5 Safe Ultra-High-Yield Blue-Chips For A Rich Retirement (2024)

(Source: imgflip)

We are living through one of the most bifurcated markets in US history right now meaning a period of extreme valuations that benefits relatively few companies.

(Source: Ben Carlson) data as of August 4th

Specifically, all of the market's gains this year have been driven by the five largest tech giants, who now make up almost 25% of the S&P 500. Apple (AAPL) alone now accounts for about 7% of the S&P 500.

(Source: Ben Carlson) data as of August 4th

44% of the S&P 500 is actually in a correction or bear market this year. This means that there remain many blue-chips available at reasonable to attractive valuations, which are the only companies I and prudent long-term investors are interested in buying today.

Using FactSet consensus data JPMorgan estimates the forward PE of the broader market at 22.34 which is 1.87 standard deviations above the 25-year norm.

By most other metrics as well stocks appear modestly to extremely overvalued.

JPMorgan points out several important facts about such lofty multiples for the S&P 500.

• high valuations are NOT a market-timing tool because since 1995 just 8% of total returns are a function of fundamentals/valuation
• high valuations do result in lower long-term returns with current expectations for the next five years slightly negative

Other research from Bank of America, Princeton, and Lance Roberts confirms that valuations, while not useful in predicting short-term returns, are rather accurate at explaining long-term returns.

Putting together all of this research, from reputable sources looking back at nearly 100 years of market returns and valuations, here is a useful rule of thumb guide for thinking about how efficient the market is over various time periods.

(Source: Dividend Kings S&P 500 Valuation & Total Return Potential Tool)

In the short-term the market is not at all efficient, driven almost entirely by sentiment/momentum and luck.

In the long-term (10+ years) fundamentals are 10X as powerful as sentiment.

What does that mean for index investors buying the S&P 500 at today's historically high valuations?

S&P 500 Valuation Profile

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, Brian Gilmartin, Reuters'/Refinitiv/IBES/Lipper Financial, FactSet, F.A.S.T Graphs, Ed Yardeni, JPMorgan, Multipl.com)

Stocks are now pricing in virtually all earnings growth for the next three years.

S&P 500 Total Return Profile

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, Dividend Kings Investment Decision Tool, F.A.S.T Graphs, FactSet Research)

Or to put another way, the market is priced for nothing ever going wrong again, but of course, something always does eventually. This is what triggers the market's historically normal and healthy pullbacks/corrections which since 1945 and 2009 have averaged one every six months.

(Source: Michael Batnick)

The pandemic and recession are the most obvious potential catalysts for a correction. Another is the risk of corporate taxes rising to 28% from 21% in 2021, which is a 50% probability according to Morningstar.

Goldman Sachs estimates that such a corporate tax hike, which is about an 80% probability if the Democrats gain control of the Presidency and Congress, would reduce future corporate earnings by about 12%.

S&P Total Return Potential Profile If Corporate Taxes Go to 28%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, Dividend Kings Investment Decision Tool, F.A.S.T Graphs, FactSet Research)

If corporate taxes do go up to 28% then the broader market's probability-weighted expected return doesn't turn positive until 2023 and just 1.7% CAGR total returns are likely through 2025.

Volatility risk becomes elevated during periods of extreme valuation and valuation risk right now is at the highest level in 18 years.

But fortunately, as my fellow Dividend Kings co-founder, Chuck Carnevale likes to say, "it's a market of stocks, not a stock market."

Something great is always on sale if you know where to look.

Which brings us to the best ultra-high-yield blue-chips that conservative investors such as retirees can safely buy in August.

Finding Safe Ultra-High-Yield Blue-Chips In This Overvalued Market

(Source: imgflip)

According to some of the best investors in history, including Peter Lynch, John Templeton, and Howard Marks, even the most skilled long-term investors will be right 60% to 80% of the time.

That's because three things determine long-term success.

1. your facts being right (when you make the investment, as best as you can know them at the time)
2. your reasoning being right (sound and evidence-based long-term approach to investing)
3. your risk-management being strong and appropriate for your risk profile and goals

Facts are ever-changing and will invariably shift over time, sometimes in our favor and sometimes not.

Your reasoning and risk management are always within your control and thus allow for success to become as close to guaranteed overtime as is possible on Wall Street.

(Source: imgflip)

That assumes you're disciplined enough to run your portfolio like a business, instead of a speculative gambling operation.

(Source: imgflip)

I begin every stock screen by using the Dividend Kings screening tool to eliminate overvalued companies.

