The stock market has been volatile and wild during the year thus far. Also, stocks have gone nowhere compared to a year earlier. In the last year, we had many instances of panics and decline. However, each time the major indexes quickly recovered. The SPDR S&P 500 Index ETF (NYSEARCA:SPY), which represents the S&P 500 Index, barely avoided a bear market correction (technically speaking) and declined nearly 20% from its peak in September 2018 until Christmas Eve on 24th December 2018. Then again, we had widespread panic, but only mini-corrections to the extent of 6-7% decline from May 3 –June 3, 2019, and July 26-August 5, 2019.
Even though, each time all the major indexes have recovered quickly, it still gives a pause to conservative investors and retirees to think about how to re-position their portfolios for a possible recession in the future (even if it's distant). Also, the bull market is long in the tooth and shows signs of exhaustion, with the world economy slowing and US corporate earnings declining. However, we are "not" recommending that one should sell all stocks and move to cash, because it's very, very hard to time the market correctly, if not impossible.
S&P 500 ( SPY) chart:
What Can We Learn from Previous Market Crashes?
A market environment like this reminds us of the importance of a well thought-out strategy that can stand both the good times and bad. Irrespective of the direction that the market may take, it becomes even more important to stick to the pre-planned strategy in times like this.
We wanted to see how different stocks or securities reacted to the market in late 2018 and the summer of 2019. No such study can be complete without looking into the 2008-2009 recession period, so we will go back to the previous market crash of 2007-2009 as well as the crash of May-Oct 2011. We start with a set of about 75-80 stocks and other securities that are drawn from either our DGI portfolio and/or from the list of dividend aristocrats. We are going to look at the behavior and price declines of our selected securities during the following periods:
Table-1:
Period S&P 500 Decline (from top to bottom) 1. -6.02% 2. -6.62% 3. -20.18% 4. -19.42% 5. Oct 11, 2007 – Mar 9, 2009 -56.19%
July 26, 2019 – Aug 5, 2019 May 3, 2019 – June 3, 2019 Sep 20, 2018 – Dec 24, 2018 Apr 29, 2011 – Oct 3, 2011
We then compared each of them with the performance of the S&P 500 (SPY) during these periods of stress. We also compared the performance of some of the popular Dividend ETFs like Vanguard High Dividend Yield ETF (VYM), Vanguard Dividend Appreciation ETF (VIG), Vanguard FTSE Developed Markets ETF (VEA), and Vanguard Real Estate ETF (VNQ). We could not compare or analyze some other popular ETFs that do not have sufficiently long histories such as Schwab US Dividend Equity ETF (SCHD) and ProShares S&P 500 Dividend Aristocrats (NOBL). SCHD has an inception date of October 2011, whereas NOBL only goes back to October 2013. We tried to analyze how these stocks performed when compared to the S&P 500 or dividend ETFs.
The list of stocks/securities that were part of our sample:
DGI Stocks (Dividend Aristocrats and a few more):
3M Co (MMM)
A. O. Smith Corp (AOS)
Abbott Laboratories (ABT)
AbbVie Inc (ABBV)
AFLAC Incorporated (AFL)
Air Products & Chemicals, Inc. (APD)
