As you probably know, a year ago I purchased some dividend stocks.
The market had just tanked and I felt like it was time to pounce on some investments that I had been watching for some time (but were just too expensive IMO to buy).
Well, the coronavirus took care of the expensive part and knocked the entire market for a loop in March 2020.
Having lived through 2008-2009, I felt fairly confident that things would bounce back, but even for an “old pro” like me, it took a gut check to follow up on those feelings and actually take action.
But take action I did. I plowed as much cash as I could (while keeping my emergency fund in tact) into both index funds and dividend stocks.
Many readers wondered why I even bought dividend stocks and didn’t put it all into index funds.
I’ve addressed that previously, but the main reasons are:
- I wanted investments that produced a higher level of income as I’m trying to create a 100% passive income portfolio that supports our lifestyle (more on this in a future post).
- I wanted to see if I could outperform the S&P 500 with dividend stocks. If you Google around you’ll see articles on both sides of the issue — that dividend stocks can allow you to outperform the market and others that say you should always just stick with an index fund and realize income by selling.
- I was financially able to. I have won the game and can now stop playing by the rules that got me here. So I can take a small portion of my net worth and invest it however I want to. After all, there’s no better teacher than experience, so I wanted to dive in and see what all this dividend investing was about.
If that’s not enough background, you can read How I Added Dividend Stocks to My Portfolio and you’ll be up to speed.
Let’s Begin with a Disclaimer
As I’ve done on other posts where I discuss specific investments, I want to put a few statements upfront just to be 100% clear to all readers:
This post is about what I’ve done investing-wise.
It’s not about what you should do investing-wise.
I do not know your goals, financial situation, or any one of a hundred other details that would even slightly qualify me to offer any investing advice to you.
As such, this post is not meant as stock advice. I am not recommending you do what I do, I’m simply telling what I did.
You need to make your own decisions based on your own goals and situation in life.
I could lose every penny of the money I’ve invested.
Every premise I’ve used to try and make a smart decision could be wrong.
If I do lose it all, I’ll be fine.
You do your own investing at your own risk.
Ok, now that you’ve been warned, let’s get to the post…
Now that it’s been a year, I wanted to look at the stocks I purchased and compare those to the S&P 500. That’s what this post is about.
Calculating S&P 500 Returns
You think it would be easy to find the S&P 500 returns from one date to another. But it is not.
At least it wasn’t for me. Perhaps for some it’s a piece of cake, but not for me.
Part of the reason is that I don’t track return rates that closely. I have always focused more on the amount and time invested, with time being the most important factor. Return rate just had to be “good” (not great) if those other two were excellent (which for me, they were).
This is similar to the situations most millionaires I’ve interviewed fall into as well. I ask them, “What’s been your overall return?” I even tell them “(a rough estimate is fine)”. And yet most of them answer along the lines of “I have no idea.”
But thankfully, I have a place to turn to for solid direction.
Total Return Indexes
After making my own attempt at calculating the S&P 500 returns, I asked the following in the Millionaire Money Mentors forums:
I’m writing a post and need to know the following:
The S&P 500 return (including dividends) from opening on March 26, 2020 to closing on March 25, 2021.
I have an answer, but I don’t trust it.
Tell me what you think and we’ll compare results…
Many of the mentors and members jumped in to offer thoughts but it was Apex (no surprise) who not only offered the best response, but also gave us all an education along the way.
He responded with the following:
This question is actually quite easy for me to answer.
The reason this is usually hard to answer is because everyone follows stock price indexes. They are what is universally reported. They are the only thing most people even know exists. It is very unfortunate that is the case because stock price indexes are very misleading over longer stretches.
Stock price indexes are simply wrong and it is a shame that they are what everyone uses because they exclude dividends. But how important are dividends really? I mean they are like 1-2% of the entire market right, so it’s just noise. In a single year that is mostly true.
Here is a quote I found just by googling dividends as a percent of total return: “Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” Does that shock you? It even shocked me to be that high. I didn’t do any work to verify it.