(Source: Dividend Kings Company Screening Tool) green = potential good buy or better, blue = potentially reasonable buy

The Dividend Kings Master List is 457 companies at the moment and includes

• all 122 dividend champions (25+ year dividend growth streaks) that are tracked by analysts
• all 65 dividend aristocrats (S&P 500 companies with 25+ year dividend growth streaks)
• all 28 Dividend Kings (any company with 50+ year dividend growth streak)
• all 66 11/11 quality Super SWANs (5/5 dividend safety + 3/3 wide-moat business + 3/3 exemplary management/dividend friendly corporate culture)

Currently, 155 companies on the Master List, or 34%, are at fair value or better. 81 companies or 18%, are potential good buys or better.

Dividend Kings Rating Scale

Good buys or better are determined by the margin of safety relative to a company's quality and risk profile.

Since we're looking for the best ultra-value companies I screen for good buys or better leaving 81 companies with yields as high as 15%.

BUT maximum SAFE yield is what conservative investors are after, which means we must consider quality and dividend safety next.

I define dividend safety by 18 metrics which are used to generate a 5 point dividend safety score.

Dividend Kings Safety Score

I don't believe in plucking numbers out of thin air, but using the best empirically driven approach, using historical research spanning decades of market data.

(Source: imgflip)

This is why every single step in my approach to analyzing safety, quality, valuation, total return potential, and overall investing prudence is based on research from reputable universities, financial institutions, and the experience of the greatest investors in history.

Or to quote Isaac Newton, I believe that intelligent investing requires "standing on the shoulders of giants".

(Source: Moon Capital Management, NBER, Multipl.com)

I base safety scores on the historical recessionary dividend cut data for the S&P 500 which is defined as average quality for companies.

Then I use the blue-chip economist consensus range of expected GDP declines in 2020 to estimate the dividend cut probability in this, or any future recession.

So next let's eliminate any companies that don't have at least 4/5 dividend safety, meaning 6% or less dividend cut risk in the worst recession in 75 years.

• 68 companies remain with yields as high as 10%

Next, let's consider the overall quality that is based on dividend safety, the business model (stable profitability vs peers over time), and management quality/dividend friendly corporate culture.

To judge a company's business model I use average profitability vs peers looking at

• operating margin
• net margin
• return on assets
• returns on equity
• return on capital

(Source: imgflip)

My definition of business model quality is supported by both Joel Greenblatt, one of the greatest investors in history, as well as factor investing research from Research Affiliates.

Quality as a factor is usually defined by returns on capital or other measures of profitability.

It's one of seven proven alpha factors that consistently generate market outperformance over time.

My approach to investing is to combine several factors together such as dividend growth investing, value, quality, and often low volatility (dividend growth blue-chips tend to be naturally less volatile over time).

So now let's eliminate any company from our screen that isn't at least a

• 9/11 quality blue-chip
• 10/11 quality SWAN stock
• 11/11 quality Super SWAN

There are 48 companies remaining with yields ranging from 0.7% to 10%.

My quality model is not based just on my own opinion but always on a combination of objective facts as well as the qualitative assessments of reputable analysts and credit rating agencies.

A satisfactory statistical exhibition is a necessary though by no means a sufficient condition for a favorable decision by the analyst." - Ben Graham, Securities Analysis, 1958

So let's confirm the safety and quality of these companies by looking at their credit ratings.

Credit ratings are driven by a combination of safety guidelines pertaining to debt ratios as well as analyst qualitative assessments of the stability of a company's business, and the risks of cash flow disruption to serving debt over 30 years periods.

(Source: S&P)

Credit rating agencies are like insurance companies using historical data to constantly improve and fine-tune their statistical models.

(Source: Dividend Kings Investment Decision Tool, S&P, University of St. Petersburg)

Bond defaults usually result in bankruptcy and stocks going to zero, which is why credit ratings are such a useful quality/safety metric.

Let's eliminate any company that isn't at least BBB rated, which implies about 7.5% or less long-term bankruptcy risk.

• 46 companies remain with yields of 0.7% to 10%

Finally, let's consider dividend track records as a final quality/safety metric.

(Source: imgflip)

Ben Graham, the father of securities analysis, valuation, and Buffett's mentor, considered 20 years of uninterrupted dividends a sign of quality.

(Source: Justin Law)

My fellow Dividend King Justin Law now maintains David Fish's CCC list. This tracks the nearly 900 US-listed companies with 5+ year dividend growth streaks.

Prior to the pandemic, there were just over 900 companies on this list and 105 have cut or superseded dividends since the crisis began.

Just 4% of dividend champions have cut so far, and 12 years is the statistically significant cutoff for dividend streaks in terms of safety in this recession so far.

So let's eliminate any company without at least a 12-year dividend growth streak to give us a final list of safe blue-chip dividend stocks.

• 21 companies remain

These 21 companies represent the safest blue-chip dividend stocks conservative investors can buy in August from the perspective of

• overall company quality
• dividend safety
• attractive valuation

(Source: Dividend Kings Company Screening Tool)

Finally from this list of safe potential investments I select all the companies with yields of 5% or higher, which in this low rate/low yielding world is my definition of ultra-high-yield.