Altria Group Inc (MO)
Amgen, Inc. (AMGN)
Archer Daniels Midland Co (ADM)
AT&T Inc. (T)
Automatic Data Processing (ADP)
Becton Dickinson and Co (BDX)
Brown-Forman Corporation Class B (BF.B)
Cardinal Health Inc (CAH)
Caterpillar Inc. (CAT)
Chevron Corporation (CVX)
Chubb Ltd (CB)
Cincinnati Financial Corporation (CINF)
Cintas Corporation (CTAS)
Cisco Systems, Inc. (CSCO)
Clorox Co (CLX)
Colgate-Palmolive Company (CL)
Consolidated Edison, Inc. (ED)
CVS Health Corp (CVS)
Dover Corp (DOV)
Ecolab Inc. (ECL)
Emerson Electric Co. (EMR)
Exxon Mobil Corporation (XOM)
Federal Realty Investment Trust (FRT)
Franklin Resources, Inc. (BEN)
General Dynamics Corporation (GD)
General Mills, Inc. (GIS)
Genuine Parts Company (GPC)
HCP, Inc. (HCP)
Hormel Foods Corp (HRL)
Illinois Tool Works Inc. (ITW)
Intel Corporation (INTC)
Johnson & Johnson (JNJ)
JPMorgan Chase & Co. (JPM)
Kimberly Clark Corp (KMB)
Leggett & Platt, Inc. (LEG)
Linde PLC (LIN)
Lockheed Martin Corporation (LMT)
Lowe's Companies, Inc. (LOW)
Mastercard Inc (MA)
MCCORMICK & CO /SH NV (MKC)
Mcdonald's Corp (MCD)
Medtronic PLC (MDT)
Microsoft Corporation (MSFT)
National Retail Properties, Inc. (NNN)
NESTLE S A/S ADR (OTCPK:NSRGY)
Novartis AG (NVS)
Novo Nordisk A/S (NVO)
Nucor Corporation (NUE)
Omega Healthcare Investors Inc (OHI)
Pentair PLC (PNR)
People's United Financial, Inc. (PBCT)
PepsiCo, Inc. (PEP)
Pfizer Inc. (PFE)
Procter & Gamble Co (PG)
QUALCOMM, Inc. (QCOM)
Realty Income Corp (O)
The Coca-Cola Co (KO)
UNILEVER N.V. (UL)
United Technologies Corporation (UTX)
Valero Energy Corporation (VLO)
Ventas, Inc. (VTR)
Verizon Communications Inc. (VZ)
W W Grainger Inc (GWW)
Walgreens Boots Alliance Inc (WBA)
Walmart Inc (WMT)
Waste Management, Inc. (WM)
WP Carey Inc (WPC)
High Income Securities:
ETFs:
iShares US Preferred Stock ETF ( PFF)
BDCs/mREIT:
Annaly Capital (NLY),
Main Street Capital (MAIN)
CEFs:
Eaton Vance Dividend Income Fund (EVT),
Flaherty & Crumrine Preferred Securities (FFC),
Kayne Anderson MLP (KYN),
Cohen & Steers Realty Fund (RFI),
Cohen & Steers REIT and Preferred Inc Fund (RNP),
Tekla Healthcare Investors (HQH),
Nuveen Municipal High Income Fund (NMZ),
Cohen & Steers Infrastructure Fund (UTF),
Treasuries:
iShares Short term Treasury Bond ETF (SHY),
iShares 7-10 Year Treasury Bond ETF (IEF),
iShares 20+ Year Treasury Bond ETF (TLT)
Stocks that Performed Better than S&P 500
DGI Stocks That Outperformed S&P 500 All Five Times (of market stress):
Among the 73 DGI stocks on our list, 28 of them fared better than S&P 500 during all five instances of market crash or stress, including the 2008-2009 recession. A view of the same is presented below.
Table-2:
Price on 07/26/2019 Price on 08/05/2019 Decline or Advance Price on 05/03/2019 Price on 06/03/2019 Decline or Advance Price on 09/20/2018 Price on 12/24/2018 Decline or Advance Price on 10/11/2007 Price on 3/9/2009 Decline or Advance Price on 4/29/2011 Price on 10/3/2011 Decline or Advance ABT 87.75 83.16 -5.23% ABT 78.69 75.71 -3.79% ABT 68.79 65.56 -4.70% ABT 25.53 22.32 -12.57% ABT 24.9 24 -3.61% ADP 169.27 159.75 -5.62% ADP 160.19 156 -2.62% ADP 148.88 121.95 -18.09% ADP 47.9 33.2 -30.69% ADP 54.36 46.47 -14.51% AMGN 175.34 181.5 3.51% AMGN 177.31 172.36 -2.79% AMGN 205.1 178.4 -13.02% AMGN 57.83 46.27 -19.99% AMGN 