Luckily there are secondary indexes called total return indexes. Those are what I use exclusively as I track my option performance and compare to both the SP500 total return index and the Nasdaq total return index (specifically the Nasdaq 100 total return index). My goal is to beat both. If I can’t beat them I might as well join them. So far so good but the point is, I compare to total return not stock price index return because stock price index return is very misleading.
So this number is easy to calculate. You simply take the SP500 Total return index (^SP500TR) and compare the values of that index on 3/26/20 and 3/26/21.
Here is a breakdown of numbers from that index for some comparable dates you might want to use:
3/19/20 4909.13
3/20/20 4697.09
3/23/20 4559.50
3/24/20 4987.80
3/25/20 5045.35
3/26/20 5360.49
3/27/20 5179.92
3/30/20 5354.39
3/31/20 5269.20
3/23/21 8106.83
3/24/21 8063.00
3/25/21 8105.51
3/26/21 8240.38
If we compare 3/26/20 with 3/26/21 (8240.38 / 5360.49) we get 53.72%.
If you want to compare the absolute low on 3/23/20 to 3/23/21 (8106.83 / 4559.50) we get 77.80%.
If you want to compare the absolute low on 3/23/20 to today 3/26/21 (8240.38 / 4559.50) we get 80.73%
Those are the accurate total returns for those periods including dividends.
Don’t be surprised. He hits it out of the ballpark with most of his responses.
In fact, I KNEW he would respond to my question and I KNEW he’d over-deliver on the answer.
S&P 500 Results
Still, I wanted to be sure I had the exact numbers correct, so I replied back as follows:
I assume these are closing numbers, correct?
So I’d take the closing number from 3/25/20 (which would be the opening number for 3/26/20, the first full day I owned the stocks.
Then I’d take the number for 3/25/21 to get in my 365 days.
So…
(8105.51-5045.35)/5045.35 = 60.65%
Correct?
He confirmed that these were correct.
I now had the S&P 500 results for the time period covering the first year I owned my dividend stocks. It returned 60.65%.
That’s a pretty good return, right? I think so! My index funds have certainly done well during that time.
Dividend Stock Returns
Now I had to calculate the return on my dividend stocks.
As a reminder, here are the dividend stocks I bought and when:
- I purchased my original 10 dividend stocks on March 25, 2020.
- I added one more on April 6.
- I purchased my last one on July 9.
The original ten stocks are as follows:
- Abbvie (ABBV)
- Aflac (AFL)
- Archer Daniels Midland (ADM)
- Eastman Chemical (EMN)
- Emerson Electric (EMR)
- Exxon (XOM)
- Franklin Resources (BEN)
- Minnesota Mining (MMM)
- Nucor Corp (NUE)
- Sysco (SYY)
On April 6 I added Chevron (CVX) and on July 9 I added Walgreen’s (WBA).
For the purpose of this comparison, I’ll only be using the first ten since those are the ones with a year of history.
Here are my final purchase results:
- Total stocks: 10
- Amount invested: $199,930
- Estimated Annual Dividends: $11,067
- Estimated Annual Dividend Yield: 5.54%
And here are the results:
- As of March 25, 2021, those ten stocks had a value of $368,706.
- In addition, those stocks have paid me $7,852.18 so far over the course of the last year. (FYI, this does not include the fourth quarter of the year’s dividends for some of these. On the initial investment, I should be paid $11,076.12 when all the dividends come in for my first year of ownership. But we’ll use the smaller number here just to make my investment results lower.)
- This makes their total one-year value to me as follows: $376,558
- This equates to a return of 88.3%. The math: (376,558 – 199,930)/199,930.
So, is a return of 88.3% better than a return of 60.65%? I think it is. 🙂
And obviously the reason is not the dividend. That may account for a small part of the difference. The dividend stocks did better because they appreciated more than the market as a whole.