1. Enterprise Products Partners (EPD): very safe 10% yield and 21-year payout growth streak
2. Altria (MO): safe 8.2% yield and 51-year dividend growth streak
3. Enbridge (ENB): very safe 7.0% yield and 24-year dividend growth streak
4. Prudential Financial (PRU): very safe 6.5% yield and 12-year dividend growth streak
5. AbbVie (ABBV): Safe 5.1% yield and 47-year dividend growth streak

(Source: S&P)

AbbVie's dividend growth streak is 47 years under the S&P's grandfather spin-off rule.

I personally own all of these companies in my retirement portfolio, and dividend kings own them in our model portfolios as well.

Dividend Kings Portfolios

Thanks to a potent combination of safe yield, strong long-term growth potential, and reasonable to attractive valuation, the average long-term return potential for these portfolios is 16.6% CAGR.

• 4.4% yield + 9.25 CAGR long-term growth + 3.1% CAGR valuation boost over 5 years = 16.6% CAGR.

(Source: Ploutos)

That's based on the Gordon Dividend Growth Model which is one of the most reliable long-term forecasting tools ever devised. Today this model is used by most asset managers including

• Brookfield Asset Management
• Oaktree Capital
• IQT
• Chuck Carnevale's asset management firm
• all the Dividend Kings

Probability Weighted-Expected Return Calculator

(Source: Dividend Kings Investment Decision Tool)

Once we know the long-term return potential, we must convert that to a probability-weighted total return.

• Chuck Carnevale's 50 years of asset management experience means he suggests a 10% margin of error for each one year time horizon you are forecasting
• JPMorgan's research confirms this is a reasonable margin of error

If every company in our portfolio grew as expected then 8% to 25% CAGR total returns over the next five years would be expected.

But since Peter Lynch, John Templeton, and Howard Marks's, with over 150 years of asset management experience, tell us that 20% to 40% of the time analysts will be wrong about how fast a company grows (even when adjusting for historical margin of error) we must also apply reasonable margins of error to adjust for the approximately 30% chance companies won't grow as expected.

When we adjust for both we find the mid-range probability-weighted expected return for a company or portfolio, which is a reasonable estimate of future returns.

This summarizes the disciplined, methodical, and evidence-based approach I use to run all the Dividend Kings portfolios, including my own retirement portfolio, where I keep 100% of my life savings.

What about EPD, MO, ENB, PRU, and ABBV in particular? To understand why I'm so bullish on these five top-quality high-yield blue-chips let's look at their fundamentals.

Fundamental Stats On These 5 Ultra-Yield Blue-Chips

• Average quality score: 9.8/11 Blue-chip quality vs. 9.6 average dividend aristocrat
• Average dividend safety score: 4.6/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
• Average FCF payout ratio: 62% vs. 72% industry safety guideline
• Average debt/capital: 61% vs. 48% industry safety guideline vs. 37% S&P 500
• Average yield: 7.3% vs. 1.8% S&P 500 and 2.2% aristocrats
• Average discount to fair value: 33% vs. 40% overvalued S&P 500
• Average dividend growth streak: 31.0 years vs. 41.8 aristocrats, 20+ Graham Standard of Excellence
• Average 5-year dividend growth rate: 12.6% CAGR vs. 8.3% CAGR average aristocrat
• Average long-term analyst growth consensus: 5.8% CAGR vs. 6.4% CAGR S&P 500
• Average forward P/E: 8.3 vs. 23.0 S&P 500
• Average earnings yield (Chuck Carnevale's "essence of valuation": 12.0% vs. 4.4%% S&P 500
• Average PEG ratio: 1.71 vs. 2.55 historical vs. 2.70 S&P 500
• The average return on capital: 460% (87% Industry Percentile, High Quality/Wide Moat according to Joel Greenblatt)
• Average 13-year median ROC: 289% (relatively stable moat/quality)
• Average five-year ROC trend: -3% CAGR (relatively stable moat/quality)
• Average S&P credit rating: BBB+ vs. A- average aristocrat (2.5% 30-year bankruptcy risk)
• Average annual volatility: 27.4% vs. 22.5% average aristocrat (and 26.3% average Master List company)
• Average market cap: $75 billion large-cap
• Average five-year total return potential: 7.3% yield + 5.8% CAGR long-term growth + 8.3% CAGR valuation boost = 21.4% CAGR (10% to 33% CAGR with appropriate margin of error)
• Average probability-weighted expected average five-year total return: 6% to 26% CAGR vs. 1% to 6% S&P 500
• Average Mid-Range Probability-Weighted Expected 5-Year Total Return: 16.1% CAGR vs. 3.3% S&P 500 (386% more than S&P 500)

Whether you look at subjective quality and safety metrics, or objective measures, these five ultra-high-yield blue-chips are some of the highest quality and safest dividend stocks on earth.

