The Passive DGI Core Portfolio: Retirement Strategy That Allows You To Sleep Well

The recent market turmoil caused by the coronavirus pandemic and the resulting economic shutdowns has tested the robustness of many financial portfolios and strategies. However, despite the uneven and uncertain economic recovery, the markets have largely bounced back. The S&P 500 is barely down by a few percentage points compared to its all-time high. Even then, the quick and ugly correction of February/March 2020 did provide a perspective and an opportunity to investors to judge for themselves if they could withstand the risks and drawdowns in their portfolios. If not, they need to adjust their strategies going forward.

The history shows that a well thought-out DGI (dividend growth investing) strategy usually outperforms the broader market over the long term. Also, it would offer less volatility and smaller drawdowns during recessions and bear markets. It was proven during the 2008-2009 recession as well during the recent coronavirus induced correction. The drawdowns of most DGI portfolios were one third less than that of broad market indexes like the S&P 500. Also, a significant stream of dividend income would make it a little easier to wait out any downturn. Another significant advantage of a DGI portfolio is that it requires little work after the initial set up.

We have been managing one such portfolio “Passive DGI-Core” since 2014 and have periodically provided an overview and performance review over the years. In fact, this portfolio has finished every year as a positive year since its inception, though it’s slightly negative for 2020 so far. That said, the performance on the basis of total return on a year-to-year basis is not the objective of this portfolio. The primary objective of this portfolio is to provide a reliable dividend income that grows faster than the rate of inflation year after year. This portfolio has been meeting its primary goal handily. When we started the portfolio, we had the average YOC (yield on cost) of 2.97%. However, over the years, it has grown to 4.34%, even though we add significant amounts of new capital every year (which drags the YOC down every year). Hypothetically, if we had invested a million dollars in this portfolio in 2014, we should be generating nearly $43,500 of annual income by now. Now $43,500 may not seem to be a large sum if you had no other source of income like a pension or social security. So, in that sense, this is one drawback with this strategy that it cannot provide a very high level of income, so one would need a sizable amount of savings to generate the required amount of dividend income that one could live off comfortably. However, this shortcoming can be overcome by investing in such a portfolio at an early age, at least 10-15 years before the retirement or the withdrawal stage.

Let’s demonstrate this by way of an example:

[Source: Author/Financially Free Investor]

Although future dividend growth could be different, assuming the same pattern over the next five years, this portfolio on a base capital of $1 million should comfortably provide between $60,000 – $65,000 income every year. So, in 10 years, you could grow the annual dividends from $30,000 to $60,000, provided you reinvested all dividends.

Here’s the month-wise performance of the Passive DGI portfolio during the last few years and the gradual dividend growth over the years.

[Source: Author/Financially Free Investor]

A DGI Portfolio: What is a DGI portfolio?

More experienced investors could skip this section. DGI generally means that you invest in a set of blue-chip dividend-paying stocks with solid dividend history. Such companies usually grow their dividend payout year after year. Assuming you are still in the accumulation phase, you could re-invest (drip) the dividends, which would result in more shares every quarter/year and higher future income. With each passing year, this growth of dividend-income becomes bigger and bigger. More time you have until the withdrawal phase, the higher the income you can aim for. We should preferably mix high-yielding, slower-growth companies with low-yielding fast-growing ones. Besides, we should diversify among various sectors and industries and keep a maximum allocation of 5% to any individual stock.

If implemented with some prudent planning and over an extended period of time, the DGI strategy can provide almost everything that a retiree needs – decent income, relative safety, and reasonable growth.

The best part is that it’s a far superior strategy to draw 4% inflation-adjusted income compared to index investing since it lets you do this without ever selling the shares.

The Passive DGI Core Portfolio: Background

We launched this DGI portfolio more than five years ago in August 2014. We wanted to create a well-diversified portfolio with mostly blue-chip companies that had a history of raising dividends year after year and hold them for years. We also wanted to invest over an extended period of time so as to take advantage of dollar-cost averaging and create a decent enough income stream without the need to ever withdraw the capital by selling shares.

We named this portfolio “passive” because we thought it would require minimal management. Many times there was no action in this portfolio for months.

