When dividend investing beats a balanced portfolio

Convinced a balanced portfolio is always the best investment strategy? A dividend investing enthusiast begs to differ

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(Photograph by Raina + Wilson)

(Photograph by Raina + Wilson)

I’m no gambler but during a one-week break in Florida in mid-February we accompanied our hosts to harness racing at Pompano Park.  The other couple and my wife procured a racing guide and started to scour the pages for the horses and jockeys that had impressive records of late.

I scornfully declined to look at the guides and settled on the strategy I had devised the previous February. I explained that it was a waste of brainpower spending even a minute looking at the past histories of the horses since it was all a matter of luck and randomness.

Instead, I was going to bet the minimum $2 (US dollars, admittedly) on Horse 5 for all 8 races. Whatever horse wore number 5 would get my bet, no matter whether it was named Northern Dancer or This Horse Has Only 3 Legs.

Oh, and unlike the others, I wasn’t going to bet on Number 5 horse to win, only to “Show,” which means the horse merely has to come in first, second or third, in a field that typically has between six and nine horses.  Now as it turned out, those who did take the time to peruse the racing form uncovered a valuable piece of information: at least at that track in recent years, it turns out that Horse number 5 did win far more often, so the odds were with me.

As you can imagine, the rewards of this approach to betting would not be enormous but I did do better than break even. I felt that if we had an evening’s entertainment and came out with slightly more than we expended, it would be a successful evening. (Don’t ask about dinner!)

Sadly—or happily for the other three—their staking it all on a few single winners also proved to be a winning strategy, and the wins were more impressive than mine.

You probably know where I’m going with this. My approach to betting was akin to “indexing” in investing: spreading your money across the market through index mutual funds or exchange-traded funds (ETFs.) The rest of the gang were in my opinion riverboat gamblers and the equivalent of Mad Money viewers rashly picking individual stocks. But when my wife saw my number 5 horses consistently coming in the top three, she started to mix that strategy into her own, which I observed was the equivalent in investing of “Core and Explore.”

As our male host was a former financial adviser who had been written up in a MoneySense profile, you can imagine how much fun we had with this analogy.

Entertaining as this true anecdote may be, though, I wouldn’t normally have written it up for this blog. However, for an upcoming MoneySense column in the magazine I had interviewed Wes Moss, author of You Can Retire Sooner Than You Think. He mentioned both in the book and in our chat a book that appears to have profoundly influenced his outlook on investing: Lowell Miller’s The Single Best Investment: Creating Wealth with Dividend Growth.

In due course, I will review this book in full on the Financial Independence Hub. Suffice it to say I highly recommend it. But for now I wanted to highlight some passages from Chapter 10, Building Your Portfolio. You see, Miller doesn’t think investors need to hold bonds at all and therefore regards asset allocation as “the mother of all buzzwords.”

And wouldn’t you know it, early in the exposition he talks about a horserace betting strategy remarkably like the one I’ve described. In Lowell’s view, asset allocation across a broad number of different asset classes is “very similar to saying you can never really know who’s going to win a horse race, so you should buy a ticket on all the horses. You’ll always have a winner—though your winners will be mostly offset by your losses … The asset-allocation mentality is rather aligned, in my mind, with the gambler who bets every number.”

Miller’s Single Best Investment consists of an equally weighted portfolio of about 30 high-yielding dividend aristocrat stocks: stocks that consistently raise their dividends over the years. He says such a portfolio will replace a balanced or asset allocation portfolio with “nearly identical risk characteristics—but without the performance drag of fixed income.”

Jonathan Chevreau is editor-at-large for MoneySense and runs the Financial Independence Hub. His email is jonathan@findependencehub.com

 

 

 

 

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