In Part II of the series, we explain what the Global Dividend Aristocrats portfolio is and how it earned 10.32% per year over the past five years.
In Part I we covered how Dividend Aristocrats out-perform the market and several reasons why higher dividend yielding companies are more generally able to produce better returns.
The purpose of this article is to take you through the model portfolio and to introduce you to the official Frugal Investors Global Dividend Aristocrats portfolio for U.K. investors. After thirty-five hours of research I have crafted a bespoke and well-balanced income portfolio that is prepared to weather whatever economic storms get thrown its way. Given that a third of your investment return comes from dividends and income alone, it makes sense to focus here.
Today we are going to cover:
- What the research says about buying shares direct versus using an ETF
- Introduction to the Global Dividend Aristocrats Portfolio
- Variations to the portfolio depending on your risk tolerance
- Historical returns
What the Research Says – To buy or not to buy shares direct…
Where you live in the world – believe it or not – dictates how you should invest your money. I think I truly began to understand this in Year 8 of my journey and as a direct result of owning assets in different regions, in local currencies. If you live in Canada or the US then please refer to the article here.
However, UK investors need to take a different approach because there are readily available products that will do all of the hard work for you!
If 100% of your assets are in pound sterling right now (GBP), then you need to be careful about taking on too much overseas exposure by buying foreign shares directly. There are currency costs through your broker for each transaction (1% with AJ Bell), foreign withholding taxes on income (typically net 15%), and over long periods of time currencies can move dramatically. Brokers also charge for dividend re-investment.
In addition, the cost of self-managing a portfolio (in time, and trading costs) is excessive especially if you have a part-time or full-time career. The risk is that you under-perform the market. In the UK, with the FTSE All-Share Index yielding you 3.96% and producing an 8.00% annual return over 10 years, it’s hard to argue that spending huge amounts of your time individually investing is going to yield you significantly higher returns. However for many individual investors, the reality is, 92-95% of you will under-perform the market over 15-year periods.
There are four good reasons why you are better placed to use a passive ETF / index approach to global dividend aristocrat investing in the UK:
- There are simply not as many dividend aristocrats in the UK as there are in the US
- The top dividend aristocrats that we do have are prohibitively expensive
- Directly buying Canadian, US and international dividend aristocrats is prohibitively expensive
- There are good GBP-denominated ETF’s that can help you form a balanced portfolio
Other Investing Options
At Frugal Investors we continue to hold the view that there are merits to taking a low-cost, balanced approach to investing through the Vanguard LifeStrategy funds. Have a look here to find out why this can help you to retire 13 years earlier.
Another option is to get direct exposure to the FTSE All-World or MSCI All-World Index. That topic is covered at length here.
The main reason for the research around the Global Dividend Aristocrats portfolio is this: over long time periods high dividend yielding companies tend to out-perform their respective benchmarks.
So the question is: how do we get access to them and benefit from that excess return?
Global Dividend Aristocrats portfolio
The original intention, at the outset, was to build a portfolio of individually owned stocks and shares that you could own directly. That proved very difficult to do, because many of the ‘by numbers’ businesses in the UK that have consistently paid a dividend have appreciated to high levels and have low dividend yields. In addition Europe, the United States, Canada, Japan and Australia are enticing markets for dividends and have hundreds (if not thousands) of established players.
The results of the Frugalist Investor’s detailed analysis suggest that getting exposure to global dividend aristocrat ETF’s is the simplest, easiest and lowest cost way to invest in this section of the market. The portfolio presented below gets you access to a large cross section of those businesses at a reasonable cost.
|Name of ETF||Tickers||%Portfolio|
|SPDR® S&P Global Dividend Aristocrats||GBDV||30.00%|
|SPDR® S&P US Dividend Aristocrats UCITS ETF Dis||USDV||15.00%|
|Vanguard FTSE U.K. All Share Index (Acc)||VUK.||10.00%|
|Vanguard FTSE 250 UCITS ETF||VMID||15.00%|
|SPDR® S&P Euro Dividend Aristocrats||EUDV||20.00%|
|SPDR® S&P Pan Asia Dividend Aristocrats||PADV||10.00%|
|Vanguard LifeStrategy 20% Equity Fund||LifeStrategy Bond||0.00%|
Choosing a Risk Profile
There are two fundamental decisions that you need to make as an investor when constructing a portfolio.
The first is to decide what to invest in. Generally speaking it is better to use a passive approach to investing, because it allows you to make decisions about the ‘type’ of investments you want and the sectors and asset classes you favour. These ETFs have the major benefit of doing most of the buying/selling and asset allocation for you. At Frugal Investors we’ve presented several time-tested strategies, including this portfolio.
The second key decision is how much exposure to the stock market you are comfortable with taking. This is not a decision to make lightly: how much volatility you experience depends on the amount of money you allocate to equities (stocks and shares) as opposed to fixed income (bonds).
