The Original Special Video Report Version Of This Article Was Published On Dividend Kings (Preparing For Recession Part 12) On June 2nd, 2022. The data has been updated for March 22nd.
It is part of the Dividend Kings 75 Part Preparing For Recession Video Series.
This week I'm attending a work conference and thus publishing updated versions of these video articles.
-------------------------------------------------------------------------------------One of my most important goals is to help you prepare emotionally and financially for the market's inevitable downturns.
This includes helping you remain calm, rational, and disciplined throughout all market and economic cycles.
Which is when we have an economic update every six weeks.
- Recession Watch Video: Can The Fed Pull Off A Soft Landing?
- Next Recession/Banking Crisis Watch video coming Monday, April 3rd.
To paraphrase Napoleon, the definition of a stock market genius is
The investor who can do the average thing when everyone else around him/her is losing their mind."
Why?
After Market Hell, Market Heaven Follows...If You Can Ride Out The Short-Term Pain.
From the first time the market hits -25%, the average 12-month gain is +22%, and ten years later, the average gain is 214%, with stocks more than tripling.
Even during the 1970s stagflation, stocks delivered solid 2X to 3X gains after 25% bear markets.
Historically, new bull markets start with a 48% rally 12 months after the final bottom (which you can never know when they have finally happened).
This is why you need to avoid the temptation of market timing.
Most investors can't, and that's why investors of every kind historically underperform mutual funds and ETFs by 1.73% per year.
- 67% less inflation-adjusted wealth over 30 years
- perfect market time since 1970 would have delivered 22% better returns over 40 years
- compared to a 6500% return for stocks
- for every $1 in extra profit you could make with perfect market timing, you risk not making a likely $295.
And even perfect economic timing isn't enough to beat buy-and-hold blue-chip investing over the long term.
But of course, even 12 months in a bear market can feel like an eternity.
Thus the reason for the Dividend Kings 75-part series on how to emotionally and financially prepare for recessions and bear markets.
- Part 1: The Nature Of Corrections And Bear Markets
- Part 2: History’s Lessons For The Next Downturn
- Part 3: The Role Of Bonds In A Diversified Recession-Resistant Portfolio
- Part 4: How The Fed Plans To Beat Inflation While Avoiding Recession
- Part 5: How Recessions Affect Corporate Fundamentals And Dividends
- Part 6: How The Yield Curve Predicts Recessions
- Part 7: The Economic Fundamentals That Predict Recessions
- Part 8: Building A SWAN Retirement Portfolio, Determining Your Risk Profile
- Part 9: Building A SWAN Retirement Portfolio, Choosing The Right Asset Allocations
- Part 10: How To Optimize Your Asset Allocation
- Part 11: The Importance And Power Of Diversification
- Part 12: How Diversification Optimizes Long-Term Retirement Income
- Part 13: Great Dividend ETFs To Help You Achieve Your Financial Goals
- Part 14: Great Growth ETFs To Help You Achieve Your Financial Goals
- Part 15: Sector ETFs To Consider Part 1
- Part 16: Sector ETFs To Consider Part 2
- Part 17: Dividend Aristocrat ETFs To Consider
- Part 18: 4 International High-Yield ETFs To Consider
- Part 19: 4 More International High-Yield ETFs To Consider
- Part 20: Beware International Dividend Aristocrat ETFs
- Part 21: Global Dividend ETFs Are Great...But There's A Catch
- Part 22: 5 Safe High-Yield Monthly Paying CEFs To Consider
- Part 23: A Powerful Way To Hedge Against Stagflation
- Part 24: How To Avoid Dangerous CEFs and ETFs (With 4 Examples)
- Part 25: Introducing The DK Great ETF/CEF Database Tool
- Part 26: Building A SWAN Retirement Portfolio: How To Find The Safest Recession-Resistant Blue-Chips
- Part 27: How To Avoid Sucker Yield Traps