56.85 53.9 -5.19% BF.B 55.23 53.25 -3.59% BF.B 53 50.32 -5.06% BF.B 49.29 45.75 -7.18% BF.B 19.96 10.95 -45.14% BF.B 19.16 17.94 -6.37% CB 152.97 148.49 -2.93% CB 145.05 147.81 1.90% CB 140 120.19 -14.15% CB 61.86 31.84 -48.53% CB 67.25 59.11 -12.10% CVX 123.72 118.74 -4.03% CVX 117.27 115.99 -1.09% CVX 119.42 100.99 -15.43% CVX 91 58.28 -35.96% CVX 109.44 89.88 -17.87% ECL 199.62 194.35 -2.64% ECL 185 185.64 0.35% ECL 159.2 137.9 -13.38% ECL 46.38 29.85 -35.64% ECL 52.76 48.07 -8.89% ED 86.34 85.48 -1.00% ED 86.03 87.37 1.56% ED 78.44 75.32 -3.98% ED 46.86 32.7 -30.22% ED 52.12 56.48 8.37% FRT 130.78 127.28 -2.68% FRT 132.96 130.85 -1.59% FRT 127.87 115.33 -9.81% FRT 91.23 40.2 -55.94% FRT 87.56 80.15 -8.46% GIS 53.64 52.81 -1.55% GIS 51.18 50.64 -1.06% GIS 44.37 37.59 -15.28% GIS 28.94 24.85 -14.13% GIS 38.58 37.96 -1.61% HCP 32.08 32.45 1.15% HCP 30.69 31.81 3.65% HCP 26.35 26.77 1.59% HCP 31.64 14.98 -52.65% HCP 36.07 30.8 -14.61% HRL 41.38 40.73 -1.57% HRL 39.68 40.42 1.86% HRL 39.86 40.91 2.63% HRL 9 7.55 -16.11% HRL 14.71 13.27 -9.79% KMB 137.17 133.63 -2.58% KMB 127.5 131.03 2.77% KMB 116.77 106.85 -8.50% KMB 67.1 41.61 -37.99% KMB 63.32 67.73 6.96% KO 54.17 51.65 -4.65% KO 48.72 49.98 2.59% KO 46.64 45.96 -1.46% KO 28.6 19.38 -32.24% KO 33.73 32.71 -3.02% LIN 200.96 190.63 -5.14% LIN 180.96 187.28 3.49% LIN 166.21 148.13 -10.88% LIN 83.28 53.98 -35.18% LIN 106.42 91.74 -13.79% MCD 215.58 210.45 -2.38% MCD 197.52 198.78 0.64% MCD 160.79 170.28 5.90% MCD 56.25 52.32 -6.99% MCD 78.31 86.02 9.85% MKC 162.57 154.74 -4.82% MKC 152.16 157.1 3.25% MKC 130.1 134.05 3.04% MKC 35.08 29.66 -15.45% MKC 49.12 44.93 -8.53% NNN 52.25 52.9 1.24% NNN 53.45 54.5 1.96% NNN 44.45 45.57 2.52% NNN 25.75 13.14 -48.97% NNN 26.34 25.95 -1.48% NSRGY 104.8 105.04 0.23% NSRGY 95.76 101.97 6.48% NSRGY 84.37 80.04 -5.13% NSRGY 43.12 30.3 -29.73% NSRGY 62.2 54.13 -12.97% NVS 93.19 90.72 -2.65% NVS 82.61 87.66 6.11% NVS 85.97 82.49 -4.05% NVS 53.93 34.53 -35.97% NVS 59.17 54.69 -7.57% O 69.54 68.96 -0.83% O 70.3 71.32 1.45% O 57.27 60.27 5.24% O 29.01 15.26 -47.40% O 35.55 30.54 -14.09% PEP 131.22 124.4 -5.20% PEP 127.67 128.98 1.03% PEP 115.22 106.03 -7.98% PEP 71.77 45.81 -36.17% PEP 68.89 60.29 -12.48% PG 114.73 113.08 -1.44% PG 106.08 103.8 -2.15% PG 85.36 87.36 2.34% PG 71.77 44.18 -38.44% PG 64.9 62.84 -3.17% T 34.15 33.49 -1.93% T 30.7 31.09 1.27% T 33.44 27.36 -18.18% T 41.61 21.72 -47.80% T 31.12 28.16 -9.51% UL 60.95 58.69 -3.71% UL 60.52 61.52 1.65% UL 55.95 50.97 -8.90% UL 32.8 17.04 -48.05% UL 32.57 30.56 -6.17% VTR 67.03 67.87 1.25% VTR 62.48 64.15 2.67% VTR 56.97 57.51 0.95% VTR 34.03 16.84 -50.51% VTR 48.98 41.77 -14.72% VZ 57.08 55.22 -3.26% VZ 57.24 56.38 -1.50% VZ 53.95 53.05 -1.67% VZ 42.71 24.48 -42.68% VZ 37.78 36.34 -3.81% WPC 85.19 83.45 -2.04% WPC 79.23 83.51 5.40% WPC 66 64.85 -1.74% WPC 31.85 18.88 -40.72% WPC 35.87 35.56 -0.86% SPY 302.01 283.82 -6.02% SPY 294.03 274.57 -6.62% SPY 293.58 234.34 -20.18% SPY 155.47 68.11 -56.19% SPY 136.43 109.93 -19.42%
Stocks That Outperformed At Least 4 Out of 5 Crashes:
Another set of 15 DGI stocks (out of 73 DGI on our list) fared better than S&P 500 at least four out of five instances. A view of the same is presented below. The Pink color highlights the underperformance with the S&P 500.