Here’s how each stock performed in the year (not counting dividends):
- Abbvie (ABBV): 54.7%
- Aflac (AFL): 69.5%
- Archer Daniels Midland (ADM): 72.9%
- Eastman Chemical (EMN): 156.34%
- Emerson Electric (EMR): 96.2%
- Exxon (XOM): 50.9%
- Franklin Resources (BEN): 75.7%
- Minnesota Mining (MMM): 48.6%
- Nucor Corp (NUE): 127.59%
- Sysco (SYY): 92.08%
You can add 3.9% to 9.8% to each of these to get total return if you like. (If you really want to do that, you can go to part 2 of my dividend stocks posts and add in the yields noted there.)
All but three of them were above the S&P 500 returns WITHOUT counting dividends. Not bad at all.
What Does This Mean?
So what does this mean? That I missed my calling as a stock picker? That maybe I’ve gotten wiser in buying stocks since I tried and failed miserably in my 30’s?
Hahahaha. I wish.
Yes, I did do a lot of research and narrowed down the stocks I felt really good about. And yes, I did take the risk and actually buy them.
But in the end, I was fortunate. The results could have gone either way.
Let’s go back to Apex who put it in this ever-so-subtle way:
Huge swings can happen around bottoms and if your purchase date is off a couple days it can make a huge difference. You are also talking about 10 stocks. If Tesla was in your list your return would be 3 figures. A 10 stock portfolio should not be surprising at all to diverge significantly from a 500 stock average. It could diverge significantly in either direction.
The whole process illustrates a couple principles I noted in How the Rich Get Richer, especially #2 (They have surplus funds to invest) and #5 (They can strike when the iron is hot.) It also helps that the amount I invested was not going to make or break me, so I could afford to be a little bit more risky with it. And as a result, these particular stocks did really well.
I wanted to share the results because when I made the investments several people wondered what the results would be — and I promised to follow up with a report after a year.
Promise fulfilled.
More on Total Return Indexes
There was more to our thread in the forums that I think many of you will find interesting.
Apex went on to educate us even more on total return indexes:
For anyone who is interested here are 5 total return indexes for most of the major indexes people benchmark against. Below is the ticker for the stock price only index with its value on 3/26/21 and then the total return index with its value on 3/26/21.
They will be listed as follows:
Index : Normal ticker (Normal Value) : Total Return Index (Total Return Value)
- Dow Jones : ^DJI (33,072.88) : ^DJITR (76,849.96)
- S&P 500 : ^GSPC (3,974.54) : ^SP500TR (8,240.38)
- Nasdaq : ^IXIC (13,138.72) : ^XCMP (15,594.59)
- Nasdaq 100 : ^NDX (12,979.12) : ^XNDX (15,205.20)
- Russell 2000 : ^RUT (2,221.48) : ^RUTTR (11,408.52)
You can see some of these have a small difference between indexes (Nasdaq), some have a medium difference, (SP500 and DJIA), and some have a very large difference (Russel 2000).
This is mostly because of the age of the indexes. Some of these indexes aren’t that old so they haven’t had the time to build the gap that others have.
As I mentioned above over a previous 81 year period the SP500 total return was 95% from dividends which means the SP500TR would be 20 times larger than the SP500 index if it was 81 years old. However the SP500TR was only introduced in 1993 so it is only 27 years old and it is already over twice the size of the SP500 index and dividends are not nearly as large a percent of returns as they were 80 years ago.
Based on the doubling in 27 years that would mean at that rate the SP500TR would be more than 8 times larger than the SP500 index after 81 years going forward from here for example.
One of the members responded:
I have never heard of a Total Return Index but it definitely makes sense.
To which Apex replied:
Exactly. Hardly anyone has.
That’s why I don’t like the normal stock price indexes we all hear reported, but unfortunately it’s what everyone knows and thus what most everyone tracks against which is not a valid comparison.
By tracking to the stock index you are ignoring about 2% of return a year, and I don’t mean 2% of the total return. I mean 2 actual percentage points of return.
