M1 Finance Dividend Growth Portfolio
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My Simple Market Beating Dividend Growth Investing Portfolio

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My Simple Dividend Growth Investing Portfolio

I like the idea of dividend growth investing.

That’s why when I started using M1 Finance, I thought it’d be a good idea to start investing in some alternative strategies. Most of my money is in index funds but why not try something else with a small portion of my funds?

After all, M1 essentially allows you to essentially create your own ETFs for free and I like the sound of that.

The first strategy I really wanted to dive into is the dividend growth investing strategy.

The strategy is simple. You buy companies that are consistently raising dividends and are financially sound and then you wait.

That’s it! As with all stock investments, this is a long term play.

The strategy is based on the idea that you’ll get a return from a growing dividend and also price appreciation. In the long run, those two combine for a solid total return.

After all, in theory, a company that pays a dividend is often seen as a reliable, safe investment. You get a yield, a guaranteed return of sorts and can use that income for expenses or to re-invest in other stocks.

On top of that, if that same company continually raises their dividend, that can be a sign of good prospects and a propensity to grow. That in turn will lead to price appreciation and a happy investor.

However, things aren’t always that simple. Investing in dividend payers can be a complex maze of deceiving high yields and total returns that trail the market.

Dividends are not free money as many seem to think.

They are a share of earnings and reduce the value of your holding by the amount of the dividend.

A $40 stock paying a $1 dividend will become a $39 stock after that payment. That $1 payment may also be taxable to the holder of the stock depending on their income. Instead of getting a dividend, why not just sell a stock on your own and forget the forced payout?

High dividends can also be misleading. A $40 company paying $4 in dividends a year may seem like a great idea investment. However, if that same company is trading at $20 five years down the line then the investment wasn’t worth it. You paid $40 and got a $20 stock plus $25 in taxable dividends, barely any return over five years whereas the market likely grew much more than that.

That can happen and often does because, in theory again, dividends can reduce a company’s ability to grow.

After all, a company that earns $4 and pays $4 in dividends has no money left over to re-invest in the business or pay down debt.

That may be fine with you if it’s a fully mature company. However, it can impact future price appreciation due to expectations of poor growth. There may be no room to grow the dividend if earnings aren’t growing.

On top of that, the company may be at risk of a dividend cut if earnings shrink and the company can lose value because earnings growth can often be part of what makes stocks appreciate in value.

So why invest in dividend paying stocks?

Why Invest in Dividend Paying Stocks?

The answer is simple. Historically, dividend paying stocks have done better than those that don’t! On top of that dividend growers have done even better!

According to RBC Research, between 1986 and 2016, dividend growers returned 11.7%, dividend payers returned 9.9% and the S&P/TSX index returned 6.6%! On top of that, dividend growers had lower volatility.

That’s pretty cool.

Research like that has been the basis of dividend growth investing as a strategy. Investors say “dividend growers have the best returns so I should invest in those.”

The question is how do I invest in them correctly and what dividend growers do I invest in?

As an investor, you’re always searching for stocks that may outperform the market. The simplest strategy any investor can follow is investing in a simple index fund that provides exposure to the entire market.

Most investors are best off simply doing just that. Pick an index fund like VTSAX and go away for forty years and you’ll be all set. However, some alternative strategies do exist and if you want to invest in those, you want to make sure there’s some benefit for the work you take on.

That certainly seems to be the case with dividend growth stock if the above research holds true. However, it’s still hard to put a strategy like that into action.

After all, most individual investors are crap at investing. You may think otherwise but the data as evidenced by this analysis from JP Morgan’s Guide to the Markets shows that. They buy at the wrong time, sell at the wrong time and lose a lot of their profits to taxes by trading too often.

As always, we all think we’re better than the average. That’s definitely the case when it comes to dividend growth investing as well.

There’s plenty of investors out there who think they can analyze the world of dividends stocks, growth rates, payout ratios, industries and more and beat the market. They can pick the best stocks and avoid the duds.

Sure, some can, but if the data is any indication, most probably can’t. After all, most professional investors can’t even do it with their army of analysts at hand. What chance do we have?

That’s where my simple dividend growth investing portfolio comes into play.

My portfolio is based on the simple assumption that I probably suck at picking stocks BUT believe that dividend growth investing can outperform the market in the long run. So how does it work and what are the benefits?

Simple Dividend Growth Investing Benefits and Returns

First, let’s start with a basic assumption. I believe that dividend growth investing can work but only if it’s simple.

My goal is not to delve through pages of annual reports, analyze a ton of data and end up with substandard results.

That’s why my dividend growth portfolio has a specific focus on a certain subset of dividend growers. More specifically, it focuses entirely on the S&P 500 dividend aristocrats.

What are the dividend aristocrats?

They are S&P 500 members who have paid AND increased their dividends for at least 25 consecutive years. It’s a simple criteria. You’re a large company, you pay dividends, you raise those dividends for 25 years in a row and you are in!