Table-3:
Or in the usual table form:
Table-3B:
Price on 07/26/2019 Price on 08/05/2019 Decline or Advance Price on 05/03/2019 Price on 06/03/2019 Decline or Advance 09/20/2018 Price on 12/24/2018 Decline or Advance Price on 10/11/2007 Price on 3/9/2009 Decline or Advance Price on 4/29/2011 Price on 10/3/2011 Decline or Advance APD 230.55 220.06 -4.55% APD 209.58 208.96 -0.30% APD 170.42 149.88 -12.05% APD 89.93 42.1 -53.19% APD 88.31 68.29 -22.67% BDX 254.39 236.34 -7.10% BDX 237.89 232.66 -2.20% BDX 261.89 209.85 -19.87% BDX 83.42 62.34 -25.27% BDX 85.94 70.84 -17.57% CL 73.69 68.8 -6.64% CL 71.95 70.69 -1.75% CL 68.79 58.04 -15.63% CL 36.8 27.53 -25.19% CL 42.18 44.15 4.67% CLX 166.33 155.03 -6.79% CLX 148.18 152.58 2.97% CLX 151.88 145.37 -4.29% CLX 62.58 45.9 -26.65% CLX 69.66 64.55 -7.34% CTAS 261.69 251.12 -4.04% CTAS 222.93 223.39 0.21% CTAS 211.69 156.02 -26.30% CTAS 36.75 18.15 -50.61% CTAS 31.05 26.88 -13.43% CVS 55.54 54.51 -1.85% CVS 56.66 53.39 -5.77% CVS 79.39 62.92 -20.75% CVS 39.62 23.98 -39.48% CVS 36.22 32.97 -8.97% GPC 97.91 90.08 -8.00% GPC 102.12 99.22 -2.84% GPC 101.51 91.85 -9.52% GPC 49.18 25.06 -49.04% GPC 53.7 49.32 -8.16% JNJ 130.73 130.16 -0.44% JNJ 142.01 131.44 -7.44% JNJ 141.98 122.84 -13.48% JNJ 65.95 46.6 -29.34% JNJ 65.72 62.08 -5.54% LMT 369.46 358.43 -2.99% LMT 334.07 344.57 3.14% LMT 333.13 245.22 -26.39% LMT 111.88 58.24 -29.34% LMT 79.25 71.16 -10.21% MDT 102.55 85.97 -16.17% MDT 89.58 85.97 -4.03% MDT 97.48 85.97 -11.81% MDT 56.44 85.97 52.32% MDT 41.75 85.97 105.92% NVO 48.84 47.9 -1.92% NVO 47.49 48.53 2.19% NVO 47.5 43.99 -7.39% NVO 11.71 8.63 -26.30% NVO 25.48 19.34 -24.10% OHI 36.99 35.88 -3.00% OHI 35.73 35.45 -0.78% OHI 32.81 33.72 2.77% OHI 16.88 12.09 -28.38% OHI 22.96 14.6 -36.41% PFE 43.09 36.96 -14.23% PFE 41.39 41.92 1.28% PFE 43.75 40.55 -7.31% PFE 25.45 12.63 -50.37% PFE 20.97 17.33 -17.36% WM 118.5 113.77 -3.99% WM 106.4 111.37 4.67% WM 91.72 83.7 -8.74% WM 38.42 22.23 -42.14% WM 39.46 31.36 -20.53% WMT 113.02 105.82 -6.37% WMT 102.08 101.96 -0.12% WMT 95.75 85.82 -10.37% WMT 46.9 47.51 1.30% WMT 54.98 51.96 -5.49% SPY 302.01 283.82 -6.02% SPY 294.03 274.57 -6.62% SPY 293.58 234.34 -20.18% SPY 155.47 68.11 -56.19% SPY 136.43 109.93 -19.42%
What Can We Observe for DGI stocks?