Today they average a very safe yield of 7.3%, with expected long-term dividend growth of about 6% CAGR.

They are 33% undervalued and thus offer probability-weighted expected returns of 16% CAGR almost 5X that of the low yielding and grossly overvalued S&P 500.

Investment Decision Score On These 5 Ultra-High-Yield Blue-Chips

I never recommend or buy any company without first running it through the Dividend Kings Investment Decision Tool, which is designed to ensure prudent and reasonable investments in all market/economic conditions.

The tool uses these three goals as well as valuation to compare how sensible a potential investment is relative to the S&P 500.

• valuation: 4/4 33% undervalued potentially very strong buy
• preservation of capital: BBB+ stable credit rating average = 5% long-term bankruptcy risk = 6/7
• return of capital: 7.3% yield + 5.8% growth = 8.5% average 5-year yield on cost = 42.4% dividend return potential vs 10.5% S&P 500 (304% more) = 10/10
• return on capital: 16.1% PWR vs 3.3% S&P 500 (386% more) = 10/10

(Source: Dividend Kings Investment Decision Score)

Since Dividend Kings began its Daily Blue-Chip Deal videos we have offered 38 investing ideas to members.

• I have personally bought $500 worth of each every day
• 94% A excellent average Investment Decision Score

DK Video Phoenix Portfolio

(Source: Morningstar)

DK Video Phoenix Performance

(Source: Morningstar)

6 weeks of performance data is not statistically significant since just about 1.4% of returns over this time period are a function of fundamentals/valuations.

However, this portfolio (which is 100% real money since I have actually made these investments) is off to a strong start.

• total returns = returns you would have earned if you owned your current holdings since the beginning of your time period
• personal returns = returns you've actually earned based on your buys/sells
• Personal returns - total returns = your personal alpha (capital allocation effectiveness over time)

My methodical approach to making excellent potential long-term investments each day has thus far resulted in 1.4% personal alpha and 0.6% alpha relative to the S&P 500.

The S&P 500 isn't this portfolio's actual benchmark, (NOBL), the dividend aristocrat ETF is.

(Source: Ycharts)

Again, 6 weeks isn't a statistically significant time period but so far DK video Phoenix has beaten its benchmark by 1.9% (30% better returns).

I'm just following a simple, sound, and methodical approach based on my motto of "quality first and prudent valuation & risk management always."

Ok, so the fundamental data on these five safe ultra-yield blue-chips looks good.

And the overall approach to selecting these companies, all of which are DK Video Phoenix buys over the past few weeks, appears to be working so far.

But what about stronger evidence that these five companies are worth potentially buying today and owning for the long-term?

Historical Returns Of These Five Companies

As Ben Graham pointed out, over the long-term (10+ years) the market almost always "weighs the substance of a company" correctly.

(Source: Imgflip)

We can backtest how an equally weighted portfolio of these five companies had done all the way back to 2002, an 18 year period in which 90% to 91% of their returns were a function of fundamentals, not luck.

Total Returns For These 5 Companies Since 2002 (Annual Rebalancing)

(Source: Portfolio Visualizer)

• 2002 yield: 4.5%
• 2020 yield on cost: 64.2%

These five companies were naturally more volatile than a 500 company index. But they also delivered

• 44% better annual returns
• fell 8% less during the Great Recession
• delivered 30% better excess total returns (relative to 10-year US Treasuries)/negative volatility (Sortino ratio = reward/risk ratio)
• average 5-year rolling return of 14.2% is similar to the 16.1% CAGR probability-weighted expected 5-year forward return

Unlike the S&P 500 which delivered negative returns for up to seven years, the longest period of negative returns was three years.

Of course, no one should actually invest 100% of their money into just five companies.

I recommend owning at least 15 companies, with no more than 7% of capital invested in any individual holding.

You also want to limit sector and industry exposure due to fundamental risk, to 20% and 15% or less, respectively.

The cost of being 60% invested in cyclical companies and 40% into midstream and 20% tobacco, has been some wild volatility over the past 18 years.

(Source: Portfolio Visualizer)

A portfolio of these five companies has been in a bear market since February 2018 and suffered significantly during the March crash due to being so heavily exposed to energy and finance.

(Source: Ycharts)

During the fastest bear market in US history

• S&P 500 fell 34%
• dividend aristocrats fell 35%
• high-yield low-volatility stocks fell 40%
• equally weighted portfolio of these five blue-chips fell 42%

The fundamentals of these companies have not been smashed by the pandemic, merely stressed. But anyone who was 100% invested in just these five companies suffered potentially sleepless nights in March.

So here is how to own these five ultra-high-yield blue-chips safely, within a bunker sleep well at night or SWAN retirement portfolio.