Beyond that, though, the Frugalist Investor has created a cheat sheet that enables you to adjust the Global Dividend Aristocrats portfolio for 40%, 60%, 80% and 100% equity exposures. So once you know what risk tolerance you are comfortable with, choose a portfolio below:
Please note that the “Vanguard LifeStrategy” fund is actually 80% bonds and 20% stocks. For the portfolio to have an 80% equity allocation (second to right column) you would need 25% weighting to the LifeStrategy fund to achieve a 20% real weighting in bonds overall. This is a clever way to gain balanced exposure to bonds while the underlying ETF does the re-balancing for you.
The Global Dividend Aristocrats portfolio (100% equity) has the following sector and country diversification features:
It is weighted towards the UK and Europe, which are home to a number of businesses that pay healthy dividends. The only disadvantage is that Canada represents 22.8% of the index but only 6.8% of this portfolio. To get higher exposure to Canada you would need to consider investing more funds (or even all of your funds) in the first ETF (GBDV).
The average dividend yield is a healthy 3.2%, representing the fact that there are a number of very high-quality and income rich businesses producing stable and regular returns for shareholders.
In terms of holdings and key information here is a snapshot of the two biggest ETF’s that form part of the portfolio and a breakdown of their underlying holdings:
|SPDR® S&P Global Dividend Aristocrats||GBDV||30.00%|
The GBDV etf has returned 9.32% per year over the last 5 years and it is an extremely well diversified dividend aristocrats fund that could be held in its own right. The underlying holdings are sound: H&M, IG Group, and AT&T all have long histories of paying and growing their dividends. AT&T – the US conglomerate – has paid a dividend for 35 years and yields around 6%.
|SPDR® S&P Euro Dividend Aristocrats||EUDV||20.00%|
The EUDV ETF has returned 10.5% per year over the last five years, and sports a five star Morningstar rating along with a 3.25% dividend yield. The top 5 holdings are well capitalised, dividend growth companies. UPM has seen dividend per share growth of 16.7% per year since 2013, which means that you receive increasing levels of income and the business is committed to returning cash to shareholders. Sampo, Bayer and Nokian tyres are also strong cash generating, stable and consistent dividend growth companies.
The US ETF speaks for itself: many of the best dividend aristocrats sit in the United States. This 5-star fund has delivered 13.86% per year and the entire list of stocks in this ETF have paid and increased dividends for a minimum of 25 consecutive years. Although some of the businesses are richly valued, this level of stable growth looks set to continue and these businesses will likely out-perform the stock market in the future.
In order to invest in anything – be it individual shares, portfolios of ETFs (that hold shares), bonds, income funds or REITs – you need to understand what is happening underneath. Hopefully the summary above has educated you on what the Global Dividend Aristocrats portfolio is composed of. We will do further deep dives on the holdings in Part III.
What you really need to know, though, is the underlying performance. How has this total portfolio performed over 1-, 3- and 5-year periods?
|Name of ETF||YTD||3 YR||5 YR|
|SPDR® S&P Global Dividend Aristocrats||0.61||5.73||9.38|
|SPDR® S&P US Dividend Aristocrats UCITS ETF Dis||0.78||8.11||13.42|
|Vanguard FTSE U.K. All Share Index Unit Trust Accumulation||0.73||6.31||7.75|
|Vanguard FTSE 250 UCITS ETF||0.50||8.09||8.85|
|SPDR® S&P Euro Dividend Aristocrats||0.59||7.03||10.96|
|SPDR® S&P Pan Asia Dividend Aristocrats||1.94||8.47||12.3|
|Global Dividend Aristocrats Return (Portfolio)||0.86||7.03||10.35|
|S&P Global Dividend Aristocrats Index (Benchmark)||0.95||10.11||7.16|
The Global Dividend Aristocrats portfolio has beaten the FTSE All-Share, FTSE 250 and FTSE 100 indexes over 3-year and 5-year periods. In addition it has beaten the long-term return of the FTSE 100 index over the last 25-years (6.4% with dividends re-invested).
A more suitable benchmark would be the S&P Global Dividend Aristocrats Index. As you can see from the chart above the Global Dividend Aristocrats portfolio has under-performed the S&P index over 3-years and out-performed the index over 5-years.
Having a geographically and sector-diversified portfolio of global dividend yielding companies makes sense. As we saw in Part I, high yielding businesses tend to significantly out perform their non-dividend yielding peers over periods of 10-15 years and longer.
The Global Dividend Aristocrats portfolio has produced an annual return of 10.35% each year for the past 5 years.
The constituent ETF’s hold fundamentally high-quality businesses, at a relatively low cost, which are diversified and help you to gain exposure to global dividend shares without spending excessive amounts of money trying to buy foreign shares directly.
From one Frugal Investor to another, the portfolio is well worth considering when it comes to your own investing approach!