As the years pass us by, more companies get added to the index as they hit that 25 year mark(and some get removed if they cut or don’t raise a dividend) but the basic theory behind it stays the same.

The idea is that any company that can pay and raise dividends 25 years in a row is pretty financially sound and probably a worthy investment. If that’s the case then they might even generate a pretty good return.

The dividend aristocrats are those companies. They are the 64 companies that have done that. Best of all, most of them have done that for much longer than 25 years.

I know what you’re asking; “but how do I know which of these 64 companies are good?” My answer is WHO CARES. You don’t, some probably suck and some are great but our ability to pick the right ones is crap.

That’s why the strategy is simple; you invest in all of them at an equal weight.

After all, all of these companies have a pretty good track record. They’ve raised dividends for at least 25 years, that’s a pretty long time. It’s enough to move through a few recessions. And as of 2020, they continue to do so every year. You don’t need to know much about analyzing business to know that such a steady track record of growth is a pretty good sign.

Best of all, it’s not just the track record of each individual business that matters here. It’s also the long term performance record!

You can theorize all you want about things being “probably” financially sound because of reason 1 or reason 2 but if the performance isn’t there then what’s the point. Luckily, this strategy has the data to back it up!

I said above that the point of any investing strategy is to do better than a simple index. This does that in two ways as evidenced below.

Dividend Growth Investing

First, the long term track record is better than not only the S&P 500 but also the Nasdaq. I included the Nasdaq because tech stocks are in vogue right now and I feel like it’s important to illustrate just how effective the dividend aristocrats have been in the long run.

It’s easy to say that a strategy worked in the 90s but it’s even more important to know if it works in more modern times. After all, things change and companies that were great in 1990 might not be so great in 2020.

Well, the long term track record is there.

Since 1991, this strategy has outperformed both the S&P 500 and the Nasdaq by quite a bit. If you look at the numbers it may not seem like much, just under 2% better than the S&P 500 and less than 1% better than the Nasdaq but these are annual returns.

$10,000 invested in the aristocrats in 1990 would be worth $290,000 now. That same investment would be worth $240,000 in the Nasdaq and $178,000 in the S&P 500. I’ll take 50k or 100k more any day!

I also wanted to add the returns post 2008 recession to illustrate the other point. The short term track record is there too.

The returns since 2009 are still pretty damn solid. They’re also pretty great in the past few years as well.

Yes, this strategy has trailed the Nasdaq in recent memory(post 2008 sell-off) but that’s expected in a bull market. After all, the dividend growth investing strategy does not shine in a bull market, it shines in a bear market and that’s another huge benefit of this strategy.

The return I get is a lot more stable. You can see that in the performance since 1999 but also in the years highlighted in red.

In a bear market, the dividend growth investing strategy shines as more people are attracted to the “safety” of dividends. And in my mind, there’s not much safer than companies that have paid AND raised dividends 25 years or more.

In these situations the strategy is much more effective at stabilizing returns. Take 2008 as an example; when the stock market was down 37-40.5% depending on the index, the aristocrats were only down 21.9%. In the tech bubble years, the aristocrats were actually up 2 of the 3 years while the Nasdaq was down 30%-40% per year and the S&P 500 lost quite a bit as well.

There’s still losses of course, nothing is quite safe in a recession. After all, we’re investing in stocks and there’s always volatility and risk. Even companies that have had the consistency of paying dividends 25 years in a row can get in trouble.

In 2008, for example, 9 companies cut their dividends and were removed from the index but not before their losses could impact the returns. On top of that, a recession will send even the strongest companies down with the market even if their financials remain strong.

However, lower volatility in these years helps so much in sticking with a strategy.

That’s what leads to better long term returns. Sure, the Nasdaq has done better since 2009 but come next bear market, I’ll certainly feel better with an investment in this strategy versus an investment in the Nasdaq.

After all, if you’re following this strategy, you’re investing for the long term and long term, this does great. The data proves it out.

The mental aspect can be huge too. That’s one of the main reasons that average investors just suck at timing the market. It’s very easy to get scared and sell at the wrong time and hard to find the right time to buy back in.

I believe you’re much less likely to sell something if the drop isn’t as precipitous as some of these Nasdaq returns. Sure, the recent performance there is great but how about all those 30-40% drops in certain years, sometimes for a few years in a row?

It probably wasn’t great being invested in tech stocks between 2000 and 2002. Would the average investor keep buying through that timeline or would they sell after buying in early 2000 to chase that 85% return the year before?

Is that potentially why the average investor does so poorly?

Dividend growth investing can help with that. After all, a 20% drop is a lot easier to stomach than a 40% one. It still won’t feel great. However, I know the long term track record will help me sleep a bit better.

That’s certainly why I started putting more money into this strategy in the recent months.

After all, we’re more than ten years into a bull market. There’s probably a bear around the corner.

Who knows when it will be but when it comes, I’d rather have a part of my money invested in stocks that have a tendency to lose less in such a market.

However, there’s another beautiful part about this strategy.

Even if that doesn’t happen, the reward on these stocks is still great in a regular market too.

