The Experimental Portfolios vs. S&P 500: October Performance Update

Two of the six portfolios outperforming the S&P 500 since May. Which are they? Dividend yield vs. shareholder yield vs. P/E vs. Buffett yield vs. "The Whale"

One of my many flaws is a general lack of consistency. If you’ve been following my YouTube channel or even this blog, you’ve probably noticed. My “weekly” ETF review series has oscillated between two videos per week and on video per month. So, yeah, sorry about that.

Another of my failed commitments has been keeping you all updated on how the dividend yield and shareholder yield portfolios have done. My original intent was to do a video each month, but videos require lots of time (planning, outlining, filming, editing, etc). Articles take less time, so here we are on the blog with the monthly updates.

Even this has been difficult to keep up with. So I may drop down to a more quarterly schedule. For now, I’ll shoot for monthly. Next month, I’ll plan to post November’s results in the first week of December.

That’s enough rambling. Onto the experimental portfolios. There are currently six individual stock portfolios. I also have a market timing experiment that I outlined in my articles on moving averages & market timing. Anyway, those are for another time. These are the portfolios we will be reviewing today:

The 6 Portfolios

  • Shareholder yield

  • Dividend yield

  • Buffett yield

  • The “Whale”

  • EBIT/EV yield

  • P/E ratio

As a reminder, these portfolios were all started on the same day and built in the exact same way. I took the S&P 500 and took the top ranking stocks in each sector (weighted equally to the S&P 500) based on each of the ratios above. Then I just bought those 30 stocks and held them. All dividends have been reinvested into the stocks that have paid them.

All of these portfolios were bought at the same time (May 4, 2020) except for the Whale Fund (May 19, 2020).

So how have each of these portfolios performed? Let’s find out…

Year-to-Date Performance 1

Here is the entire portfolio comprised of the five valuation ratio funds. We’ll break them down more below. The starting value was $5,000 in May 2020 split equally across each “slice.” You can follow the whole portfolio with this link. (I think if you sign up for M1 Finance with this link, you get something and I get something? I don’t actually know the details, but just so you know I may make some money if you sign up with that)

NOTE: Remember, these portfolios are merely experiments. I have not done any fundamental analysis of these stocks. They were all chosen based on a preset methodology. I’m in no way recommending any of these for purchase. Do your own research before investing. :)

#6: High Buffett Yield +14.3% 2

Methodology: 10-year average free cash flow / enterprise value

The worst performing portfolio is quite surprising to me. These are all companies that had great cash flows relative to their enterprise value. 3 I would have expected this portfolio to do better than it has, but here we are. We’ll see if it can improve upon this for the rest of the year.

#5: Lowest Forward P/E Ratio +14.8% 4

I’ve long been critical of the price-to-earnings (P/E) ratio. It’s simple to calculate, intuitive, and widely referenced. However, I think it contains virtually no useful value information. It only captures one moment in time, which can lead to value traps or for stocks to look “expensive” which really are not. That’s not even to mention the substantial issues with GAAP earnings per share.

Anyways, it’s satisfying (and not surprising) to see the P/E ratio struggling to keep up with other, more robust methods of valuation capture.

#4: Highest Dividend Yield +18.9% 5

Ah, yes. Here we are. The portfolio that most of you are probably most interested in. So I’ll include the top holdings (and performers) so far since I started this experiment in May.

Top 5 Performers

  • UPS +93.2%

  • IVZ +84.4%

  • GM +79%

  • DOW +55%

  • AVGO +46%

Worst 5 Performers

  • OXY -34%

  • COTY -33%

  • GILD -22%

  • T -1%

  • IBM -1%

NOTE: The above are all total return data. So, yeah, you got paid a big dividend with T, but you lost it all (and then some) because the price went down. Taking a multi-billion dollar write-down will do that to you…

How has the highest dividend yield portfolio performed since May? Not bad, but it doesn’t look very impressive compared to some of the other portfolios.

As I said in my video when I started this list, dividend yield does not include as much information as you might think. Companies can do all kinds of things to pay big dividends while funding them in questionable ways (issuing equity, borrowing money, reducing future investment, etc.) so it’s not a great way to pick your stocks. You need to, at a minimum, consider other variables.

#3 High EBIT/EV Yield +21.4% 6

Methodology: Highest operating income (EBIT) / enterprise value (EV) as described above

Research has shown impressive results for the EBIT/EV ratio. It’s one of my favorite single valuation metrics. It’s far better than the P/E ratio, which we will talk more about in a later post or video.

Thus far, every one of these portfolios has underperformed the S&P 500 index, which is the next portfolio shown for reference. Portfolios #1 and #2 are the only ones to beat the market since May.

S&P 500 Index (as represented by SPY) +22.45% 7

The S&P 500’s total return over this time period has been about 22.5% according to Morningstar’s total return calculator. Remember, to be consistent with any benchmark we have to compare with consistent dates.

S&P 500 Equal Weight Index (as represented by RSP) +23.4% 8

The S&P 500 is a market-cap-weighted index. Since we are equal weighting all of our holdings at the start, the most representative benchmark is probably the equal-weight S&P 500. That index has actually performed slightly better than the S&P 500 since May 4th. Including it here.

#2 High Shareholder Yield +30.1% 9

Methodology: Highest shareholder yield (total dividends + buybacks (equity issuance) / market cap)

See the difference between shareholder yield and dividend yield? So far, it’s nearly 12% better since May. Of course, that doesn’t necessarily mean shareholder yield will always do better. The evidence both historically and in real-time suggests shareholder yield is the far superior metric. So where did the performance come from? Let’s look at the top 5 and bottom 5 performers:

Top 5 Performers

  • PWR +79%

  • VIAC +79%

  • GLW +77%

  • QCOM +72%

  • DFS +70%

Worst 5 Performers

  • VLO -31%

  • BIIB -10%

  • OMC -3%

  • SLG -1%

  • AMGN 0%

#1 The Whale Fund +29.2%10

Methodology: (Shhhhh… It’s a secret… More to come on this later)

Wait a minute… this fund performed +29.2% vs. shareholder yield at 30.1%. Why is this #1? With the date being a bit later (May 19th), the shareholder yield portfolio had about a 2% head start on this fund. If we looked at the same time period, this fund would’ve been slightly ahead of shareholder yield.

I’ll talk more about this last portfolio at a later date. If you want to get notified of that one, you can subscribe below.

We’ll do another update in early December. Hold me to that. ;)


DISCLAIMER: This is for educational purposes only and is not investment advice. It is not a recommendation to buy or sell any security. The author owns every stock mentioned above. All opinions are my own.

  1. Source: M1 Finance Dashboard. Accessed on October 23, 2020  ↩

  2. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩

  3. Calculated as total debt + market cap, which generally gives a more complete picture of a company. In essence, this is what the company would cost if you bought the entire thing and paid off all debts  ↩

  4. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩

  5. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩

  6. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩

  7. Source:Morningstar “SPY” Total Return interactive chart. Calculated as $11,747 today / $9,593 on May 4, 2020 minus 1.  ↩

  8. Source: Morningstar “RSP” Total Return interactive chart. Calculated as $10,688 on October 22, 2020 / $8,660 on May 4, 2020 minus 1.  ↩

  9. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩

  10. Source: M1 Finance Dashboard “Valuation Ratio Derby.” Accessed on October 23, 2020  ↩