- Part 28: Building A SWAN Retirement Portfolio: Finding The Most Dependable Blue-Chips
- Part 29: Building A SWAN Retirement Portfolio: How To Find Attractively Valued Blue-Chips
- Part 30: Choosing The Blue Chips For Your Needs
- Part 31: When To Rebalance Your Portfolio
- Part 32: Guide To Tax Loss Harvesting
- Part 33: Superior Alternatives To A Traditional 60/40 Retirement Portfolio
- Part 34: The Long-Term Recession-Optimized Portfolio
- Part 35: Building A Zen Extraordinary Ultra SWAN (Z.E.U.S) High-Yield Portfolio
- Part 36: Building A Zen Extraordinary Ultra SWAN (Z.E.U.S) Growth Portfolio
- Part 37: Building A Zen Extraordinary Ultra SWAN Value Portfolio (Z.E.U.S)
- Part 38: How To Back Test And Stress Test Your Optimal Portfolio
- Part 39: Good Risk Management Can Save You From Catastrophe
- Part 40: Why Hedge Funds Are A Bad Deal And How To Build Your Own
- Part 41:
- Part 42: How To Rebalance A High-Yield Portfolio
- Part 43: Preparing For Recession Webinar Video
- Part 44: A Potentially Game-Changing 12.4% Yielding ETF For Your Ultra SWAN Portfolio
- Part 45: The Dangerous Way Most Investors Use Leverage
- Part 46: What You Need To Know About Stagflation
- Part 47: The Smart Way To Buy Stocks In A Bear Market
- Part 48: The ZEUS Dollar-Cost-Averaging Strategy
- Part 49: How To Sell Bonds To Buy Stocks During A Bear Market
- Part 50: Net Worth Diversification
- Part 51: How To Hedge Your Portfolio Against Stagflation
- Part 52: Preparing For The Potential Debt Ceiling Crisis
- Part 53: How Bad This Bear Market Is Likely To Get
- Part 54: Don't Fall Victim To Recession Doomsday Prophets
- Part 55: The Right And Wrong Way To Think About Forecasts
- Part 56: Ignore The Noise And Keep Buying
- Part 57: How To Hedge Against Recession
- Part 58: When Experts Fail
- Part 59: How To Rebalance A Value Portfolio
- Part 60: DK $1 Million Retirement Portfolio Rebalancing
- Part 61: DK High-Yield Blue-Chip Portfolio Rebalancing
- Part 62: DK Deep Value Blue-Chip Portfolio Rebalancing
- Part 63: DK Fortress Portfolio Rebalancing
- Part 64: DK Phoenix Portfolio Rebalancing
- Part 65: DK Zen Retirement Portfolio Rebalancing
- Part 66: DK Zen Yield Portfolio Rebalancing
- Part 66: DK Zen Value Portfolio Rebalancing
- Part 67: DK Zen Quality Portfolio Rebalancing
- Part 68: DK Zen Growth Portfolio Rebalancing
- Part 69: The Power Of "Strategic Mediocrity."
- Part 70: Using The Right Benchmark Is Important
- Part 71: Useful Tools For Portfolio Planning, Management, and Recession Monitoring
- Part 72: Why Smart Investors Should Look Forward To Bear Markets
- Part 73: Build Your Financial Future On Facts, Not Fantasies
- Part 74: Ways Of Emotionally Dealing With This Bear Market
- Part 75: The Zen Of Bear Market Investing During Recessions
Let me share why diversification can turbocharge your long-term income growth and leave you swimming in cash in retirement.
Why Diversification Is Important In High-Yield Portfolios
- Preparing For Recession Part 11: The Importance And Power Of Diversification.
Last week we saw why diversification is the only "free lunch" on Wall Street and how it reduces both fundamental risk and volatility.
Today we'll see why it also is the key to maximizing long-term retirement income.
Let's start with the most extreme example, the single highest-yielding blue chip on Wall Street.
- Daily Blue-Chip Deal Video: MPLX: The Safest 9.2% Yield On Wall Street.
If you put all your savings into MPLX, you'd get a safe 9.2% yield that analysts expect to grow at 3% over time.
- slightly ahead of the bond market's 30-year inflation expectations of 2.3%.
Of course, owning a single stock exposes you to concentrated fundamental risk.
- BBB credit rating = 7.5% risk of bankruptcy over 30 years
- 1 in 13.3 chance of going to zero.
But here's how to harness the principles of safe high-yield, combined with diversification.
- MPLX (MPLX)
- Magellan Midstream (MMP)
- (OTCPK:LGGNY)
- Altria (MO)
- Enterprise Products Partners (EPD)
- British American Tobacco (BTI).
