Benchmark Needed for Extra-Safe Dividend Portfolio

[redduck]

@Oldshooter,

Thanks for the YouTube link. Fortunately, I had the time to watch it twice as I was afraid that I might have missed something the first time around.

I, too, am enjoying this thread.

 

[redduck]

I ran 20 stocks chosen in 2004-05 by six ER members. The idea was to eliminate survivor stock bias (I don't know if I actually did that. I tried to eliminate cherry picking (I don't know if I did that, either). I'd appreciate somebody letting me know about this.

The 6-guy $100,000 portfolio became a $196,000 portfolio.

The VTI $100,000 portfolio became a $234,236 portfolio.

Just how lucky can those Total Return advocates continue to be?

 

[ERD50]

I ran 20 stocks chosen in 2004-05 by six ER members. The idea was to eliminate survivor stock bias (I don't know if I actually did that. I tried to eliminate cherry picking (I don't know if I did that, either). I'd appreciate somebody letting me know about this.

The 6-guy $100,000 portfolio became a $196,000 portfolio.

The VTI $100,000 portfolio became a $234,236 portfolio.

Just how lucky can those Total Return advocates continue to be?

And I keep saying (hedging?) that any selection of stocks has ~ 50-50 chance of beating the market, yet this, and the Boho contest seem to keep showing more losers than gainers.

It's enough to shake someone's core belief system!

But more seriously, it does seem to hold, and as others have said, I just can't see taking the effort and risk of non-diversification with stock-picking, with no clear benefit.

It's added risk w/o reward. What's the point?

Fortunately, picking 20 or so stocks gets you decent diversification in most cases, and will probably give you something close to market performance. So it's not 'wrong' by any means, but it just doesn't seem 'right' either.

-ERD50

 

[Scuba]

I have also enjoyed this thread. As someone who currently has a taxable diversified portfolio of individual stocks (both growth stocks and dividend payers), bonds and a few ETF’s, I’ve been thinking about converting to a simpler portfolio of just ETF’s, starting with the equity portion only. One obstacle for me is large capital gains that would result from selling appreciated shares. The other obstacle (which may not be logical as this thread demonstrates) is that I do like getting a steady stream of dividends to help fund my lifestyle without having to sell the underlying securities.

Given my desire for a dividend cash flow stream as well as the need to minimize capital gains, what advice do others have about converting from individual issues to a handful of ETF’s?

 

[rayvt]

Given my desire for a dividend cash flow stream as well as the need to minimize capital gains, what advice do others have about converting from individual issues to a handful of ETF’s?

You have to pay the capital gains tax at some time, anyway. It's not like you can avoid it. Don't let the tail wag the dog.

The desire for a cash stream without having to take action on your part is just that---a desire. A personal preference. It's like wanting to get money in the form of a paper check instead of an ACH transfer.

Find a mutual fund(s) that is equivalent to the ETF(s) that you like, put your money there, and direct them to send you a check for $XXX once a month/quarter.

 

[ERD50]

You have to pay the capital gains tax at some time, anyway. It's not like you can avoid it. Don't let the tail wag the dog. ...

It's a bit more nuanced than that.

If you can stay within the 15% bracket LTCG are taxed at 0% (is 0% a 'tax'? But that is how they word it).

And if you are already above the 15% bracket, you might want to be careful to not sell enough in any one year to push you into the next higher bracket, paying more in taxes that way.

And finally (appropriately), the cost basis is stepped up at death, so it is possible to never have to pay those cap gains, though it may not matter or be a realistic option, depending on circumstances.

-ERD50

 

[OldShooter]

And I keep saying (hedging?) that any selection of stocks has ~ 50-50 chance of beating the market, yet this, and the Boho contest seem to keep showing more losers than gainers.

It's enough to shake someone's core belief system!

But more seriously, it does seem to hold ...

Well, I don't think that there is any serious question about the 50/50 number. William Sharpe told us that in his 1991 paper*: The average of all stock pickers inevitably delivers to customers the market average less their costs.

Since individual stock pickers do not have significant costs, one might expect that they will end up closer to the average than the pros. If one then argues for the efficient market hypothesis, then that is the expected result. If one believes that the pros will know more about particular stocks than individuals know, then that might be a reason for individuals to underperform.

... Fortunately, picking 20 or so stocks gets you decent diversification in most cases, and will probably give you something close to market performance. So it's not 'wrong' by any means, but it just doesn't seem 'right' either.

With respect, I have never seen an analysis that says 20 stocks are enough to diversity away individual issue risk. To succeed at this, one must have a variety of stocks spread across all market sectors. Even assuming 100% home country bias, IMO this results in only a couple of stocks per sector. The analyses I have seen argue for more like 50-100 stocks. More here: https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp and many other places. For the individual investor who truly wants to be diversifies, I think total market mutual funds are the only feasible option. (Re dividends, I am not hampered by any facts, but my guess is that selecting for dividends results in uneven sector weighting.)


