Today I begin a new experiment in dividend investing where I invest in fractional shares of all 57 Dividend Aristocrats (as of 2019) directly and gauge the overall performance of a dividend growth investment strategy compared to a pure growth investment strategy.
It's important to note the difference between the characteristics of a stock's growth versus dividend.
With a growth strategy, the investor is aiming to achieve a much higher value of the stock one owns than the stock's value has currently and then sell it at the higher value. That means that the investment is completely dependent on what other people is willing to pay for the company (or a piece of the company in this case) and leads to volatility and high risk, at least in the short term. The returns aren't truly made until the stock is actually sold, so if the market were to tank 50% at the year you planned on selling said stock, you would only receive 50% of the share price that year. That means potential earnings are lost if you sold it then, but then of course you go on to wondering how long will it take to recover the lost stock price and whether you have time to wait that long. That uncertainty with market volatility makes growth stocks a double-edged sword. You stand to make huge gains but the time you decide to sell those investments is a coin flip. It could be a good year or a very bad year to sell, although if the investments had been made long enough, the losses of that year can be offset by the gain made in the past 20, 30, or more years.
With a dividend strategy, the investor aims to make one's investments through the quarterly (roughly every 3 months) payouts from the company's profits to its shareholders, otherwise known as dividends. With dividends, you are effectively guaranteed returns every year, earning back some of the money you invested in overtime and then some. It's like a loan, but this loan never has an expiration date. However, the company is never obligated to pay said dividends. It can be cut at any time, and the company may even stop paying dividends altogether. Bear in mind, however, that any dividend cut is a sign of troubles within the company, and that any sort of dividend cut will negatively affect the company's stock price. One little thing to notice is that splits are not dividend cuts. They are simply dividing the shares so that more potential investors may obtain stocks at a cheaper price. Consequently your own shares would effectively double, though the investments will relatively remain unaffected. Dividend stocks have slow growth characteristics but high dividend payouts. Enough of those payouts can effectively fund one's entire annual salary without having to work themselves. However because these investments typically have little growth over their lifetimes, the investments will not grow as much as simply investing completely into growth-oriented stocks.
A dividend growth strategy combines aspects of both high-paying dividends with stock growth. What is particular about a dividend growth strategy is that, like a growth stock, the investments are made into the company's growth and expansion, however it is through the buying of more shares (and therefore more ownership of the company) that results in the growth of a larger net worth through the reinvesting of dividends paid out. Instead of pocketing the money for your personal use, you use the dividends to buy more shares of the company. Some companies even allow you to reinvest those dividends automatically through what is called a DRIP (Dividend Reinvestment Plan). Overtime, you own more of their company, which entitles you to more of the dividends, which grows your net worth with stock appreciation. The now-bigger dividends get reinvested into the company, buying more shares, which gets more dividends, which grows your net worth, so on and so forth. You get a little of both worlds with a dividend growth strategy. Shares that have appreciated overtime which you could sell for a lump sum, or shares that you can keep to hand you a nice little paycheck every few months.
Using M1 Finance, I will be tracking the progress of all 57 Dividend Aristocrats (according to S&P 500 Dividend Aristocrats), allocating an equal amount of funds to each GICS (Global Industry Classification Standard) economic sector. Every week, I will be reporting the returns of the Dividend Aristocrats and adjusting the investment plan every year to reflect the new S&P 500 Dividend Aristocrats list.
As of October 11, the M1 Finance Research Tab reported a 13.34% gain in the stocks' values over 5 years, with a dividend yield of 2.96%. I anticipate that employing the dividend reinvestment strategy would outpace the S&P 500 Index by a slight margin of 1-2% as well as delivering a slightly larger dividend yield overtime.
With the current market trends, I suspect the Consumer Staples and Consumer Discretionary to be negatively affected over the next few weeks, amplified by the trade war between the US and China, but will recover once November and December begins to roll around. Real Estate will grow for now, but with rising housing costs, it will be taking a much deeper plunge than other sectors in the far future, regardless of the market now, so it is something to keep in mind. Industrials and Materials will be a coin toss depending on the outcome of the US-China trade war, Energy is expected to rise for now thanks to the intensifying conflict surrounding the Middle East and the resulting higher price of oil, while all other sectors (Communication Services, Financials, Healthcare, Information Technology, and Utilities) will recover within a month or two.