Basic Portfolio Structure:

The underlying principles of the portfolio were:

  • Select 30 plus solid dividend-paying, dividend-growing companies, and invest the initial capital divided equally.
  • Invest additional money on fixed intervals according to a pre-determined schedule.
  • Use dollar-cost averaging and buy in a spread-out manner on a set timetable.
  • Stay consistent and rarely sell or replace a company.
  • Reinvest the dividends for the first 5-10 years or more (depends on the personal situation) to grow the yield on cost (YOC). Thereafter, reap the benefits!

This is what we have done so far:

  • $1,000 invested on Aug. 1, 2014, in each of 30 original stocks, total $30,000.
  • $1,000 invested on Nov. 3, 2014, the first trading day of November 2014, in each of 30 stocks, total $30,000.
  • Starting February 2015, every year on the first day of trading in February, we invested $1,000 in each of the 30 stocks (total $30,000 each year). This was completed for the years 2015, 2016, 2017, 2018, and 2019. These annual investments will continue until the year 2024.
  • In 2017, we stopped reinvesting dividends automatically. Instead, we now let the cash accumulate and invest when we feel the price is right.

The original article that launched the portfolio can be accessed here and here.

Over the years, we added a few additional stocks. Below is the current list of 41 stocks with the industry/sector information for easy reference.

(ABBV), (ABT), (ADP), (AFL), (APD), (CL), (CLX), (CSCO), (CVS), (CVX), (DEA), (DWX), (EMR), (INTC), (ITW), (JNJ), (LMT), (MCD), (MDT), (MMM), (MO), (MSFT), (OTCPK:NSRGY), (O), (OHI), (PEAK), (PEP), (PFE), (PG), (PRU), (QCOM), (RTX), (T), (TEVA), (UNH), (VLO), (VTR), (WBA), (WM), (WMT), (XOM).

[Source: Author/Financially Free Investor]

Brief Highlights from Additional Investments

February 2020:

As per our annual pre-determined schedule of contribution in the first week of February, we added $30,000 of new money to this portfolio. We invested/added $1,000 each to 15 existing securities at the time. The selected securities (15 out of 41 positions at the time) were chosen based on relative valuation and dividend safety scores. They were ABBV, ADP, CSCO, CVX, ITW, MDT, MMM, MSFT, PFE, PRU, UNH, VLO, VTR, WBA, and XOM.

This year, in hindsight, the timing of Feb. 1 to invest the annual contributions appears a bit awful because if we had waited just a month, we would have got many bargains. But, please keep in mind that this is not a market-timing portfolio – that’s not our objective here.

Additional Buy/Sell during the Year 2020

We also added additional money at other times, mostly in March 2020, when we felt the prices of many companies offered value and margin of safety. All the buy transactions are listed below. There were no sell transactions. (Note: All buy/sell decisions are communicated to subscribers of our marketplace service HIDIY in advance.)

[Source: Author/Financially Free Investor]


Note: Starting in April 2017, we stopped reinvesting the dividends automatically. This was to allow us to build some cash position and make some opportunistic buys from time to time.

Dividends in 2014


Dividends in 2015


Dividends in 2016


Dividends in 2017


Dividends in 2018


Dividends in 2019


Dividends in 2020 (only half year – until June 30, 2020)


Total dividends since inception (27,695+5,148)


Current Yield: (2*5148)/339,759


Yield on Cost [YOC]: (2*5148)/240,000


[Source: Author/Financially Free Investor]

Dividend Cuts or Freezes in 2016/2017/2018/2019/2020

  • In 2017, CVS froze its dividend at $0.50 per share due to its pending acquisition of Aetna Inc. (NYSE: AET). The acquisition was completed in 2018; however, CVS continues to pay the same dividend.
  • PEAK (formerly HCP) had to cut its dividend by 35% in 2017, following the ManorCare assets spin-off in 2016. Since then, it has been paying a constant amount of $0.37 per share. HCP changed its name to Healthpeak Properties and symbol to PEAK in 2019.
  • TEVA eliminated the dividends entirely in the fourth quarter of 2017. It no longer suits our portfolio, but since it’s a minor position, we will exit at an opportune time.
  • This year, in June, Ventas (VTR) cut their dividend by nearly 43%, due to the negative impacts from the COVID-19 pandemic.
  • Future dividend freeze or a possible cut: XOM (this is only a possibility, no such announcement or indication has been made by the co.)

