Dividends vs. Capital Gains
I recently had my assumptions about long term security investing shaken up by investing guru Richard Stooker's book Income Investing Secrets. His die hard fanaticism for value investing (dividend yielding securities) started innocently enough with a metaphor about a golden goose but quickly had me rethinking everything I thought I knew about the stock market investing and I am someone who had read a lot financial trading strategies.
He argues that no matter how valuable the meat you should never sell a goose that lays golden eggs. Then goes on to extend Richard Kiyosaki's comment from "Rich Dad Poor Dad" about how a house in not an asset unless it's generating income to all securities. The book was written in 2011 and he ends with a number of recommendations so using Quantopian's IDE and backtesting capabilities I decided to run some backtests to see how well his diversified dividend strategy compared to the SPY benchmark
Benchmark Backtesting
SPDR S&P 500 ETF
Below we are using the SPDR S&P 500 ETF for benchmarking. The portfolio consists of the top 500 companies from the S&P 500. All portfolios are starting with $100,000 and assume no reinvestment of your dividends
2014-2015, 1 year test
# Dividends = $1,649
# Positions Value = $112,213
# Dividends = $1,649
# Positions Value = $112,213
2010-2015, 5 year test
# Dividends = $11,196
# Position Value = $182,826
# Dividends = $11,196
# Position Value = $182,826
Value Investing Backtesting
Below is diversified portfolio of dividend paying securities of all types. Pro's and con's of each security are reviewed in the book and these were the proportions I felt was best. The actually ticker numbers however were recommended by Richard Stooker.
Value Investing
All portfolios are starting with $100,000 and assume no reinvestment of your dividends
10% - Dividend equities of all types (CVY)5% - Treasuries ETF: (BWX)
5% - Corporate bonds: (VCIT)
5% - Muni bonds: (MUB)
5% - TIPS: (TIP)
20% - US dividend paying stocks
- 5% - All US companies that keep raising dividends (PFM)
- 5% - 50 companies paying the highest dividends now (PEY)
- 5% - Dow Jones Best US Dividends Stocks (DVY)
- 5% - Tracks dividends with highest yield (DHS)
10% - International dividend paying stocks
- 5% History of raising dividends (PID)
- 5% Tracks companies paying highest dividend (DTH)
10% - Utilities
- 5% - US utilities: (VPU)
- 5% - Foreign utilities: (IPU)
10% - REIT’s
- 7% - US REIT: (VNQ)
- 3% - Foreign REIT
- - 1% - (RWX)
- - 1% - (WPS)
- - 1% - (DRW)
5% - Canadian Foreign Trust: (ENY)
5% - MLPs: (TYG)
5% - Preferred Stock
- 2.5% (PFF)
- 2.5% (PGF)
5% - BDC (PSP)
10% - International dividend paying stocks
- 5% History of raising dividends (PID)
- 5% Tracks companies paying highest dividend (DTH)
10% - Utilities
- 5% - US utilities: (VPU)
- 5% - Foreign utilities: (IPU)
10% - REIT’s
- 7% - US REIT: (VNQ)
- 3% - Foreign REIT
- - 1% - (RWX)
- - 1% - (WPS)
- - 1% - (DRW)
5% - Canadian Foreign Trust: (ENY)
5% - MLPs: (TYG)
5% - Preferred Stock
- 2.5% (PFF)
- 2.5% (PGF)
5% - BDC (PSP)
2014, 1 year test
# Dividends = $3,581
# Positions Value = $104,868
# Dividends = $3,581
# Positions Value = $104,868
2010, 5 year test
# Dividends = 18,943
# Position Value = $134,192
# Position Value = $134,192
Conclusion
Because of the undeniable miracle of compounding interested I am going to divote a full 50% of my overall portfolio into this strategy. I am still convinced of Bitcoin is baby goose who will grow very big and and I like to experiment with other trading algorithms so I can't go 100% in but there is something important to take away from this.
The bottom line is even if the returns start as small dividends, its real cash that can compound now. There are so many amazing examples of compounding in life including the trillions of cells that make up a full humans it's an important metric to think about as you plan for retirement.