We can see that as a group, these stocks performed very well. Out of the total 73 stocks, 43 (28+15) stocks performed better than S&P 500 at least four out of five times, 28 of them all five times. In fact, further, all of these stocks are dividend stocks, and they continued to pay good dividends, many of them paid between 3%-4%, probably double of the S&P 500. Since the above comparison is based on the market prices, without including the dividends, their performance would be even better, especially during the prolonged periods of stress (like in 2008-2009).
What about the Dividend ETFs?
Here's the snapshot for the four dividends ETFs, including VNQ (the Real Estate ETF). Only one of them, "VIG," fared slightly better than SPY all five times. VYM fared better at least four times, whereas VEA and VNQ fared better three times.
Table-4:
Price on 07/26/2019 Price on 08/05/2019 Decline or Advance Price on 05/03/2019 Price on 06/03/2019 Decline or Advance Price on 9/20/ 2018 Price on 12/24/ 2018 Decline or Advance Price on 10/11/ 2007 Price on 3/9/ 2009 Decline or Advance Price on 4/29 /2011 Price on 10/3/ 2011 Decline or Advance SPY 302.01 283.82 -6.02% 294.03 274.57 -6.62% 293.58 234.34 -20.18% 155.47 68.11 -56.19% 136.43 109.93 -19.42% VEA 41.57 39.35 -5.34% 42.08 40 -4.94% 43.81 35.84 -18.19% 51.37 19.44 -62.16% 39.62 29.36 -25.90% VIG 119.29 113.1 -5.19% 113.42 108.71 -4.15% 112.09 92.08 -17.85% 58.57 30.55 -47.84% 57.45 47.5 -17.32% VNQ 88.29 87.56 -0.83% 87.67 87.1 -0.65% 82.81 71.74 -13.37% 75.25 21.62 -71.27% 61.83 48.47 -21.61% VYM 89.22 84.51 -5.28% 87.84 83.43 -5.02% 89.14 73.71 -17.31% 55.41 22.94 -58.60% 46.11 39.43 -14.49%
High-Income Funds (CEFs and BDCs):
For most CEFs and other income funds, S&P 500 probably is not the correct benchmark to compare. Also, since most income funds provide monthly distributions in the range of 6%-10%, the price alone is not a good comparison as the results are skewed. However, nonetheless, here is the comparison based on price action:
Table-5:
Price on 07/26/2019 Price on 08/05/2019 Decline or Advance Price on 05/03/2019 Price on 06/03/2019 Decline or Advance Price on 9/20/ 2018 Price on 12/24/ 2018 Decline or Advance Price on 10/11/ 2007 Price on 03/09/ 2009 Decline or Advance Price on 4/29/ 2011 Price on 10/3/ 2011 Decline or Advance EVT 24.38 23.6 -3.20% 23.92 22.14 -7.44% 24.5 17.63 -28.04% 28.89 6.81 -76.43% 18.13 13.19 -27.25% FFC 20.23 19.95 -1.38% 19.4 19.48 0.41% 18.5 16.05 -13.24% 18.31 4.8 -73.78% 17.83 15.76 -11.61% HQH 19.56 19.01 -2.81% 19.95 19.13 -4.11% 22.85 16.79 -26.52% 17.61 8.42 -52.19% 15.82 12.52 -20.86% KYN 15.45 14.42 -6.67% 15.69 14.97 -4.59% 18.18 12.52 -31.13% 31.56 14.96 -52.60% 30.58 26.03 -14.88% MAIN 41.91 40.9 -2.41% 39.96 40.12 0.40% 39.29 32.58 -17.08% 14.9 9.4 -36.91% 18.81 17.03 -9.46% NLY 9.6 9.22 -3.96% 9.7 9.05 -6.70% 10.31 9.71 -5.82% 15.34 12.97 -15.45% 17.84 15.84 -11.21% NMZ 14.09 14.16 0.50% 13.71 14 2.12% 12.63 11.43 -9.50% 16.03 8.8 -45.10% 11.77 11.52 -2.12% PFF 37.32 36.88 -1.18% 36.49 36.37 -0.33% 37.1 33.41 -9.95% 47.88 15.23 -68.19% 40.06 34.67 -13.45% RFI 14 13.64 -2.57% 13.66 13.86 1.46% 12.4 10.65 -14.11% 17.83 4.32 -75.77% 13.95 10.61 -23.94% RNP 22.26 21.8 -2.07% 20.94 20.81 -0.62% 19.8 16.45 -16.92% 26.49 3 -88.67% 15.92 12.36 -22.36% UTF 25.93 25.56 -1.43% 25.27 23.88 -5.50% 22.78 18.78 -17.56% 27.35 6.78 -75.21% 18.37 15.31 -16.66% SPY 302.01 283.82 -6.02% 294.03 274.57 -6.62% 293.58 234.34 -20.18% 155.47 68.11 -56.19% 136.43 109.93 -19.42%
