companies that have increased their dividends for 25 years running.
A meaningful dividend growth history.
On Sure Dividend you can have a look at the list of current aristocrats, and also some greater background reading. That index has a habit of out-performing the market with lesser volatility. What’s truly surprising is that the Aristocrats are out-performing the market in this 10-year bull run. It’s greater advantage came in the last 2 major corrections for US stocks.
How does dividend aristocracy outperform the market without any high flying tech companies? There’s no Apple, Google, Amazon, Netflix, Microsoft, Texas Instruments, Facebook or Visa. Many will suggest that defense wins championships. ‘Winning’ can come by way of losing less often.
And certainly I could have gone with the Aristocrats. That is available in ETF form by way of ProShares NOBL. I could have skimmed enough of the Aristocrats. But I wanted to have exposure to a few of the more ‘growthier’ names of the Dividend Achievers.
The Achievers vs Mr. Market
Dividend Appreciation VIG as Portfolio 1
The S&P 500 IVV is Portfolio 2
We see that for the 5-year period the Achievers (in ETF form) had a lesser drawdown and much greater performance through the financial crisis. That’s very telling as many of the big US banks and other financials were long-time dividend payers and were constituents of the index. The financial health screens were able to catch and remove some of the distressed financials.
That said even the top 10 original Achievers outperformed the the cap-weighted S&P 500 through the correction. As I wrote on Seeking Alpha – this should not have worked.
What a nasty list of companies, eh? Well, here’s how they stacked up against the total index through the correction.
We see some slight out-performance even with the ugliness of the AIGs and GEs.
There was enough stability, less losing, in the other core top holdings for the index. Of course the Achievers top 10 held up much better than ‘the market’.
The top Dividend Achievers in 2015.
Here’s the list of Achievers that I purchased in 2015. Even though I did buy stocks without looking, the index sure did look. And it takes an an incredible success story to make it into that Dividend Achievers index. I simply did no further evaluation, I trusted the index methodology.
3M , Pepsi, CVS Health Corporation, Walmart, Johnson & Johnson, Qualcomm, United Technologies, Lowe’s, Walgreens Boots Alliance, Medtronic , Nike, Abbott Labs, Colgate-Palmolive, Texas Instruments and Microsoft.
Here’s how those 15 Achievers have performed vs VIG from 2015 through 2019. The chart is courtesy of portfoliovisualizer.com. The portfolio is not re-balanced, we let the winners run.
And here’s the returns of the individual stocks for the period. As a benchmark, the CAGR for VIG was 11.24%.
The slight out-performance is driven by just 6 stocks.
From the above returns chart of the 15 Achievers vs VIG we see that the 15 companies closely track total index. It’s a cap weighted index. The largest companies do a lot of the heavy lifting for the total index.
How many does it take?
In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, “…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks.”
That said if you’re an index skimmer (or stock picker) you might move to the area of 20 holdings or more. And certainly the greater the quality considerations the greater the odds of success. I was using an index that was seeking quality and financial health. Business success and profitability was present in spades. We also hold market leaders Apple, BlackRock and Berkshire Hathaway as ‘picks’. We hold a portfolio of 18 US names.
Mark Seed of myownadvisor practices a form of index skimming for Canadian stocks. He holds 30 dividend paying TSX constituents. For the US holdings, he holds 10 stocks in tandem with ETFs. You can follow Mark’s progress on his site.
Buy. Hold. Add.
While this is a real life exercise in index skimming, it’s also an exercise in patience and consistency. We continue to hold all of the 15 companies. Even though some of the companies have been removed from the index. I am trusting the initial process.
I had to be patient. You can see the incredible volatility that exists when holding individual stocks. I had many companies that were in a negative position. I watched as most of them moved into a positive position. It has been a great experience – the trials and tribulations of holding a portfolio of individual stocks.
I’ve learned a ton about investor behaviour and index construction. I have been more passive than the total index. Here’s more evidence of what happens when you invest without looking. The Voya fund bought 30 market leaders in 1935 and has not sold or added a company. Certainly mergers and acquisitions have change the face of the fund over the many decades. The following, also from Sure Dividend.
Here’s a ‘recent’ performance snapshot.
Buy. Hold. Add. When I include our 3 picks at approximate weightings the returns are then a little better. That’s mostly thanks to Apple of course.
I am not seeking out-performance. I simply would like to see the US holdings hold up a little better in a major correction. The approach has not been tested. There has been no real correction in the US in the last several years.
We also hold Canadian stocks and funds, plus Canadian and US bonds (treasuries). We are now moving to protect our US equities with US bonds. I’ve deployed a modest amount of long term treasuries, iShares TLT.
Net takeaways.
It doesn’t take many holdings to replicate a cap weighted index. Most investors have no idea that they are actually index skimming even though they are ‘stock picking’ from the large cap or dividend indices. I’ve watched so many under-perform due to impatience and tinkering. If we start from a position of higher quality we don’t have to look, at all.
Well that’s my story, and I’m sticking to it. Of course, please, don’t try this at home. 🙂 If this fails, I can make money writing about said failure. You may not have that luxury.
Please fire away in the comment section with the many warranted criticisms. Ha.
And happy index skimming. Would you buy stocks without looking?
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Dale