Instead of a single 9.2% yielding MPLX, we now have six blue chips yielding 7.4% in three sectors and from two countries on two continents.
- quality is nearly as high as dividend aristocrats
- from a portfolio that yields 3X as much as the dividend aristocrats.
Over the long-term, analysts expect 5.2% growth to drive 12.6% long-term returns.
Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return 6 High-Yield Blue-Chips 7.4% 5.20% 12.6% 8.8% Safe Midstream 5.6% 6.0% 11.6% 8.1% High-Yield 3.1% 12.7% 15.8% 11.1% REITs 2.8% 6.5% 9.3% 6.5% Dividend Aristocrats 2.2% 8.9% 11.1% 7.8% S&P 500 1.7% 8.5% 10.2% 7.1%
(Sources: Morningstar, FactSet, Ycharts.)
Market and aristocrat beating return potential and 3X to 5X better safe yield? Yes, please, I'll have some of that.
High-Yield Blue-Chip Total Returns Since November 2012 (Annual Rebalancing)
Portfolio 2013 Income Per $1,000 Investment 2022 Income Per $1,000 Investment Annual Income Growth Starting Yield 2021 Yield On Cost S&P 500 $24 $54 9.4% 2.4% 5.4% Vanguard High Yield ETF $36 $88 10.4% 3.6% 8.8% 6 High-Yield Blue-Chips $50 $181 15.4% 5.0% 18.1%
(Source: Portfolio Visualizer Premium.)
And now, we can add dividend growth stocks to showcase the true power of diversification.
Why Dividend Growth Stocks Are An Important Part Of A Diversified Portfolio
Here are six hyper-growth dividend blue-chips, which yield just 1.4% (vs. Nasdaq's 1%), but offer 21.3% long-term return potential.
- Lowe's (LOW)
- ASML Holding (ASML)
- Qualcomm (QCOM)
- Taiwan Semi (TSM)
- Mastercard (MA)
- Visa (V).
- and are far higher quality than the dividend aristocrats
- 1.64% average 30-year bankruptcy risk = A- positive outlook average credit rating vs. A- stable for aristocrats
- half the bankruptcy risk of the aristocrats.
What if we combine these six hyper-growth dividend growth Ultra SWANs with our six high-yield blue-chips?
Now we have a 4.4% yielding portfolio with a 12.6% long-term growth consensus for a 16.9% long-term total return potential.
Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Safe Midstream 5.6% 6.0% 11.6% 8.1% 5.6% 12 Dividend Growth Blue-Chip Portfolio 4.4% 12.55% 16.9% 11.8% 9.3% High-Yield 3.1% 12.7% 15.8% 11.1% 8.5% 10-Year US Treasury 2.9% 0.0% 2.9% 2.9% 0.4% REITs 2.8% 6.5% 9.3% 6.5% 4.0% Dividend Aristocrats 2.2% 8.9% 11.1% 7.8% 5.2% S&P 500 1.7% 8.5% 10.2% 7.1% 4.6%
(Sources: Morningstar, FactSet, Ycharts.)
That's potentially better returns than the Nasdaq and VYM over time, and with a much higher yield to start with.
Inflation-Adjusted Consensus Return Potential: $1,000 Starting Investment
Time Frame (Years) 7.7% CAGR Inflation-Adjusted S&P Consensus 8.7% Inflation-Adjusted Dividend Aristocrats Consensus 14.4% CAGR Inflation-Adjusted 12 Dividend Growth Blue-Chip Portfolio Consensus Difference Between Inflation Adjusted 12 Dividend Growth Blue-Chip Portfolio Consensus Vs S&P Consensus 5 $1,445.67 $1,514.08 $1,955.15 $441.07 10 $2,089.97 $2,292.44 $3,822.62 $1,530.19 15 $3,021.42 $3,470.93 $7,473.82 $4,002.89 20 $4,367.98 $5,255.26 $14,612.46 $9,357.20 25 $6,314.67 $7,956.89 $28,569.60 $20,612.72 30 $9,128.95 $12,047.36 $55,857.96 $43,810.60
(Sources: DK Research Terminal, FactSet.)