* for those unfamiliar: https://web.stanford.edu/~wfsharpe/art/active/active.htm or (via a short video): https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx

 

[NW-Bound]

Today sees the growth stocks taking it on the chin, while stodgy dividend stocks come alive. Investors are changing their mind. When will they change it again?

 

[ERD50]

...

With respect, I have never seen an analysis that says 20 stocks are enough to diversity away individual issue risk. To succeed at this, one must have a variety of stocks spread across all market sectors. Even assuming 100% home country bias, IMO this results in only a couple of stocks per sector. The analyses I have seen argue for more like 50-100 stocks. More here: https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp and many other places. For the individual investor who truly wants to be diversifies, I think total market mutual funds are the only feasible option. ...https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx

Oh, I agree. I was using the "decent diversification' term to intentionally be imprecise. Probably better than a single sector, probably better than just a handful of tickers. But like you, I just don't see any reason to go that route when Total Market funds/ETFs are readily available and cheap.

-ERD50

 

[Ronnieboy]

OK, curiosity got the best of me.

Well, like I said, I'd expect any pick of stocks to have ~ 50-50 chance of outperforming the market. And these picks didn't do it. Not for the 10 year period. Charts and details here:

https://goo.gl/pHVAvM ( 10 year )

[EDIT: not quite 10 years...

Note: The time period was automatically adjusted based on the available data (Aug 2009 - Feb 2018) for the selected asset: Anheuser-Busch Inbev SA (BUD) ]​

Not only did the "div-payers" under-perform in the "Total Return" view, they didn't provide any more cash flow (divs) than VTI most years, and the 'worst years' were worse than VTI.

What's the attraction again?

Portfolio    Initial        Final        CAGR    Stdev    Best Year    Worst Year    
VTI -----    $1,000,000    $3,295,275     14.90%     12.45%    33.45%        0.36%        
DIV Picks    $1,000,000    $2,722,486     12.38%     11.02%    23.21%       -4.05%

-ERD50

That website is pretty cool. Thanks for the link.

Interesting thing is when you take out BUD as it didn't have all the data and put in O which Redduck stated was one of the other 4 stocks and run it from 2000 to Feb 2018 (Well it says 7/2001 to Feb 2018 as VTI wasn't around then, so I added Vangard 500 Index too) it showed up with this:

VTI Final $3,342,842
DIV Final $4,398,924
Van 500 Final $3,036,336

And that is with dividends reinvested. But the whole purpose is to live off the dividends, so lets make some assumptions and say that when you started your $1M portfolio you wanted to get $20K/year plus 3% inflation. So year 1 is $20k year 2 is 20,600, then 21,218, then $21,854, then $22,509, then $23,184. etc. etc.

Since it only goes back to 7/2001 here are a few results:

From 7/2001 to 7/2002 Goal $20K
VTI has a balance of 752,743 and shot out $9704 in dividends, need to come up with the difference.
Div Picks ending balance 912,236 and shot out $22516 in dividends I got more than what I wanted. What to do with the extra cash??
Vanguard 500 Index 745,709 and shot out $9902 in dividends, need to come up with the difference.

7/2002 to 7/2003 Goal $20600
VTI 1,019,397 dividends 16,003 still short of the 20,600 I wanted this year.
DIV Picks 981,514 dividends 27745 over and above
Van500 1,002,847 Dividends 16966 short

7/2003 to 7/2004 Goal $21218
Vti 1,149,811 divi 16706 short
Div Picks 1,139,725 divi 31813 over and above
Van500 1,132,193 divi 17,554 short

7/2004 to 7/2005 Goal 21845
VTI 1,109,599 divi 19657 short
Div Picks 1,071,432 divi 36538 over and above
Van500 1,080,353 divi 20945 short

7/2005 to 7/2006 Goal 22509
VTI 1,076,726 divi 20113 short
Div P 1,101,065 32411 over and above
V500I 1,071,851 19615 short

7/2006 to 7/2007 Goal 23184
VTI 1,140,844 divi 19847 short
Div P 1,207,218 divi 35,313 over and above, love these raises every year.
V500I 1,146,679 divi 20,268 short again

That is when I got tired of all the results. As you can see over the course of time, the dividend picks would have supplied the necessary income while you would be left scrambling to come up with the difference every year with the others or cutting back on lifestyle.

Going from 7/2001 to 3/2018 without the dividends reinvested cause you are spending them comes up with this:

VTI $2,402,124
Div Picks $2,617,661
Vanguard 500 Index $2,157,143

The main difference is you would have been getting more than your goal with dividend picks and could reinvest the extra to get even more income. And possibly selling shares of the VTI and Van500 to make up the difference and your total being less than the above.