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 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. 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 honest 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.