Even if the growth stocks in our portfolio only grow as expected for 10 years, that's potentially 4X inflation-adjusted returns in the next decade.
Time Frame (Years) Ratio Aristocrats/S&P Ratio Inflation-Adjusted 12 Dividend Growth Blue-Chip Portfolio Consensus Vs S&P Consensus 5 1.05 1.35 10 1.10 1.83 15 1.15 2.47 20 1.20 3.35 25 1.26 4.52 30 1.32 6.12
(Sources: DK Research Terminal, FactSet.)
Or, to put it another way, about 2X the market's return potential with 3X the much safer yield.
12 Dividend Growth Blue-Chip Total Returns Since November 2012 (Annual Rebalancing)
Analysts expect about 16% long-term returns, which these 12 blue chips delivered over the last decade.
- including two bear markets
- the most severe recession in 75+ years
- and half of these companies being in severe bear markets.
From disappointing returns to outstanding market-smashing ones, and with lower volatility to boot! And take a look at the income growth!
(Source: Portfolio Visualizer Premium.)
Portfolio 2013 Income Per $1,000 Investment 2022 Income Per $1,000 Investment Annual Income Growth Starting Yield 2022 Yield On Cost 6 High-Yield Blue-Chips $50 $181 15.4% 5.0% 18.1% Vanguard High Yield ETF $36 $88 10.4% 3.6% 8.8% 12 Dividend Growth Blue-Chips $36 $230 22.8% 3.6% 23.0%
(Source: Portfolio Visualizer Premium.)
In 2013, this portfolio yielded 3.6%, but it delivered 23% annual dividend growth over the last decade.
- precisely because dividend reinvestment and annual rebalancing benefited from the high-yield blue-chip bear markets.
What income growth do analysts expect in the future?
Risk, Inflation, And Tax Adjusted Income Growth Consensus
Analyst Consensus Income Growth Forecast Risk-Adjusted Expected Income Growth Risk And Tax-Adjusted Expected Income Growth 22.2% 17.1% 14.5% 12.0%
(Source: DK Research Terminal, FactSet.)
Very similar income growth. Adjust for the risk of these companies now growing as expected, inflation, and taxes, and you get 12% real expected income growth.
Now compare that to what they expect from the S&P 500 (SP500).
Time Frame S&P Inflation-Adjusted Dividend Growth S&P Inflation-Adjusted Earnings Growth 1871-2021 1.6% 2.1% 1945-2021 2.4% 3.5% 1981-2021 (Modern Falling Rate Era) 2.8% 3.8% 2008-2021 (Modern Low Rate Era) 3.5% 6.2% FactSet Future Consensus 2.0% 5.2%
(Sources: S&P, FactSet, Multipl.com.)
What about a 60/40 retirement portfolio?
- 0.5% consensus inflation, risk, and tax-adjusted income growth.
In other words, these 12 dividend growth blue-chips offer:
- 3X more than the market's yield (and a much safer yield at that)
- 4X its long-term inflation-adjusted consensus income growth potential
- 24X better long-term inflation-adjusted income growth than a 60/40 retirement portfolio.
This is the power of dividend growth blue-chip investing that combined both yield and growth.
Bottom Line: Diversified Growth And Value Is The Key To Maximum Retirement Income
High-yield blue-chips are great for maximum safe income today. Still, if you want to maximize your income over time, you must also be diversified into fast-dividend growers and even future dividend blue chips (like Autodesk and Amazon).
How does a very safe 4.4% yield today sound? How about 17% long-term returns? Or what about 22% annual income growth for years to come?
That's what MPLX, MMP, LGGNY, MO, EPD, BTI, LOW, ASML, QCOM, TSM, MA, and V are offering today.
Better yet, you can turn these companies into a diversified and prudently-risk managed balanced portfolio can be constructed to deliver:
- far superior yield today
- market-beating long-term returns
- 33% lower volatility
- 50% lower peak declines than a 60/40 in even the most extreme market crashes
- 50% to 60% lower peak bear market declines than the S&P 500
- far superior long-term retirement income than a 60/40.
This weekend I'll show you exactly how to combine the power of high-yield blue-chips, with hyper-growth blue-chips, and create the ultimate high-yield income growth sleep night portfolio.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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