The dividend-focused model portfolio which I have been running since March 2011 has beaten the market over its first five years, producing double the market’s growth rate with less risk and a higher yield.
In some ways, I’m amazed that the portfolio has even reached its fifth birthday. It certainly hasn’t been easy, having left my career in software to focus full-time on developing a defensive value investing strategy, publishing a monthly investment newsletter and even writing my first book.
But that critical five-year period is in the bag and the results so far are encouraging.
More dividend income, more capital growth, less risk
Fortunately (for me) it is beginning to look as if there is some merit to the investment strategy which I have been developing these past five years.
The chart below compares the model portfolio to a FTSE All-Share tracker portfolio, both of which started with £50,000, reinvest all dividends and include all broker fees, stamp duty and bid/ask spreads:
Here are the performance figures in numbers:
For me, the key points are that the model portfolio has:
- Generated more than twice the market rate of return (10.5% annual return vs 5%)
- Had a high dividend yield at all times (currently 4.4% vs 3.6% for the All-Share)
- Been significantly less risky than the market (largest decline of 8% vs 13.5% for the All-Share portfolio and a three-year Beta – a measure of volatility – of 0.49 vs 1.00)
Bear market, what bear market?
Looking at the chart, the most noticeable difference between the two portfolios is the performance since mid-2015, where the model portfolio has completely avoided the (admittedly very minor) bear market experienced by the FTSE 100 and All-Share.
In fact, rather than seeing any sort of significant decline, the model portfolio has instead continued to set record highs.
I think there are two main reasons underlying the portfolio’s resilience:
- The portfolio’s dividend has continued to grow faster than the All-Share’s
- The portfolio’s dividend yield is still higher than the All-Share’s
This combination of a rapidly growing dividend combined with a high dividend yield means that the dividend acts like a strong wind at the portfolio’s back, driving it forwards and stopping it from falling backwards.
The All-Share’s climb to a record high in early 2015 was not matched by growth in its dividend, which made it far easier for that index to decline when the economic environment turned sour.
While we’re on the subject of dividends, here’s a chart showing the total dividends paid out by the two portfolios since inception, showing how the model portfolio’s dividend has continued to march forward while the All-Share’s has stagnated:
So the portfolio’s overall performance is good, but what about the performance of its individual holdings?
Two more holdings were sold with very satisfactory gains
Although I don’t talk publicly about the portfolio’s holdings until they’re sold (other than within my investment newsletter), you can get a good idea of how things are progressing at the individual company level by looking at the list of past holdings on the portfolio performance page.
During the last quarter, I added another couple of stocks to that list of ex-holdings:
- Amlin: I was forced to sell Amlin (a FTSE 250-listed insurer) in February as it was the subject of a takeover. The investment produced a total return of 85% over three years
- Hill & Smith: I decided to sell Hill & Smith Holdings (a FTSE 250-listed engineering company) in March after a relatively quiet and short holding period. The total return from this investment was 83% over two years and nine months
Both of these holdings have since been replaced with new, more attractive investments, and this is more or less what most quarters look like; one or two sales followed by one or two new purchases.
In general, I aim to make either one buy or one sell decision each month. This slow and steady approach to buying and selling isn’t whizzy and it isn’t clever, but having used it now for several years I think it’s an excellent way to drive a portfolio forwards over the long term.
Looking forwards to the next five years and beyond
So the first five years are in the bag and I’m happy to say that they have been a surprisingly successful five years. However, in all honesty, I still think five years is a relatively short period over which to measure investment returns.
That’s why I’m really looking forward to the next five years, after which the model portfolio will have a much more credible ten-year track record.
What do I expect of the next five years? I don’t like to be too optimistic, but I would be surprised if the portfolio didn’t beat the market over that timeframe.
After all, value investors from Buffett to Greenblatt have shown over many years that buying above-average companies at below-average prices is a winning formula, and all I’m trying to do is follow the same well-trodden path.
Great read as always!!
Thanks Sam, much appreciated.
John, I couldn’t get the link to work on the book you have written. Ping me the title etc and I’ll order a copy from Amazon today.
Regards LR
Hi LR, the title is The Defensive Value Investor: A Complete Step-By-Step Guide to Building a High-Yield, Low-Risk Share Portfolio. Just search for The Defensive Value Investor and it’s the only book with that title. (although I’ve just noticed that Amazon have the paperback version listed without the “The”, so I’ll have to rectify that).
Thanks for your support.
Why sell Hill and Smith, it looks fine?
Hi Andrew, yes Hill & Smith is doing very well as a company, but the share price is no longer especially attractive by my reckoning. The yield is down to about 2%, so for me to expect my usual 10% annualised return it’s got to grow the dividend by 8% per year. That might be possible, but it’s a big ask.