Stock Allocations
Below are the stock allocations used for the Dividend Aristocrats 2019 investment portfolio.
Communication Services (10% Allocation)
AT&T (T) - Diversified Telecommunication Services
Consumer Discretionary (9% Allocation)
Genuine Parts Company (GPC) - Distributors
Leggett & Platt (LEG) - Household Durables
Lowe's Companies, Inc. (LOW) - Specialty Retail
McDonald's (MCD) - Hotels, Restaurants & Leisure
Target Corporation (TGT) - Multiline Retail
VF Corporation (VFC) - Textiles, Apparel & Luxury Goods
Consumer Staples (9% Allocation)
Archer-Daniels-Midland Co (ADM) - Food Products
Brown-Forman (Class B shares) (BF.B) - Beverages
The Clorox Company (CLX) - Household Products
Coca-Cola Co (KO) - Beverages
Colgate-Palmolive (CL) - Household Products
Hormel Foods Corp (HRL) - Food Products
Kimberly-Clark (KMB) - Household Products
McCormick & Company (MKC) - Food Products
PepsiCo (PEP) - Beverages
Procter & Gamble (PG) - Household Products
Sysco (SYY) - Food & Staples Retailing
Walmart (WMT) - Food & Staples Retailing
Walgreens Boots Alliance (WBA) - Food & Staples Retailing
Energy (9% Allocation)
Chevron Corp. (CVX) - Oil, Gas & Consumable Fuels
Exxon Mobil Corp (XOM) - Oil, Gas & Consumable Fuels
Financials (9% Allocation)
AFLAC Inc. (AFL) - Insurance
Chubb Limited (CB) - Insurance
Cincinnati Financial Corp (CINF) - Insurance
Franklin Resources (BEN) - Capital Markets
People's United Financial (PBCT) - Banks
S&P Global (SPGI) - Capital Markets
T. Rowe Price (TROW) - Capital Markets
Healthcare (9% Allocation)
AbbVie Inc. (ABBV) - Biotechnology
Abbott Laboratories (ABT) - Health Care Equipment & Supplies
Becton Dickinson (BDX) - Health Care Equipment & Supplies
Cardinal Health Inc. (CAH) - Health Care Providers & Services
Johnson & Johnson (JNJ) - Pharmaceuticals
Medtronic (MDT) - Health Care Equipment & Supplies
Industrials (9% Allocation)
3M Company (MMM) - Industrial Conglomerates
A.O. Smith (AOS) - Building Products
Caterpillar Inc. (CAT) - Machinery
Cintas Corp (CTAS) - Commercial Services & Supplies
Dover Corp (DOV) - Machinery
Emerson Electric (EMR) - Electrical Equipment
General Dynamics (GD) - Aerospace & Defense
Illinois Tool Works (ITW) - Machinery
Pentair (PNR) - Machinery
Roper Technologies (ROP) - Industrial Conglomerates
Stanley Black & Decker Inc. (SWK) - Machinery
United Technologies Corporation (UTX) - Aerospace & Defense
W. W. Grainger (GWW) - Trading Companies & Distributors
Information Technology (9% Allocation)
Automatic Data Processing (ADP) - IT Services
Materials (9% Allocation)
Air Products & Chemicals Inc (APD) - Chemicals
Ecolab Inc (ECL) - Chemicals
Linde plc (LIN) - Chemicals
Nucor (NUE) - Metals & Mining
PPG Industries (PPG) - Chemicals
Sherwin-Williams (SHW) - Chemicals
Real Estate (9% Allocation)
Federal Realty Investment Trust (FRT) - Equity REITs
Utilities (9% Allocation)
Consolidated Edison Inc (ED) - Multi-Utilities
M1 Finance Platform Referral Link: https://m1.finance/UIl_N9XNA_CO
M1 Finance Dividend Aristocrats 2019 Pie: https://mbsy.co/BRN6n
No comments:
Post a Comment