Note: On Jan. 23, I launched a premium investing service in partnership with Dave Van Knapp, Greg Patrick, Jason Fieber and Christian Phillips. This new service is called Dividends & Income Select, and it features three real-life dividend portfolios, high-yield opportunities, option income trade alerts and real estate income insights. One of these portfolios is a brand new Income Builder Portfolio. This portfolio is a sequel to our highly successful, real-money Income Builder Portfolio that long-time readers are familiar with.
The original IBP achieved significant income growth over 6 years while also producing a 10.75% annual total return that easily outperformed both the Dow Jones Industrial Average and balanced portfolios. It demonstrated the effectiveness of Dividend Growth Investing, and I’ll be using DGI to build a new version of the portfolio from scratch.
With $1,000/month coming into the new IBP, I’ll be choosing high-quality companies that are likely to grow their dividends for years. Click here to learn more about our brand new Income Builder Portfolio and Dividends & Income Select.
Otherwise, read on to for a full review of our original Income Builder Portfolio…
As the note above suggests, we have exciting endeavors ahead. Meanwhile, we are wrapping up this version of the Income Builder Portfolio. And what a way for the IBP to go out!
When you start working on a project, you hope it goes a certain way and you think it has a good chance of doing just that … but you have absolutely no assurances it will turn out as well as you think and hope it does.
Well, our real-money, real-time Dividend Growth Investing portfolio turned out just fine. Better than fine, actually.
First, for the fifth consecutive year, the IBP produced income growth in excess of 28%.
And the IBP did all that even while achieving a 10.75% annual rate of return during its six years as a portfolio — about 2 points better than the performance of the Dow Jones Industrial Average, and just a smidge below that of the S&P 500.
schwab.com
Millions of investors follow the lead of financial planners in choosing mutual-fund combinations that produce stock/bond balances – such as 70%/30% or 60%/40%. The IBP handily beat such portfolios, in great part due to the significant underperformance of bonds (barely 1% in the graphic above).
A DGI-based portfolio that produces a reliable, growing income stream while also generating a competitive total return isn’t some kind of fluke; the same thing happened when I managed the Dividend Growth 50 from December 2014 through April 2023.
You’ll never hear me claim that DGI is the strategy every investor should use. There are a lot of ways to build financial security. Nevertheless, the real-money Income Builder Portfolio demonstrated over the last 6 years that DGI can be an effective way to invest.
Let’s Talk Income
Let’s look at relevant data regarding the 52 positions (51 stocks, 1 certificate of deposit) that made up the IBP at the end of 2023:
In addition to being worth more than $195,000 — nearly $34K higher than was the case at the end of 2022 — the IBP finished 2023 with a projected annual income stream of $5,414.
The “Income Target” when the portfolio was established back in January 2018 was $5,000 in projected annual income within 7 years, so Mission Accomplished … and then some!
Had my boss (and IBP money man), Greg Patrick, decided to keep the project going with $500 monthly investments, here’s how the income stream could have grown:
SimplySafeDividends.com
As the graphic shows, with similar rates of dividend growth and reinvestment, the portfolio’s annual income stream would have nearly doubled in 5 years and grown to about $30K in 15 years.
DGI is a long-term approach in which the compounding effect really takes off after 10-15 years. So I’m certain that plenty of investors who use the strategy have generated similar dividend streams — and even much larger ones — to help pay for their wants and needs.
“Projected annual income” is a forward-looking statistic based on each position’s share total and each company’s declared annual dividend. Stepping aside from projections, here were the actual dividends that each IBP position generated year after year:
Going back to the very first table in this article, there were years in which the IBP’s income stream grew 44% … 74% … even 253%. How was that possible?
Well, the IBP was not a static project. For most of the portfolio’s existence, Greg Patrick allocated $2,000 monthly to be invested on his behalf; only in the second half of 2023 did he reduce that to $500/month..
So $24K came into the portfolio in 2018, and again in 2019, and again in 2020, and so on … and it was used to build up existing positions and to initiate new ones. Additionally, the vast majority of companies in the IBP increased dividends annually, and dividends were automatically reinvested (“dripped”) over and over again.
Such a formula can supercharge any income stream.
Here is some additional dividend-related information about companies within the Income Builder Portfolio:
Led by Mastercard’s (MA) 15.8% dividend increase, a dozen IBP components raised their payouts by at least 10% in 2023. 3M (MMM) gave shareholders an increase of less than 1%, but that helped extend the company’s streak of consecutive raises to 65 years.
The middle column in the above chart is the dividend safety score from Simply Safe Dividends, which uses the following grading system:
According to Simply Safe Dividends, only one stock in the portfolio has an “Unsafe” dividend with a “heightened risk of being cut.” That’s 3M, which is suffering through a litany of litigation and revenue-generating woes. I should have sold it long ago.
Total Return Report
“Income” was the portfolio’s first name, so building a dependable and increasing dividend stream was always on my mind. I nonetheless always kept an eye on total return when building the IBP.
I aimed my focus on fundamentally sound and reasonably valued (or better yet, undervalued) companies with growing earnings, revenue and free cash flow. The results speak for themselves: total return that beat the Dow, just about matched the S&P 500, and significantly outperformed the kind of balanced portfolios popular with millions of investors.
Here were the IBP’s top 20 positions in total return through the end of 2023:
Unfortunately, every IBP stock wasn’t a winner. Eight were worth less on Dec. 31, 2023, than what we paid to build the positions:
Pretty much every investor has a few clunkers. Show me someone who claims to have no losers, and I’ll show you a world-class fibber.
That the Income Builder Portfolio could perform as well as it did over a 6-year span despite holding some laggards is a testament to its overall strength.
Wrapping Things Up
The idea of the IBP was never to convince fellow investors to buy all the stocks it held.
It was about discussing the process of portfolio building, about studying DGI’s efficacy over a multi-year stretch, and about presenting interesting investing candidates for further research. I like to think it did all that.
As a major bonus, the project also ended up giving my boss a competitive return on his investing dollar while providing him a reliable, growing income stream.
Add it all together, and that’s what success looks like.
— Mike Nadel