Reviewing my stock portfolio performance: 2011 – 2015

In the summer of 2014, some 18 months ago, I reviewed the performance of my stock portfolio. I’ve hesitated to do it again because I was more interested in dividend income and I wasn’t worried about trying to beat the market with my stock selection. I have since ‘evolved my position’ (as a politician might say) because I was wrong (as a politician wouldn’t say) and I only just realized that this week…


My Income Fund consists of a large proportion of mutual funds and some individual stocks (about 19% as of December 31st). I’ve never been 100% into buying individual stocks since I like the diversity and simplicity that low-cost mutual funds provide. In this review, I’m only looking at the 19% of my portfolio which is held in individual stocks.

I have a fairly simple method of picking stocks that I describe in my Charter, but really it just favors large, stable companies with above-average dividend yields and reasonable payout ratios. What’s not to like about that? The upper cap on dividend yield excludes more risky companies and I mitigate against dividend cuts by limiting the amount of dividends each stock can contribute to the total.

My old way of thinking

My previous thoughts about my stock portfolio performance can really be summarized as

  • My goals are mostly target-income based so I’m not all that interested in market value.

I’ve see similar sentiment in some of the blogs that I read so I think it’s a fairly common viewpoint. But I believe for me personally, that this perspective was really just my way of excusing any bad overall performance I might encounter. Income targets can be met or exceeded by new purchases so the actual performance or efficiency of my strategy is hidden.

My new way of thinking

So what changed? Well I started questioning the time and effort that I was putting into individual stock purchases vs just setting up an automatic bank payment to buy an index fund. In the last two years I’ve been decreasing how much time I’ve been spending on this strategy by reducing the number of purchases, and now I’m wondering if there’s any actual performance benefit. So I concluded that

  • I should monitor if the time and trading fees I spend buying individual stocks provide any real benefits compared to a benchmark.

There are alternatives to individual stocks; low-cost mutual funds. If my stock portfolio can’t beat a suitable benchmark fund then why put the time and effort into selecting individual stocks over simply buying that fund? My old way of thinking simply didn’t care; I now think that I should care and at least review any evidence so that I have some data to make any decisions on.

Benchmarks

I’m going to use Vanguard High Dividend Yield Index Fund (VHDYX) as my benchmark. I already own it and it forms a large part of my Income Fund. VHDYX follows the FTSE High Dividend Yield Index and it holds 435 dividend-paying stocks, with an expense ratio of 0.18%. The fund allows a “fire and forget” method of investing since purchases can be automated from my bank account with no need to transfer money to a settlement account before buying.

VHDYX is just my personal preference as I favor higher-yield over dividend growth. Other potential benchmarks are the Vanguard Dividend Appreciation Index (VDADX), the Vanguard Dividend Growth Fund (VDIGX) or the Vanguard Equity Income Fund (VEIRX).

I’ve also included the Vanguard 500 Index Admiral Fund (VFIAX) as a comparison to contrast performance against a total return fund. Since it emulates the S&P 500, VFIAX contains around 400 dividend-paying stocks and 100 non-dividend stocks, including companies such as Berkshire Hathaway (BRK.B) that are excluded from a dividend portfolio. It pays a quarterly dividend but the yield is lower because of the non-paying stocks. The fund has an expense ratio of 0.05%.

My Market Value vs Cost Basis

The following graph shows the market value of my stocks vs their cost-basis. This is probably a lot lower now after the January market swings, but at the end of December 2015 my portfolio was at $40,699 with a 10% gain on cost-basis.

Graph showing my portfolio's market value vs cost basis

Benchmark comparison

To perform the comparison I listed and dated every stock purchase I’ve made since April 2011 when I first bought some Microsoft stock (which I still own). I then made the equivalent purchases into the benchmark funds on the same day I purchased my actual stocks. Dividends were calculated based on the number of shares on the dividend record day. All dividends were reinvested back into the funds by purchasing new shares based on the share price.

I also compensated for stock sales as I usually re-invested proceeds from the sales into new purchases so I decreased future purchases by the received amount. There’s no need to ever sell fund shares unless you want the capital back so they have an advantage in that respect. My real portfolio cost basis is a little bit different by about $100 – the actual amount from my accounts is $36,802 and in this exercise I ended up at $36,924.91. So there’s a small margin of error but I don’t think it’s going to change the outcome significantly.