After all, it’s not like these stocks have been dogs since 2009. They’ve returned 15.78% annually which beats the S&P 500 and while it lags the Nasdaq, it’s still a pretty fantastic return. If I can have upside in a bull market and have some level of protection from the downside in a bear market then I’m on board!

Of course, as always, there are no guarantees. Past returns do not guarantee future performance but hey, I’m not putting 100% of my money into this strategy. It’s meant to be an additive to regular index investing, not a replacement.

My M1 Dividend Growth Investing Portfolio

When I started using M1, I wanted to have use the flexibility it allows to follow some strategies I don’t normally follow.

That’s when the dividend aristocrats portfolio was born. I had done the research and found that the risk/return profile of the dividend aristocrats was something I liked. Hopefully, based on the above, you like it too.

This became more enticing as the market kept rising and rising and the bull market seemed to have no desire to stop.

I wasn’t really worried about a bear market. However, it’s always good to have a strategy in place that provides some protection in case one arises. For that reason, this type of investing style spoke to me.

There were ETFs that mirrored this strategy like NOBL but that had a 0.35% expense ratio and I’d rather do it for free.

That’s why I created this portfolio on M1 Finance. It’s designed to make it simple to mirror this long term strategy without a cost!

I want this portfolio to be simple. It has equal weighing towards each individual stock in the portfolio. In order to do that in M1, I had to create two separate pies as M1 only allows allocation based on a full percentage. As such 64 stocks cannot be equally split in one pie. 100/64 does not equal a whole number.

After all, I didn’t want to overweight certain stocks in this portfolio. It’s meant to be simple. All thought and personal opinion is taken out here as all I’m doing is taking all the dividend aristocrats and investing in them equally. Unfortunately, even with two portfolio there is a stock or two that is just a bit overweight but it’s a minor issue in my mind.

The returns above are all assuming equal weighting. That means moving away from that meant moving away from those returns so I want to stay as close as possible!

Here’s the entire portfolio in a spreadsheet for those that want to see it.

This is not a high yield portfolio as the current yield is about 2.4%. It’s focused on dividend growth and price appreciation in the long term. The annual dividend growth rate for these guys has been about 9% annually in the last 5 years. That’s a decent growth rate and will help improve yield on cost(current dividend/price paid) if the dividend keeps going up.

Overall, the portfolio is very set it and forget it and that’s what I like about it. The targets are preset and will only change if companies are added(which happens when the index is reconstituted in January) or if a dividend is cut(I would remove the company right away).

Anytime, I add money, any contributions get allocated based on whichever security is below it’s target. That way I’m always buying the stocks in the group that are under-allocated(and in theory attractively priced from a long-term perspective).

The companies in it are a mix of familiar names and niche businesses. However, they share one thing in common. They’ve continued to raise their dividend for at least 25 years in a row.

I dig that about them. There’s dividend growth and good historical performance. On top of that, there’s a nice volatility buffer that can help in a bear market.

That’s the reason why a lot of my recent post-tax dollars have been going into this portfolio. It has the upside of investing in the stock market but has historically had a much lower downside. I quite like that with how expensive this stock market seems today.

I say seems because who knows the answer to that question.

I’m still investing in my usual suspects through my 401k and most of my money is still going into regular old index funds. However, I feel comfortable sending additional dollars into this portfolio when I can. After all, even if I’m wrong about things seeming expensive then there’s no real downside. This strategy still does well in a bull market. It just does better than the standard index in a bear market.

It’s the best of both worlds!

If you’re an M1 user and interested in investing in this pie, the link is available right here. If you’re not an M1 member yet but want to invest, you can sign up right here as well.

Using another broker? I guess you could buy all 64 stocks and keep them equally weighted. However, in that case you’re better off just buying the ETF and paying the expense ratio. It’s easier that way!

Disclosure : I am long all 64(66 as of 4/3/20) stocks in this portfolio. Investing comes with risks including loss of principal and should be discussed with a qualified investment adviser before any action is taken. Don’t invest any money you can’t afford to lose. Because the information herein is based on my personal opinion and experience, it should not be considered professional financial investment advice or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional. I make no representations as to the accuracy, completeness, suitability or validity of any information.

5 Comments

    • TimeintheMarket

      Most of my money is in VIIIX(S&P 500 fund) and other mutual funds. This is still a very tiny portion of my holdings so the dividends are mainly from those other mutual funds right now! Hopefully this will grow with time though as it’s always nice to have bigger individual months and a bigger variety of payments.

  • Bull Beta

    Very informative read, what do you think about tech giants offering low dividend yields but sound financial reports

    • TimeintheMarket

      I think they’re a good bet too and will likely be dividend growers for a while. I hold Apple and Microsoft and will likely eye a few others if the market turns south again. The big tech players haven’t really had a big drop in this market yet which shows their power these days and I think they’ll be able to pick up smaller financially impacted companies on the cheap now.

      • Bull Beta

        I do believe tha same and ince acquisitions start I really thing it is a sing that the market had bottomed if it did not happened already in mid March

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