Since 2007-2009 was the only prolonged downturn, we will consider this period to show the impact of dividends/distributions and compare with S&P 500. If we were to invest $100,000 at the beginning of October 2007 (equally among the above 11 funds) and sold at the end of March 2009, this is how it would compare with S&P 500 (chart courtesy portfolio-visualizer):
The Income Fund portfolio and S&P 500 were down by 43% and 47% respectively, with dividends included, so the income-portfolio fared slightly better after including distributions. This shows that an income portfolio consisting of mostly CEFs, BDCs, and maybe some REITs, should have no greater risk than the S&P 500.
The Treasury Funds
As widely believed and correctly so, the Treasury funds are supposed to be a safe haven during the times of crisis or stress. This is amply demonstrated below from the data from each of FIVE crash scenarios. Each time, the Treasury funds rallied as S&P500 declined. That would mean a modest 10% allocation to the Treasury funds (some mix of long term, mid term, and short term) will go a long way in providing safety cushion to any DGI portfolio.
Table-5:
Price on 07/26/2019 Price on 08/05/2019 Decline or Advance Price on 5/3/2019 Price on 6/3/2019 Decline or Advance Price on 9/20/ 2018 Price on 12/24/ 2018 Decline or Advance Price on 10/11/ 2007 Price on 03/09/ 2009 Decline or Advance Price on 4/29/ 2011 Price on 10/3/ 2011 Decline or Advance TLT 131.47 138.87 5.63% 123.66 132.44 7.10% 117.15 121.32 3.56% 88.06 103.65 17.70% 93.89 123.81 31.87% IEF 109.44 112.11 2.44% 105.48 109.22 3.55% 100.96 103.48 2.50% 83.33 94.52 13.43% 94.47 105.83 12.02% SHY 84.57 84.85 0.33% 83.87 84.55 0.81% 83.05 83.46 0.49% 80.91 83.89 3.68% 84.13 84.54 0.49% SPY 302.01 283.82 -6.02% 294.03 274.57 -6.62% 293.58 234.34 -20.18% 155.47 68.11 -56.19% 136.43 109.93 -19.42%
Portfolio Construction for the Bear Market
(just in case we have one):
For the sake of completeness to this article, we will construct a balanced risk-averse DGI portfolio that's somewhat bear-market resistant and likely to provide lower drawdowns and quicker recovery. At the same time, we would like our portfolio to provide a decent level of income that would make it much easier to ride out any prolonged correction. Also, over and above the income, the portfolio should also provide a decent amount of growth to meet the rate of inflation and some more.
With the above goals in mind, we have selected a combination of 20 DGI stocks from eight different sectors (roughly 15 industry segments), eight CEFs/BDCs, and 10% allocation to mix of Treasuries. Younger investors with a long horizon should replace the Treasuries by a couple of growth stocks.