Finally I compared the actual market value of my portfolio at the end of the month against the value of the holdings in each fund and plotted that out in the chart below.

Graph showing market value of my portfolio compared to two funds (VHDYX and VFIAX)

So the results show that the S&P 500 Index fund (VFIAX) performed the best, followed by VHDYX and lastly my portfolio. VFIAX was the best performer when I compared previously in 2014 and it’s no surprise that it wins again.

Asset Market Value ($)
Vanguard S&P 500 index (VFIAX) 42,541 (+4.5%)
Vanguard High Dividend Yield Index (VHDYX) 40,966 (+0.66%)
 My Stock Portfolio 40.699 

Total Dividend Income

Not to be deterred because I’m focused on dividend income; let’s see how the total dividends paid by my stock portfolio compare to the benchmark.

Graph showing Cumulative Dividends from my portfolio compared to two funds (VHDYX and VFIAX)

That’s pretty much the same result for dividend income. As expected the S&P Index fund is lowest from its 2.14% yield whereas VHDYX has a 3.39% yield.

Asset Total Dividends ($)
Vanguard High Dividend Yield Index (VHDYX) 2,270.97 (+1.11%)
My Stock Portfolio 2,245.95
Vanguard S&P 500 index (VFIAX) 1627.34 (-27.5%)

Comparison of dividend growth

This is a harder comparison to make but I decided to try it anyway. The Fund dividends are straightforward – they pay dividends quarterly so I divided each dividend by the first paid dividend to get the increase over time.

For my stock holdings, I calculated percentage growth of each individual stock each month and then averaged all the percentages. So the red line is smoother because it’s based on a monthly increase whereas the other plots are quarterly. This average is just an approximation since I’m not weighting the results by the number of shares that I held in a given month. Plus I’m ignoring any stocks that paid dividends that I sold during the period.

Edit 20-Jan-16: The chart below is incorrect. Please read dividend growth performance 2011 to 2015 for an updated and more detailed review of the dividend growth performance.

Graph showing the average dividend growth % of my portfolio compared to two funds (VHDYX and VFIAX)

I forgot to multiply the results by 100 in the chart above; so 1.50 means 150% (a 50% increase). But the chart is showing that the S&P Index had the greatest dividend growth over time with a total dividend that was 92% higher than at the start of the period ($1.102 vs $0.574).

VHDYX had lower growth (but a higher yield) and even lagged below my average increase. However the VHDYX fund still paid out slightly higher dividends in total than my individual stocks.

Incidentally the highest dividend growth stock in my portfolio was actually Marriott International (MAR) with a 165% dividend increase over the 4.5 year timeframe. The worst performer was AT&T (T) with a 9% increase.

Comparing holdings

Here are the top ten holdings in each portfolio.

Top Ten My Portfolio (50% of total) VHDYX (32.2% of total) VFIAX (18.9% of total)
1 Microsoft Corp. Microsoft Corp. Apple
2 AT&T Inc. Exxon Mobil Corp. Alphabet
3 Procter & Gamble Co. General Electric Co. Microsoft Corp.
4 Emerson Electric Johnson & Johnson Exxon Mobil Corp.
5 Alliant Energy Wells Fargo & Co. General Electric Co.
6 Exxon Mobil Corp. JPMorgan Chase & Co. Johnson & Johnson
7 Johnson & Johnson Procter & Gamble Co. Amazon.com
8 Pfizer Inc. AT&T Inc. Wells Fargo & Co.
9 T. Rowe Price Pfizer Inc. Berkshire Hathaway Inc.
10 McDonalds Verizon Communications Inc. JPMorgan Chase & Co.
# Stocks 41 433 503

I have 50% of my total portfolio in ten stocks based on value (I excluded my VPU ETF holding in this calculation). I don’t use a market-cap based weighting so this is just for the case of comparison. VHDYX contains all of the stocks I own; just at different weightings.

The two index funds are increasingly diverse with the top ten holdings comprising 32% of VHDYX and 19% of VFIAX.

Comparing Total Return

I’ve summarized the three portfolios below showing the contributions of dividends and capital gains to the total return.

