Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
Portfolio Building, Part V: Brick Upon Brick
After significant deliberation, I decided to re-post this from weeks ago with some key additions to the post to better explain the caveats and even pitfalls with certain aspects of portfolio building.
My apologies for not thinking this through fully to have it in the first time, but I hope the additions are worth your time the second time around or for new guests, consider this the Greatest Post in Investing Blog History.
So here we go (again)…
We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.
An easy way to set up a retirement portfolio is to do the following:
25% S&P 500 Index Fund
25% Mid cap Fund
25% Small Cap Fund
25% Stocks
There it is.
That’s it.
That’s all there it is to do to retire on Easy Street.
That simple.
Well, I guess I should close down the blog now.
Wait, you want to know more?
OK then.
Let’s get started.
Let me introduce you to the brilliant David Fish (RIP to the recently departed King of Dividend Investing) who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.
Dividend Challengers: the last consecutive 5-9 years
Dividend Contenders: the last consecutive 10-24 years
Dividend Champions: the last consecutive 25+ years
Then, to add to the confusion, there’s another overlapping category:
Dividend Aristocrats: the last consecutive 25+ years
SR: Umm…that’s the same thing there, Captain.
To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..
SR: The fix is in…
Dr. Scared: This is it!! This is how they screw you!!
PWT: Uuh..yeah..so anyway…
…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).
This “CCC” list is updated at the end of each month by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.
To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.
Let’s take a look at the dividend aristocrats in particular.
These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epically awesome AKA The Unattainable Dream.)
As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.
Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :
3M–59
Coca-Cola–55
Johnson & Johnson–55
Colgate Palmolive–54
*Altria (Tobacco company; formerly Phillip Morris)–48
McDonald’s–42
RLI (Insurance Company)–42
Clorox–40
ExxonMobil–35
AT&T–34
*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.
It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).
So, in a portfolio sense, it would break down as the following:
25% S&P 500 Index Fund
25% Mid cap Fund
25% Small Cap Fund
25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)
Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).
Then just sit back and watch the returns roll in.
Several caveats:
1,) Realize that the above percentages (25% for each category with 2.5% of each stock) is how it will start, but not likely how it will be in 2, 5, 10, or a greater number of years. Stocks and funds will fluctuate and will also generate dividends in varying amounts at varying times which should then be purchasing those same stocks and funds at varying prices.WIth differences like that, it’s inevitable that some equities will race ahead of others over years to decades.
2.) This inequity in your equities (HA! I’m here all week folks!) may be perfectly fine and isn’t dangerous or problematic in of its own though some people rebalance their investments by shifting how much they pay into each equity to keep them the same as much as possible (OCD much?). Rebalancing these equities will take constant monitoring and not an insignificant amount of calculating/effort to do so which is totally contrary to what any of us would like and certainly not the whole point of the “build it and feed it and otherwise leave it alone” system of retirement investing.
The one thing to note as equities separate out from one another is to realize that the inequity is blunted by the fact that the most expensive ones will wind up gaining fewer and fewer shares with each purchase due to their share prices relative to the other cheaper ones.
3.) Do NOT fall into the trap of changing your equal contribution towards the best performing equities and away from others. The point of having equal contributions is to have your savings spread out throughout the US or even global economy in case of fluctuations and especially in case of downturns. What is well performing one quarter or year or even decade may stall or even recede suddenly at the exact time where you keep putting in more and more money into that very equity. Don’t let market fluctuations in the short term distract you from a solid-great plan that will thrive over 25-35 years, not 25-35 days or even 25-35 months.
4.) A good argument against the above portfolio is that owning shares of mega cap companies in addition to a S&P 500 fund is that they are both representative of large cap companies which is now 50% of the portfolio with mid caps and small caps at 25% each. In addition, some people are just not comfortable with owning stocks of individual companies which I think is personally fine. Do what you’re comfortable with and not what you think you should be doing. None of this is worth having reflux or insomnia over. That is an absolute certitude.
Before we finish, it’s time for a little shouting however.
THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.
END OF YELLING DISCLAIMER…
Thanks for tolerating my CYA tirade!
We will discuss evaluating individual stocks in a future post however.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Until next time…