Table-6:
Ticker Sector/ Industry Invested Amount Yield % Dividend Amt **Average Drawdown Variance % with S&P 500 ##Market Value if S&P 500 were to drops 50% 70% Allocation to 20 DGI stocks ABT Healthcare 3500 1.50% 52.5 41.66% 2770.95 ADP Business Process 3500 1.88% 65.8 70.38% 2268.35 AMGN Healthcare 3500 2.82% 98.7 22.13% 3112.73 CB 3500 1.94% 67.9 47.74% 2664.55 CVX Energy/Oil major 3500 4.10% 143.5 63.16% 2394.70 ED Utility 3500 3.37% 117.95 4.68% 3418.10 JNJ Healthcare 3500 2.91% 101.85 53.45% 2564.63 KO Beverages 3500 2.97% 103.95 23.66% 3085.95 MCD Restaurants/Retail 3500 2.12% 74.2 -7.53% 3631.78 MSFT Technology 3500 1.34% 46.9 82.75% 2051.88 NNN REIT 3500 3.76% 131.6 6.39% 3388.18 NSRGY Consumer Staples 3500 2.20% 77 8.67% 3348.28 NVS Healthcare 3500 3.18% 111.3 14.94% 3238.55 O REIT 3500 3.75% 131.25 24.58% 3069.85 PEP Beverages 3500 3.00% 105 47.79% 2663.68 PG Consumer Staples 3500 2.51% 87.85 25.90% 3046.75 T Communications/Media 3500 5.77% 201.95 47.41% 2670.33 UL Consumer Staples 3500 3.04% 106.4 39.60% 2807.00 VTR REIT/Healthcare 3500 4.37% 152.95 19.96% 3150.70 VZ Communications 3500 4.28% 149.8 36.13% 2867.73 70,000 2,128 83.16% 58,215 20% Allocation to CEFs/BDCs EVT Equity CEF 2500 7.43% 185.75 100% 1250.00 HQH Healthcare CEF 2500 9.24% 231 100% 1250.00 MAIN BDC 2500 6.60% 165 100% 1250.00 NMZ Municipal CEF 2500 4.98% 124.5 100% 1250.00 JPC Preferred CEF 2500 7.52% 188 100% 1250.00 RFI Real Estate CEF 2500 6.70% 167.5 100% 1250.00 UTF Infrastructure CEF 2500 7.10% 177.5 100% 1250.00 PCI Debt Securities CEF 2500 8.73% 218.25 100% 1250.00 20,000 1457.5 10000.00 10% Allocation- Treasuries SHY Short-term 3400 2.09% 71.06 -5.84% 3499.28 IEF Mid-term 3300 2.28% 75.24 -38.47% 3934.76 TLT Long-term 3300 2.42% 79.86 -82.80% 4666.20 10,000 226.16 12100.24 Portfolio TOTAL/AVERAGE 100,000 3.81% 3,812 80.31% 80,315
** Average Drawdown Variance % with S&P 500: This factor for each security is the average variance ratio (of five crash periods). The variance ratio for each period is calculated by dividing the drawdown for each security by the drawdown for S&P 500. For CEFs/BDCs, we have assumed a factor of 100% because after including their dividends, they move down as much as the S&P 500. This was proved by our examples earlier. The Average Drawdown Variance factor for the entire portfolio is about 40% of S&P 500. This means that when the S&P 500 drops by 50%, the portfolio will drop by 20%.
## Market-value, if S&P 500 were to drop 50%: This is simply calculated by multiplying the Investment amount with “Drawdown Variance % with S&P 500.”
Concluding Remarks
The above portfolio is conservative and well diversified with exposure to different types of assets. In addition, it would provide a decent level of income of nearly 3.80%. Most of all, it should do relatively well during a recession.
To be clear, some of the stocks in the recommended portfolio are not cheap today, so we are not recommending just to go out and buy these stocks in full positions today. Each individual should consider his or her personal situation, financial goals, and risk tolerance before making any investment decisions. However, if you are thinking of converting your portfolio away from risk-assets and moving to safer dividend stocks, we believe this is a methodical approach to make a diversified, income-producing and drawdown-resistant portfolio that can also serve well for the long term. Remember the Wall-Street saying - "bulls make money, bears make money, pigs get slaughtered.” So, it will be prudent to have a strategy, make some goals, and be ready with an action plan.
High Income DIY Portfolios: The primary goal of our "High Income DIY Portfolios" Marketplace service is high income with low risk and preservation of capital. It provides DIY investors with vital information and portfolio/asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe it's appropriate for income-seeking investors including retirees or near-retirees. We provide six portfolios: two High-Income portfolios, a DGI portfolio, a conservative strategy for 401K accounts, a Sector-Rotation strategy, and a High-Growth portfolio. For more details or a two-week free trial, please click here.