So if on average the SP500 is returning 10% a year then the index is only going to be growing at about 8% CAGR per year. That means the index is missing 20% of the annual return each year, and that difference gets compounded every year which is how the index ends up missing 95% of the total return over an 81 year period.
So if you beat the SP500 index by 1% per year you are actually trailing the total SP500 return by about 1% per year due to dividends that amount to about 2% of the total value of the index per year.
Good stuff, right? I know it was an education for me!
MI-173 says
This is great stuff. I was doing something similar to you at that time, as I converted my IRA to a Roth on 3/19/20, and then over the next couple weeks, bought a basket of dividend stocks, about 25 in total. Ironically bought all the stocks on your list except the best and worst performer (EMN, MMM). A couple high dividend duds held my returns back (T, VZ)
I calculate a 76% return including dividends, so not quite as well as you did, but a little better than the 68% return from 3/19/20 per the index. Of course, the best decision by far was converting the IRA to a Roth just two trading days before the bottom, but that was probably pure luck.
The great thing about this was the education though – I learned a lot about dividend investing, what to look for, and how to identify solid values. I’ll always have the core portfolio in index funds, but am comfortable now with the idea of 20-30% of invested capital being in solid dividend stocks too.
Accidentally Retired says
I’ll be interested in seeing performance for the next year forward. You obviously invested at the right time and it had hugely positive results. More power to you than anything for going all in during the downturn!
Josh M. says
Great information and congrats on a great first year. Does anyone know of a good website that can track overall performance – possibly compare it to total return of S&P or others? I add to my brokerage account monthly, which complicates the process. I have an excel sheet that I use to track, but is highly manual and clunky. I use Yahoo finance to track daily, but even the pay version doesn’t have a good way to understand overall return over a period of time.
MI 173 says
For dividend stocks, I use the simply safe dividends website. It’s a premium service ($400/year), but it has a great tracker and lots of excellent advice and tools to really understand dividend stocks in depth. If you’re going to be a dividend investor, it’s a great tool. It syncs with major brokerage accounts, which is really nice if you reinvest like I do, so you always have current share prices.
Josh M. says
Yah, I’ve been holding off on paying for a service on account of how cheap I am, but at some point it’s probably worth it. Thanks!
Charlie @ doginvestor.com says
I use Sharesight to track returns since my portfolio became cumbersome for Excel. It handles withdrawals, additions and dividends very well. Can then benchmark against whichever index you’d like to track. There’s a free version for a small portfolio (think 20 shares or something), but the paid version has been great so far ($19 per month). I also like to see my taxable income and forecasted income through it.
The expert level product (not sure on the price), allows you to do contribution analysis too if that’s your thing.
MI-119 says
Next similar (rare) opportunity try putting some into a leveraged index fund for enhanced returns. It was my biggest portfolio holding at about 33%, and over the time frame you specified (3/26/20-3/26/21) it returned almost 148% due to the Nasdaq 100’s relative outperformance and even with the recent pullback.
I’m too chicken to dive into individual stocks (ever since buying Amazon at 42 and selling it at 48) but hey with 20 years of financial education under my belt maybe I’ll look into it next big opportunity.
Apex says
You find leveraged index funds less risky than individual stocks?
Do you hold the leveraged index fund long term?
I presume you are aware that leveraged index funds lose value due to the up and down nature of stocks on a day to day basis because the fund has to reset the allocation back to the same amount of leverage at the end of each day.
That means if stocks go down the fund is now over leveraged (kind of like an internal margin call) so to get back to the proper leverage ratio they have to sell (sell low). If stocks go up that means they are under leveraged now so to get back to the correct leverage ratio they have to buy (buy high). This works just fine in a market that is on a rocket ship to the moon (aka the last year). It works horribly in most typical markets as the fund thrashes itself into a negative return most of the time due to day to day gyrations in the market.