Asset Cost Basis ($) Dividends ($) Growth ($) Market Value ($) Total Return (%)
My Stock Portfolio 36,924.91 2,245.95 (60%) 1,528.31 (40%) 40,699 10.22
Vanguard High Dividend Yield Index (VHDYX) 36,924.91 2,279.97 (56%) 1,770.47 (44%) 40,966 10.95
Vanguard S&P 500 index (VFIAX) 36,924.91 1,627.34 (29%) 3,988.32 (71%) 42,541 15.21

I use the following formula because dividends were re-invested:
Market Value = Cost Basis + Dividends + Growth
since Market Value, Cost Basis and Dividends are all known quantities, Growth is the only value needing to be calculated and it’s equal to
Growth = Market Value – Cost Basis – Dividends

Dividends caused a high percentage of total returns in my portfolio (60%), but this result needs to be considered in a larger context since my capital gains were lower.

Complications from stocks

In looking through the last 4.5 years of history, I came across some stocks I obtained from stock splits that I’d totally forgotten about. This is one potential problem with a long-term stock portfolio; companies change and merge or go private. So what you end up with is likely very different than what you start with. Mutual funds hide all that from you so they have simplicity in that sense.

Here’s a summary of the ‘churn’ in my portfolio which incurred unexpected costs.

Stock Notes
CDK Global (CDK) Acquired by ADP spinoff and sold on 10/20/14.
Albermarle (ALB) Acquired by Rockwood Holdings merger and sold on 12/11/15.
South 32 Acquired by BBL spin off and sold on 12/14/15.
Halyard Health Acquired by KMB spinoff and sold on 12/22/15.

Now I wasn’t forced to sell these holdings of course; I could have kept them. But my point is that these moves indirectly lowered potential dividend income and changed the makeup of the portfolio.

Expenses and fees

The only expenses with stocks are trade commissions when you buy and sell. For most online brokerages this is a fixed $7 a time, but the price can vary.

In contrast, mutual funds and ETFs are typically commission-free but they incur a yearly fee which is listed as an Expense Ratio (ER) and automatically taken out of the funds so you never actually ‘see’ it. A good number is an ER of < 0.3% and the values tend to be higher for funds than ETFs.

I don’t personally worry about the fees charged by funds if they’re < 0.3%. It just makes my brain cell hurt. A $7 fee on a $1,000 stock commission is a 0.7% hit at the outset since you only end up with $993 of stock; it takes over 2 years for the stock purchase to catch up assuming both investments grow at the same rate.

Clearly for stock investing the larger purchase you can make, the better, since you’re minimizing fees and my current investing amount is $750 which is a 0.93% expense on each purchase.

Conclusions

When I did my previous review in July 2014 the S&P Index also had the highest market return at $21,339 vs $20,714 for my portfolio. That was an opportunity cost of $625 which has since increased by an additional $1,216 over the last 18 months to $1,841 at the end of 2015.

Since I hold my investments in taxable, I also incurred $618 more taxable income by holding the dividend stocks rather than the S&P fund which means an additional payment of $173 (28%) this coming April, pushing the total cost to $2,014. Clearly there’s a reason why Warren Buffet favors the capital growth approach in his 2012 letter to shareholders (see page 19 onwards)

Now I’m not considering to switch over to a total return strategy for my Income Fund although in my particular circumstances it is more efficient. My goal is still to be able to reach a dividend income stream that exceeds my living expenses. This is a harder target to reach however since it really means that you’re setting your Safe Withdrawal Rate of your portfolio to its dividend yield. Because dividend yields tend to be lower than historical stock gains this implies you’ll need a larger amount of investments.

And I do like investing and owning stocks. I like feeling a connection with the companies whose stock I own especially when I use their products. I like the fact that I get a discount from my AT&T phone bill from the dividends they pay me. And owning individual stocks feels more real to me even though I own AT&T shares via VHDYX and even more of their shares from the index funds in my Retirement Portfolio.

I also think that a dividend investing strategy is a good one since it promotes good investing behavior such as:

  • taking a long-term view
  • buy and hold approach which reduce trading fees
  • avoiding panic when prices drop because the stocks are likely better value
  • picking good quality companies with wide economic moats
  • avoiding the riskier elements of the market

However I must recognize that in the absence of any significant financial performance, all of my personal reasons for holding individual stocks are more of an emotional benefit than a financial one. I think my stock strategy has performed pretty well and that I’m about on a par with my benchmark. But when I factor in the additional management time that it requires and the increased risk it adds, I don’t see much benefit to a large portfolio allocation to individual stocks.