The Safe Way To Own These 5 Ultra-High-Yield Blue-Chips

I'm a bit of a fanatic when it comes to safe portfolio construction. Why? To help you avoid horrible returns like this.

(Source: Dalbar)

Why do I support buy and hold investing as the cornerstone strategy for most people?

Because the average investor's ability to "buy low and sell high" is pretty awful. Over the last 20 years buy and hold investors in virtually any prudently asset allocated portfolio, or any asset class at all, outperformed market timing investors.

(Source: Lance Roberts, Dalbar)

Emotions are the enemy of most investors, accounting for approximately 50% of long-term underperformance.

(Source: imgflip)

Forced selling is the thing that successful investors must avoid at all costs during downturns which is where prudent asset allocation, the mix of stocks/bonds/cash you own, comes into play.

Bonds are the least volatile asset and thus serve as ballast and a hedge during market downturns.

Think about bonds in terms of protection, not yield. The stock market becomes more important when rates are on the floor but that doesn’t mean you can forsake bonds or cash altogether.

Most investors think about bonds in terms of yield or income. And why shouldn’t they? The vast majority of returns in bonds over time come from the starting yield, not price appreciation.²

In a negative interest rate world, you have to change the way you think about bonds. Bonds have always acted as a shock absorber to stock market declines but this becomes even more important when the yield is more or less taken out of the equation.

Bonds can provide dry powder to rebalance into the stock market or pay for current expenses when the stock market inevitably goes through a nasty downturn. Bonds keep you in business even if they don’t provide high returns as they have in the past." - Ben Carlson (emphasis original)

Why is it still prudent for most investors to own some bonds even when they yield virtually nothing?

Because risk-free bonds have a negative correction to stocks, at least the risk-free, sovereign bonds do.

This is why, since 1945, in 92% of years that stocks fall, bonds are stable or appreciate in value.

Wharton Business school professor Jeremey Siegel recommends 75/25 as the "new 60/40" portfolio and considers it reasonable and prudent for most clients.

So let's see how a portfolio that's 75% stocks, 25% cash/bonds would have performed since 2002.

• 35% (7% equal allocation) into these 5 blue-chips
• 40% (CMLIX) (proxy for large-cap US stocks)
• 12.5% cash (US T-bills)
• 12.5% (FBNDX) (proxy for investment-grade bonds)

Why would one potentially want to own such a portfolio vs the standard 60/40 portfolio that's been the gold standard since CFA William Bengen invented the 4% withdrawal rule in 1994?

(Source: JPMorgan Asset Management)

For one thing, it yields 1.2% more than a 60/40. If you're able to live off a 3.7% yield then you can potentially avoid ever having to sell any shares at all during retirement.

The other reason for preferring this portfolio to a 60/40 is that this portfolio has done well over the last 18 years. Specifically, it's provided superior absolute and risk-adjusted returns, including through the two most severe economic crises the US has faced since the Great Depression.

75/25 SWAN Portfolio Since January 2002 (Annual Rebalancing)

(Source: Portfolio Visualizer)

This portfolio has 25% more stock exposure so we'd expect 25% higher annual returns and 25% higher annual volatility.

Instead due to the superior returns, these five blue-chips have generated over 18 years, we got 29% better returns with just 20% higher annual volatility.

As a result, the reward/risk ratio (Sortino) was 15% higher.

(Source: Portfolio Visualizer)

The portfolio outperformed a 60/40 portfolio in 15 out of the last 18 years.

(Source: Portfolio Visualizer)

Average rolling returns have been superior in all time frames.

Returns During Recent Market Declines

(Source: JPMorgan Asset Management)

Across most recent corrections this portfolio performed similarly well to a 60/40 portfolio.

Note that it did fall 29.7% during the COVID-19 crash which is about 5% more than a 60/40. That's a 21% greater decline BUT remember it's 25% more allocated to stocks which means it actually outperformed reasonable expectations of 25% greater peak declines.

During the Great Recession, the peak decline was 37.7%, a 3% smaller decline than a 60/40 portfolio, and 17% smaller than the S&P 500. That's despite being 25% more exposure to equities.

While every downturn will be different, over the last 11 we've seen corrections and bear markets caused by a wide assortment of factors.

• recessionary fears
• oil crash induced industrial recession
• rising interest rates/overheating economy concerns
• financial meltdown
• economic lockdowns

In each of these corrections/bear markets, this 75/25 SWAN portfolio fell significantly less than the broader market, which is what a properly constructed SWAN portfolio is supposed to do.

What about market decline performance during periods prior to the Great Recession?

Long-Term Market Decline Performance

(Source: Portfolio Visualizer)

This portfolio

• recovered new record highs 9 months faster than 60/40 portfolio following Financial Crisis
• recovered 5 months faster from Tech crash

Returns During Periods Of Strong Market Gains

(Source: JPMorgan Asset Management)

During most periods of markets rising following downturns this portfolio outperformed by amounts larger than would be explained simply by the 25% greater allocation to stocks.