Dividend Increases Declared In 2020

2017 summary:

Out of 35 individual stocks in 2017, dividends were increased by 30 companies, kept the same by four companies, and cut by one.

2018 summary:

A total of 33 companies announced dividend increases in 2018. The average for these 33 companies was roughly 8.8%. The average for all 38 positions was roughly 7.6%.

2019 summary:

In total, 32 companies increased dividends at an average rate of 7.19%. But if we average out for all positions, the increase comes down to 6.36%.

2020 summary:

So far, 24 companies out of 41, have increased their dividend payouts. One company Ventas (a healthcare REIT), has cut the dividend by nearly 43%. The average dividend increase for 24 companies has been 6.01%. However, if include VTR cut, the average increase comes down to 4.28%.

Dividend increases in 2020:

[Source: Author/Financially Free Investor]

Portfolio Positions, Total Return, and Relative Performance

Here’s a snapshot of relative performance as of July 1, 2020, created using the Morningstar Portfolio Tool. The DGI portfolio and Morningstar Market Index are represented by green and gray lines, respectively. It may be relevant to note that the DGI portfolio never had a down year since its inception, including 2018, though it underperformed the index and S&P 500 in 2019 (though just by a hair).

Note: Morningstar describes “Personal Return” as follows: The calculation of Personal Return illustrates how your allocation of capital has affected the performance of your portfolio.

Here’s the image of the current portfolio from excel, as of 07/02/2020:

[Source: Author/Financially Free Investor]

In the above table, P/L columns do not account for the dividends that were not reinvested. Also, the total cost in the last row represents the sum-total that was invested in the portfolio (and not the column total).

The below table shows positions in the order of performance after including the (uninvested) dividends:

[Source: Author/Financially Free Investor]

The Good, the Bad, and the Ugly

As of 07/02/2020, the portfolio has 41 positions, and when we include all of the dividends (the amounts that were not dripped), this is how they performed:

Gain/Loss % (range)

Number of positions


Positions > 200% gain



Positions > 100% gain but < 200%



Positions > 50% gain but <= 100%



Positions > 25% gain but <= 50%



Positions > 0 to 25% gain



Positions < 0% but >= -15% loss



Positions < -15% but >= -40% loss



Positions > – 40% loss



[Source: Author/Financially Free Investor]

We know that there always are going to be a few stocks in your portfolio that are not going to pan out according to your expectations. That’s why diversification is so important. But more importantly, this demonstrates that a few bad choices are not going to have any meaningful impact on the overall portfolio.

Concluding Remarks

This portfolio is part of a multi-basket strategy that we follow personally and also recommend in our Marketplace service. That said, this DGI portfolio is an essential part of our overall strategy and plays a foundational role. In our allocation model, we suggest investing 35%-50% of the investment assets into DGI, depending upon personal factors. The rest can be allocated to other compelling and complementary strategies that provide not only strategic diversification but also some hedging against a future downturn. A multi-basket approach certainly requires more effort and may not be suitable for everyone. For more passive type investors, a DGI strategy is ideally suited as it requires minimal effort, mostly just a few times a year.

It’s a well-accepted notion that over a long period of time the dividend-paying companies provide a higher total return compared to non-dividend-paying companies. We feel in the long term this portfolio will offer better returns, lower volatility and drawdowns, and consistently growing income. In addition, it requires minimal management. We believe the DGI portfolio strategy described above is the simplest way to accumulate wealth over a long period of time. This portfolio is simple, easy to implement, and hassle free.

Below is our investment allocation model, and as you can see, the DGI portfolio forms the foundation of the overall strategy. The other portfolios are focused on high income and risk management and are suited for active investors. These allocations are just for broad guidance – everyone should decide what’s right for them based on his/her goals and risk tolerance.

High Income DIY Portfolios:
The primary goal of our “High Income DIY Portfolios” Marketplace service is high income with low risk and preservation of capital. It provides DIY investors with vital information and portfolio/asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe it’s appropriate for income-seeking investors including retirees or near-retirees. We provide six portfolios: two High-Income portfolios, a DGI portfolio, a conservative strategy for 401K accounts, a Sector-Rotation strategy, and a High-Growth portfolio. For more details or a two-week free trial, please click here.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, VTR, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolio presented here is a model portfolio for demonstration purposes; however, the author holds many of the same stocks in his personal portfolio.

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