I would prefer to sell now, lock in the profits the investment has produced and reinvest into other good companies. They’ll typically be somewhat out of favour (unlike Hill & Smith which is very much in favour at the moment) and as a result trading at much more attractive valuations, with (mostly) much higher yields.
Since you adopt a rigorous set of quantitative criteria when you buy I was hoping you would do so when you sell too. I think just saying the yield is low and its in favour is not really a good reason. Its like saying buy XYZ because its out of favour and the yield is high. Often that just means it gets cheaper and the dividend gets cut. Companies with low yield often make up for it with high capital appreciation, take Visa or Sage for example, while those like Tesco can cut the dividend.
Hi Andrew, good point, and my previous answer was much over-simplified. The full answer is that the primary driver of my buy or sell decisions is my stock screen (click on that link for quite a detailed outline of how the stock screen works). A very short summary is that it ranks stocks based on the combination of their growth rate, growth quality, profitability, PE10 and PD10 ratios (price to 10-year earnings and dividends).
When I bought Hill & Smith it was the 28th ranked stock out of about 240, so very near the top. It had a growth rate of 11%, growth quality of 88% and a PE10 ratio of 15.5 (I didn’t track profitability when I bought it in 2013, and I don’t have the at-purchase PD10 figure to hand). It’s dividend yield was also 3.5%, although I don’t use the dividend yield in my purchase decisions.
When I sold it in March 2016 those figures had changed to a growth rate of 7%, growth quality of 88% and a PE10 ratio of 23.6 (and profitability of 10%, just out of interest). So its 10-yr growth rate had slowed down but the 10-yr PE ratio had gone up. The dividend yield, which I focused on in my first reply to you, had gone down to 2.3%, although that was not a primary factor in my decision to sell (so apologies for over-simplifying the situation before, and for inadvertently misleading you).
The key reason was that Hill & Smith’s rank had declined to 125 out of 240, so it was about average in its rank and I don’t want to hold averagely attractive stocks. Every other month I sell one of the five lowest ranked stocks from the portfolio, and the company was one of those bottom five. Out of that pool of five I then use subjective judgement to select which one to sell, because I don’t like being too mechanical, for example by just selling the lowest ranked stock. I want investing to be interesting, and this sort of subjective judgement-based decision keeps it that way, as long as the decision is executed within and bounded by my systems and rules.
So in the end it was a combination of the company’s low rank and its low yield (some of the other low rankers had better yields, and I do like dividends) which sealed its fate.
That is about as detailed an answer as I can give!
What about comparing your performance to other value focused/high yield indexes rather than a broad index?
Hi Robin, I guess I just want to keep things simple. I think the FTSE All-Share is a reasonable benchmark as my portfolio is about 50% FTSE 100, 40% FTSE 250 and 10% Small Cap, which isn’t a million miles away from the All-Share. Others have suggested comparing against a portfolio split 50/50 between the 100 and the 250, which seems reasonable enough, while others have suggested some high yield indices.
The problem is that you can always argue that some other benchmark index should be used. If I pick a value index and beat it, someone will say what about this other index that beat you? If I then compete myself against that other index and beat it in the future someone will say what about this other other index.
So I would rather just stick to a simple, vanilla appropriate benchmark, which for me is the All-Share. And if I can’t beat the All-Share with less risk then I should hang up my hat and go do something else, like being a passive investor.
Very interesting reading but do you think the FTSE All Share is the best comparison to your portfolio ? One could get the impression that the portfolio is more orientated towards the FT250 and perhaps a bench mark that reflected the overall mix of your portfolio could be an additional comparator ?
Apologies, I didn’t see your last post that answered my query.
No problem Hari, it’s a good and fair question which is why I get asked it quite often!
Hi John,
Impressive results. I’m interested to know where you got the figures for the FTSE All Share Returns in your comparison. E.g., if I look at a tracker like Vanguard FTSE UK All Share Index Unit Trust, how do get those 1, 3 and 5 year figures? Sorry if this is a dumb question. Thanks. Paul.
Hi Paul, not a dumb question at all. There are probably quite a few different ways that it could be done, but for me I run a virtual portfolio inside ShareScope which holds the Aberdeen UK Tracker Trust, which is a FTSE All-Share tracking investment trust. The portfolio tracks all dividends paid as well as the capital value of the shares, and I manually reinvest dividends whenever they’re paid out (and take into account broker fees etc). As I have been running this virtual portfolio for five years I can then easily calculate the total return performance over any period I like, with the help of a spreadsheet.