• Great Recession Rally: outperformed 60/40 by 29% vs 25% expected
• Flash Crash rally: outperformed by 8%
• QE rally: outperformed by 78%
• Post-2016-2018 rally: outperformed by 8%
• Post-Dec 2018 correction rally: outperformed by 33%
• COVID-19 recovery rally: outperformed by 33%
• average post-crisis rally outperformance: 32% vs 25% expected

Falling Interest Rate Environments (Weaker Economy Periods)

(Source: JPMorgan Asset Management)

In 3 out of the 5 falling rate environments of the past decade, this portfolio outperformed a 60/40 portfolio.

Rising Interest Rate Environments (Stronger Economy Periods)

(Source: JPMorgan Asset Management)

In five of the last six rising rate environments, when bonds fell due to concerns about rising inflation, this portfolio outperformed. Since it's 25% more weighted towards stocks, which thrive in good economic conditions, that makes sense.

This is also strong evidence against the "rising rates are bad for our portfolios" meme that's been so popular for the past decade.

• weaker economy = rates falling
• good economy (stronger earnings growth) = rates rising = stocks do better

What about the various risks facing us today? Here's JPMorgan's stress test analysis of this portfolio.

Future Market Risk Scenarios

What does JPMorgan expect to happen to this SWAN portfolio and a 60/40 portfolio under either very bad or very good market conditions?

(Source: JPMorgan Asset Management)

If the financial markets get into severe stress (credit spreads widen by 7.5%) then it's expected to fall 5.7% slightly worse than a more bond heavy portfolio. That's to be expected when your equity allocation is higher.

If interest rates rise to the point that bonds fall almost 11% (stronger than expected economic recovery and inflation spike) then it's expected to perform far better, +9.2% vs 6.1% for a 60/40 portfolio.

(Source: JPMorgan Asset Management)

Naturally, should we get a vaccine relatively soon, the stronger exposure to stocks, especially economically sensitive names like EPD, ENB, and PRU, has JPMorgan estimating that this portfolio would outperform to the upside.

In the downside COVID-19 scenario (vaccine delayed until 2022) it would be expected to underperform. BUT notice how the expected decline is still merely a correction, not a bear market.

JPMorgan considers a GOP sweep of the election (the least likely outcome) to be a slight net positive, which UBS agrees with.

(Source: UBS)

Notice how UBS considers any outcome in November to be neutral/slightly positive/slightly negative.

JPMorgan agrees with that assessment as do most economists and analyst firms. There is no "economic doomsday" scenario where one party or another winning control of DC is likely to torpedo the economy or the stock market.

(Source: Imgflip)

How much sleep should prudent long-term investors with SWAN portfolios lose over the November election? None at all.

(Source: JPMorgan Asset Management)

JPMorgan's model estimates that a 60/40 stock/bond portfolio will go up 2% if the GOP wins big and will fall 2.5% if the Dems sweep the government.

JPMorgan estimates that our 75/25 SWAN portfolio would do slightly better or worse in either scenario, rising by 2.6% or falling 3.0%, respectively.

If you can't stomach such modest portfolio volatility than 75/25 asset allocation is too aggressive for your risk profile.

The bottom line is that

• every recommendation I make should be owned within a diversified and prudently risk-managed SWAN portfolio
• constructing such a portfolio takes a few hours but is how you tailor your savings to your personal needs
• once constructed a SWAN portfolio can be trusted to see you through virtually any realistic economic, market, political, or current event scenario we'll face in the future

The Ultimate SWAN Portfolio Based On These 5 Ultra-High-Yield Blue-Chips

(Source: Imgflip)

What if your portfolio is large enough that you have the luxury of not seeking the highest possible returns just "good enough" returns to offset inflation and maintain your standard of living during retirement?

What if your primary goal is very smooth positive returns over time with minimum downside volatility?

Then a 50/50 stock/bond version of this SWAN 5 Blue-Chip Ultra-Yield portfolio might be more appropriate for your risk profile.

• 35% equal weighting into EPD, ENB, MO, PRU, and ABBV (to keep safe yield as high as safely possible)
• 15% weighting into blue-chip US stock fund (CMLIX in our case but any highly rated fund by Morningstar will do)
• 25% cash
• 25% bonds (FBNDX in our case, but any highly rated investment-grade fund by Morningstar will do)

(Source: JPMorgan Asset Management)

Thanks to weighting less into lower-yielding large caps while keeping our allocation to these 5 ultra-yield blue-chips the same, this portfolio still yields 3.6% vs 2.5% for a 60/40 portfolio.