Decision

I compromised. I’ve decided that I won’t increase my allocation to individual stocks as I had decided in December in my Charter and in fact I’ll limit it to 10% of my Income Fund. I’m not going to sell any stocks so I’ll re-balance to this new allocation by not purchasing any new stocks for the remainder of the year and putting the money into the mutual fund components of my Income Fund instead.

I believe a 10% allocation to individual stocks

  • will mean fewer purchases in the long-term which means less time taken up with research and purchases. Simplicity is good.
  • won’t significantly affect overall performance and I don’t need to worry about micro-managing individual stocks. I can just let them play out over the next 30 years.
  • will continue to provide me with the emotional benefits I get from owning shares.

Performing this comparison has been useful for me and helped me rethink my decision on my stock allocation. It’s not that investing in individual stocks is a bad strategy; it isn’t. It’s just that if I can achieve the same result in my sleep why wouldn’t I?

Quote of the day

One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity.

0 thoughts on “Reviewing my stock portfolio performance: 2011 – 2015”

  1. Boy this got me thinking DL. Plus with funds you can invest regularly with smaller amounts. On the flip side if you buy stocks at the right price (which does require research/time) you may come out ahead. Just have to wait for a big drop. I think I may end up splitting things similar to you. Still like the fun in buying a stock.
    Cheers,
    DFG

    1. Hi DFG,
      As long as the funds are low-cost and not an ‘active triple-leveraged smart-beta derivatives fund” with a 3% ER! 🙂

      The rational side of me knows that over the next 25 years, I’m likely to buy the wrong thing at the wrong price (probably multiple times) and mistakes can be very expensive – the so-called ‘bear market math’ where a 50% drop requires a 200% gain to get back even. The irrational side of me loves buying individual stocks and believes that my stock choices will be good enough!

      Had my results showed significant improvements over the fund then I would have stayed with a higher allocation towards stocks; but I’m getting similar results so what I’ll be saving instead is time.

      Best wishes,
      -DL

  2. Trevor,

    Very interesting analysis – and very timely since I’m in the process of making the exact same comparison! My research will probably result in an upcoming post that touches upon many of the points you make here.

    The total return of your stocks versus the total return of the funds isn’t much, but still significant enough to warrant a second look at your strategy (and mine!).

    After quickly going through your results there’s just one ‘flaw’ in your thinking, in my opinion: over the past four years you’ve enjoyed a mostly upward trend (bull market), so I wonder if the better total return of the index holds up when markets decrease over an extended period of time. Many people refer to the less volatile nature of dividend growth stocks in this regard.

    I hope you continue to compare the results from your stocks to the benchmark!

    Best wishes,
    NMW

    1. Hi NMW,

      I can probably fill a couple of blog posts in answering this 🙂

      I’m not switching to a total return strategy for my Income Fund; but I wanted to include it in my comparison because it is a more tax efficient strategy for a taxable account. I don’t necessarily need the extra dividend income that I’m receiving right now after all.

      My real comparison / benchmark is to VHDYX which consists of only dividend-paying stocks. In my particular case it looks like I can get similar performance from it than from individual purchases. Other index funds are more dividend-growth focused e.g. VDIGX but I like the higher yield.

      It’ll be interesting to see if my portfolio catches up with the S&P fund in the future as it looks like we’re certainly off to a bad start for the stock market!

      Out of interest, here’s a Growth of $10,000 chart showing the growth of the two funds I compared in my post (VHDYX and VFIAX) assuming that I bought $10,000 of each in April 2011.

      VHDYX vs VFIAX April 2011 to Dec 2015, dividends reinvested.

      The dividend fund won which is the opposite result from my results. So the main factor in my real-life result was when I purchased. Maybe the higher volatility of the VFIAX meant that more of my purchases were at lower prices by comparison? I don’t know but it’s an interesting result.

      I look forward to reading your own comparison and the conclusions you reach!

      Best wishes,
      – Trevor

  3. Interesting analysis. I have a few funds (ETFs) in my portfolio, but they are a very small percentage of my total portfolio. I am interested to do the same comparison for my portfolio against a dividend ETF or something.
    Thanks for the update.
    DGJ

    1. Hi DGJ,

      I went into this analysis from a “are individuals tocks worth the time and expense?” point of view. The dividend fund VHDYX represents average performance and it can be hard to beat average performance over a long time-frame. But from what I saw average performance seems to be good enough and the higher than expected dividend growth of the fund was a surprise to me.

      Best wishes,
      -DL

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