How do you deal with that when investing in leveraged index funds?
https://www.investopedia.com/articles/financial-advisors/082515/why-leveraged-etfs-are-not-longterm-bet.asp
MI-119 says
Very specific funds, that have long term longevity and purchased at lows as OP describes to take advantage of market rebound like OP’s referenced time frame. They are also definitely not all created equally. I stay away from the vast majority. Mine was trading around 65 cents at the lows of the Great Recession. It is now trading around $69, or >100 fold. I first purchased in 2014 and held on since due to my ongoing research, so I have longevity with it, although that is not the recommendation to hold long term it’s worked out well. It resets monthly, not daily. 5 and 10 year returns currently showing at >35% annualized. Ironically I hold a few non-leveraged funds that have done even better in 2020, but have lower long term annualized returns.
The time to buy is after a major drop as OP describes, even better after a prolong, deep recession subsides, when most institutional investors do a lot of their buying too. I’m not a buyer right now. It’s not for most because most buy high and don’t research what they’re buying much, but a good entry and exit strategy does well, like a good stock trade. They are for more sophisticated investors with the means and risk tolerance to take on some additional risk for reward.
I will also say that it is a relatively small percentage of my total investment portfolio (market and non-market investments), even with the disproportionately high growth over the last few years.
MI-119 says
My bad. It’s trading around $59, not 69.
Apex says
Thanks for that description. That is very helpful and a critical distinction from the general advice to just buy a leveraged fund. Daily resets can cause very unexpected leakage. I did not know they had funds that reset monthly. That would definitely help a good bit with the thrashing and that makes sense to do something like that. What is the fund you are using?
MI-119 says
I don’t believe in any general advice for all including standard indexing. OP’s circumstances are different than most, but similar to mine in terms of risk tolerance and financial circumstances.
I generally hold about 10-12 mutual funds in our retirement portfolio at any given time and with some level of sophistication the majority have outperformed (and often significantly) the coveted S&P 500 index benchmark over the longer term. As such, despite starting late as healthcare professionals, we have managed to amass about $3.8M (at peak, up from $1.8M in my MI-119 interview 2.5 years ago, or op 111%) in retirement accounts alone now in our mid-late 40’s, with the expectation of an 8 figure balance in retirement accounts by our early-mid 50’s (barring a major recession/depression). Seems lofty, and probably difficult without at least some holdings earning >index returns. As a reminder we can afford to lose everything in our retirement accounts and remain FI due to our household income, cash, business and real estate holdings. A prolonged recession can derail/delay the trajectory.
The holding I referenced above is DXQLX, which has GROWN to about 30% of our retirement portfolio due to performance. I do not rebalance for risk but for performance given my individual circumstances. Financial sophistication is important for the non-financial in being able to find the needle in the haystack researched, purchased and potentially exited at the right time. The timing is more important than the selection IMO to achieve better returns and as OP eluded to in the timing of his purchases.
117 says
I’ll admit I’ve been intrigued with Direxion funds/ETFs for a while now. I even purchased a small quantity of SPXL a while ago. When I eventually sold it I only had small gains since the market was not accelerating enough and the trashing didn’t help. However if you looking at the total returns for SPXL compared to say VOO over 1 year, 2 years, 5 years and 10 years- it’s done very well. When the Covid crash came I didn’t have the nuts to go back in but wish I did. I’ll be ready next time. Love to hear other experiences as well.
I’ve been in mostly ETF indexes with about 35% cash/cash equivalents as I’m approaching retirement. Looking at that cash is killing me so much I’m even doing some iBonds for now.
M15 says
Good job! I think one take away from this post is that as investors, we need to have patience. If you have $200k burning a hole in your bank account, it is stressful to see it there not generating a return. I have always kept a large part of my emergency fund in the brokerage account on standby in case of a sudden market downturn. It happened in 2008 and it happened last year and both times I bought stock and have had great returns on the dividend and capital gain side. But I was tempted so many times to do something with that money. Not sure if its a good strategy or not but the only way to buy when the market goes down is to have the funds available to move quickly when it happens.
Farm says
Awesome! You absolutely rocked it! Congrats on diligently and systematically building your passive income streams.
Your strategic thinking and lens of sharing is greatly appreciated.