This dividend fund has beaten the stock market this year and provides a stable stream of cash flow
It’s a little under four months since I created four investing funds on Motif so I thought I would provide an update on how each are doing. We talked last week about how the American Future Fund of stocks within energy, agriculture and healthcare had doubled the stock market’s return over the period. I’m updating on the dividend fund this week and while it hasn’t done quite as well, I’m still happy with the return and the outlook to meet my investing goals.
If you’ve been reading the blog long enough, you know I love dividends. The quarterly cash payout from dividend stocks is one of the only certainties in the stock market and have accounted for about 40% of the long-term return on stocks.
Not only do they provide a strong return but dividend stocks help to reduce inflation risk and provide stability during a stock market crash. Need more convincing? Check out these four reasons to invest in dividend stocks.
Before we review the return on the dividend fund, note I’m not suggesting you invest in the fund. I like to share how I am investing and my process for picking stocks on the idea that maybe it will help you make some of your own decisions. The investing funds I created on Motif are built around my own goals and tolerance for risk and may not be appropriate for your needs. To get started on your own investing strategy, take a look at how to create a personal investing plan around your needs.
Beating the Stock Market and Putting Cash in Your Pocket: A Dividend Fund that Rocks
The dividend fund, actually called Dividends for Growth and Cash Flow on the Motif Investing platform, is composed of three exchange traded funds (ETFs) that make up 50% of holdings and 12 individual stocks across six sectors. Motif classifies stocks a little odd sometimes in its tables so the railroads and diversified machinery segments in the table below are actually part of the industrials sector.
The three ETFs give me exposure to hundreds of individual stocks in typically high dividend themes. While dividends in the energy sector might not be as high as those in a few others, I added it because of the outlook for strong growth and cash return as the sector gets back to normal after two years of falling prices.
The dividend fund is built on the core-satellite investing strategy, one of the best ways to invest and really the secret to stress-free investing. I talked about the core-satellite strategy in a recent Facebook Live video along with how to beat the stock market game (join us live every week on Facebook @3pm eastern). The basic idea is just to put half or more of your investment in broad funds that cover the market or your investing theme. This lowers your risk around any individual company and helps you earn the market return. The rest of your portfolio is spread out across individual stocks to help get a little extra return.
It’s only been a few months since I created the dividend fund but the return of 17.2% has beaten the S&P 500 by more than 3% and that’s not including the 1.35% return on dividends collected so far. Note that’s not an annualized return but the actual return on the fund to date, which is pretty darn good. Dividend yields on the fund range from 2.2% up to 6.4% with a 3.2% average weighted yield.
Winners and Losers in the Dividend Fund
Shares of energy companies have done very well since February on the rebound in the price of oil. The Vanguard Energy ETF (VDE) is up over 24% and shares of Devon Energy Corporation (DVN) have jumped 61% over the period. I don’t expect much more from energy over the rest of the year but still love the theme as a long-term investing theme. The world is only going to need more oil & gas and prices are still well below what they were a few years ago. It may take a while for oil to reach $100 a barrel again but I’ll benefit from growing dividends and stock values until it does.
Stocks of utilities companies, including the Vanguard fund and FirstEnergy Corporation (FE) in the dividend fund, have really been the laggards in the stock market. This is because investors are worried about rising interest rates, something that makes investment in utilities less attractive compared to bonds and other high yield stocks. I’m not worried though because they are some of the safest stock investments you can make and will provide great long-term cash flow and a stable return.
The investment in CF Industries (CF), an agricultural chemicals company, has also under-performed the dividend fund and the rest of the market. I see this as an opportunity and will be buying more shares over the next month. Companies in the agriculture industry have been hit hard over the last few years on record-breaking harvests that sent crop prices plummeting. It’s a very cyclical industry though and all it takes is for a year or two of bad weather to send crop prices back up and see these stocks jump. The National Weather Service puts odds at 75% that we get a La Nina weather phenomenon this year, the same weather pattern that typically dries out the Northern Hemisphere and led to record grain prices in 2012.
Against the average investor return of just 2.6% annually over the ten years through 2013, I would be happy with the dividend fund if it just made the same return as the general stock market. The fact that it has beaten the market is just an added bonus to the consistent cash flow it provides.
While I don’t recommend you invest directly in the dividend fund above, instead creating your own fund around your investing goals, I do think Motif Investing is a great choice for everyone. It would have cost 15-times as much to buy the stocks in the fund on another platform. With Motif, you create a fund and then pay just one $10 commission to buy all the stocks within it. Each time you go to invest more money in the fund, it’s just one commission.
There are so many reasons to invest in dividend stocks but the best one is just for general stock market diversification. Dividend stocks are generally more mature companies and will help to smooth out your investing returns when combined with growth stocks and other investing themes. Set up your own dividend fund on Motif or just invest in a few dividend ETFs for long-term appreciation and cash in your pocket.