• higher yield + lower short-term volatility risk = superior choice for extremely conservative investors such as retirees

How did this portfolio do over the past 18 years?

Now it's important to remember that 99% of bond returns are historically a function of yield, not capital gains.

This means that in the future a 60/40 portfolio and any bond containing portfolio for that matter, is likely to see lower returns than what we're seeing in this historical analysis.

The reason I'm showing this analysis is to highlight an important retirement planning fact.

• superior quality high-yield blue-chips that outperform the market over time are likely to result in stronger portfolio returns, regardless of asset allocation

For example, this 50/50 stock/bond portfolio is 17% less weighted into stocks so a historical analysis would be expected to show, relative to a 60/40 stock/bond portfolio

• 17% lower annual returns
• 17% lower annual volatility

What did this 50/50 SWAN 5 Ultra-Yield Portfolio actually generate?

50/50 SWAN 5 Ultra-Yield Portfolio Since 2002 (Annual Rebalancing)

(Source: Portfolio Visualizer)

Thanks to owning so many high-yield outperformers this 50/50 portfolio actually outperformed a 60/40 portfolio and with similarly lower volatility to what we expected.

It fell 9% less during the Great Recession and achieved 26% better excess total returns/negative volatility.

(Source: Portfolio Visualizer)

In 11 of the last 18 years, this portfolio has outperformed its more conservative benchmark.

In recent years, the long bear markets in its largest stock holdings (these five ultra-yield blue-chips) have weighted down returns but not enough to result in poor overall returns.

And remember that the safe ultra-high-yield is what allows this 50/50 portfolio to generate almost 4% yield today, nearly enough to fund a 4% withdrawal rate retirement without having to ever sell a single share.

Superior Returns That Are Far More Consistent With Far Less Volatility To Boot

(Source: Portfolio Visualizer)

Now let's consider the various market periods we've seen over the last 15 years, which is as far back as JPMorgan has data for with this portfolio.

Historical Market Decline Periods

(Source: JPMorgan Asset Management)

During the Great Recession, this portfolio's peak decline was 26.8% vs -41% for a 60/40 portfolio and a 55% crash for the S&P 500.

During the COVID-19 Bear Market, it fell 22.3% vs 24.5% 60/40 and 34% S&P 500 and 42% being 100% invested in these 5 blue-chips.

During every major market correction period of the last decade, it matched or beat a 60/40 portfolio even during the rising rates correction period of 2018.

Overall Performance During Market Decline Periods Since 2002

(Source: Portfolio Visualizer)

Why does JPMorgan's peak decline data differ a bit from Portfolio Visualizer's?

• Because Portfolio visualizer is using the end of month prices while JPMorgan is using daily prices
• The point of showing both is to get a bigger picture view of how portfolios perform vs benchmarks across the economic/market cycle (long-term periods)

What this historical data tells us is that this 50/50 Ultra-Yield SWAN portfolio recovered

• 11 months faster after the Great Recession
• 6 months faster after the Tech crash

It has suffered a peak decline of just 27% during the past 18 years, and that was during the 2nd worst market crash in US history.

The only two corrections this portfolio suffered in 18 years was during unprecedented recessionary bear markets.

This portfolio fell 50% less than the S&P 500 during the Financial Crisis, which is the ultimate example of what a sleep well at night bunker portfolio should do.

But what about other market environments, outside of periods of extreme market declines?

Historical Market Recovery Periods

(Source: JPMorgan Asset Management)

Naturally, a 50/50 stock/bond portfolio won't do as well as more stock-heavy portfolios during very strong market rallies. But this portfolio still delivered extremely attractive gains during strong post-crisis recovery periods.

Falling Interest Rate Environments (Periods of Economic Stress)

(Source: JPMorgan Asset Management)

During periods of economic stress, when interest rates were falling, this portfolio did well, BUT not as well as you might think. Bonds do very well during such periods as you can see.

Yet because a weak economy is bad for corporate earnings and cash flows, this shows the fallacy of the "falling rates are always good for stocks" meme that has been so prevalent over the past decade.

Rising Interest Rate Environments (Stronger Economic Conditions)

(Source: JPMorgan Asset Management)

Rising rates are bad for bonds this is true. But because they are good for stocks, due to stronger economic conditions resulting in stronger corporate earnings growth, the idea that "rates going up is bad for stocks" is empirically incorrect.

Not once in the past 15 years in a rising rate environment did this 50/50 SWAN portfolio suffered a loss. It naturally underperformed a less bond heavy 60/40 portfolio, but it never suffered negative returns.

Could it suffer mild negative short-term returns in the future? If rates rise fast enough then potentially yes. But that kind of environment would likely mean the stocks are roaring higher generating strong capital gains in half the portfolio.

Which we can see in JPMorgan's Market Scenario Stress test results.

Market Risk Scenarios

(Source: JPMorgan Asset Management)

If interest rates were to rise fast enough that bonds fell 11% relatively quickly, then JPMorgan estimates this portfolio would underperform a 60/40 portfolio by 0.7%. However, it would still likely post a modest gain of about 5.5%.

If the recession increased financial stress so that credit spreads widened by 7.5% then JPMorgan estimates it would fall by 4.1%, 1.1% less than a 60/40 portfolio.

That's due to the hedging power of bonds.

What about all the various risk factors we face now?

• pandemic going poorly
• election uncertainty
• US/China trade conflict getting worse
• unexpected inflation spike

Here's what JPMorgan estimates would happen to this 50/50 SWAN portfolio as well as a 60/40 stock/bond portfolio under those scenarios.

(Source: JPMorgan Asset Management)

If we get a vaccine early? Then rising interest rates would likely cause this portfolio to underperform marginally by about 1% but still post a 5% to 6% gain.

If no vaccine is available through 2022 then this portfolio might fall about 13% but the higher bond allocation could cause it to outperform a 60/40 portfolio by nearly 3%.

The US election isn't expected to have a significant impact on the portfolio in either extreme, a GOP sweep, or a Democratic sweep.

China trade tensions might cause a modest 4% dip but JPMorgan doesn't expect even a pullback of 5%, while a 60/40 portfolio is expected to fall 1% more.

An unexpected spike in inflation might cause this more bond heavy portfolio to fall 5%, about 1% more than a 60/40 portfolio.

But a 5% decline is still not something that will cost prudent long-term investors any sleep.

The bottom line is that safe portfolio construction doesn't have to be hard or especially time-consuming.

1. focus on a bond/cash allocation that is reasonable for your needs/risk profile
2. focus on blue-chips for your company-specific holdings, always buying at a reasonable/attractive valuation
3. use mutual funds/ETFs to achieve a prudent and safe level of diversification/asset allocation for your individual needs and risk profile
4. Trust your SWAN portfolio to protect your wealth during inevitable and unpredictable periods of market stress caused by various political/economic/current events in the future

Bottom Line: Reaching For Yield Is Dangerous...Reaching For Safe Yield Is Smart

Dividend Kings have no interest in high-risk yield/value traps.

A dividend that isn't dependable in a recession is not owning.

Fortunately, even in the worst recession in 75 years, with hundreds of weaker companies slashing or eliminating payouts, there are many safe ultra-yield choices conservative income investors can make today.

And even in the most irrational market bubble in history, with the 2nd highest market valuations ever occurring at the same time as some of the worst economic fundamentals ever recorded, something great is always on sale.

Today EPD, ENB, MO, PRU, and ABBV represent the five safest ultra-yield blue-chips retirees can buy.

Their strong fundamentals, decent to great long-term growth potentials, and extremely attractive valuations combine into a potent mix that's expected to deliver about 16% CAGR total returns over the next five years. That's almost five times the expected return of the S&P 500.

All while investors enjoy a very safe 7.3% average yield that's expected to grow about 6% CAGR over time, three to four times the rate of inflation.

Within a diversified and prudently risk-managed bunker SWAN portfolio, you can trust your hard-earned savings will likely continue to do what you expect.

• generate generous, very safe, and steadily growing income in all economic conditions
• compound your wealth at a rate that can hopefully achieve your long-term financial goals
• allow you to sleep well at night no matter what happens with interest rates, the pandemic, the election, the recession, or any unexpected current events that pop up in the future

Dividend Kings aren't market timers, looking to call the top or bottom of the S&P 500 or any particular company.

We're disciplined long-term investors who believe in

• sound long-term investing strategies
• based on the best available empirical research spanning back nearly 100 years
• validated by both quantitative and qualitative methodology
• including the experience of the greatest long-term investors of all time (such as Buffett, Graham, Lynch, Dodd, Miller, Munger, Greenblatt, Marks, Fisher, and Templeton)
• buying quality companies with good cash flow producing assets
• run by competent and trustworthy management with a good track record of adapting and overcoming whatever challenges pop up over time
• at reasonable to attractive valuations
• held for the long-term so that dividends and management can help us achieve our financial goals
• always within a diversified and prudently risk-managed SWAN portfolio
• that can be trusted to stand up to virtually any market/economic environments

(Source: AZ quotes)

Market timers, speculators and gamblers pray for luck because they have to. Prudent long-term investors don't have to pray for luck because they can make their own.

(Source: imgflip)

Long-term success with investing isn't a function of luck, it's a function of quality, valuation, risk management, patience, discipline, and time.

Buffett's skill is investing but his secret is time". - Morgan Housel

Or to put another way, all that we need to get rich over time and achieve a prosperous retirement are

• our facts being right at the time of the investment
• our reasoning/strategy being sound and evidence-based
• our risk management being rock solid for virtually any future economic/market conditions