SPY Vs Dividend Growth Portfolio


A couple of weeks ago, I asked you why you think you can beat professionals? This led to an interesting conversation about the difference between beating the market and reaching your goals. I think the most important thing is to reach your financial goals. It’s like registering for a run; when you register for a 10K, you don’t mind if you win the run or not; you focus on your own running objective. As long as you reach that goal, your run is a success. This is also a good mentality to apply when investing.

After writing this article, I received an email from a reader asking the question about the difference between buying SPY (Spider S&P 500 ETF index) yielding nearly 2% and building a dividend growth stock portfolio:

More often than not, I choose not to buy individual stocks when I compare their yield to SPY, which is a core holding in my account. Can you perhaps do a write-up of SPY? It has all the same advantages a good dividend stock has. It has dividend growth, it has a reasonable yield, dividends reinvested in SPY will have the same snowball effect. But, it has a KEY advantage that individual stocks do not — diversification.

So how can I determine if an individual stock is a better buy than SPY? When is the decision to to buy an individual stock for its dividend better than my default position of “keep it in SPY”? What return should an individual stock give me for the risk of abandoning SPY’s diversification? What risk premium?

I found his question quite interesting as it positioned a global well-diversified and dividend paying investment vehicle trading with very little effort Vs a handpicked dividend growth stock portfolio requiring continuous management. Let’s dig deeper to see what both strategies have to offer…


SPY is Not a Dividend Growth Portfolio

First, let’s be honest, SPY is not a dividend growth portfolio. This is not its function, regardless if the members of the S&P 500 pay enough dividends to have a yield around 2%. When you look at its past 10 year dividend history payment, you understand better why SPY can’t really replace a dividend growth portfolio:

SPY dividend

As you can see, dividend payments are quite hectic. This is normal as within the group of the 500 biggest companies, you will have a little bit of everything:

Strong growth companies not paying dividend

Classic dividend growth companies

Companies going through troubles and cutting their dividend


Being a “big company” is not a gauge of success and it is also far from an indication you will see your dividend payments growing. It becomes obvious when you compare the dividend growth in % over the past 10 years compared to a classic dividend growth company such as Johnson & Johnson (JNJ):


JNJ dividend payments increased steadily year after year and offer double the dividend growth payment than SPY over this period.

Besides the dividend growth test fail, there are many other reasons why I’m not a big fan in investing in SPY as a dividend growth investor:

It doesn’t follow my dividend growth investing philosophy.

Dividend payments are hectic.

SPY includes too many “bad companies” I wouldn’t pick.

The overall market is not what I want to buy.

In the end, there are very limited similarities between a dividend growth portfolio and SPY. The dividend yield may confuse investors, but don’t fall in the trap; if you are looking for a dividend growth investing vehicle, SPY is not the one.


What About a Dividend ETF Then?

One question leading to another, I wanted to finish this article by with a comparison of a dividend growth ETF vs a handpicked dividend growth portfolio. I’m all about efficiency in life and if I could spend a big 3 minutes to initiate a transaction in a dividend growth ETF and forget about my investing strategy for the rest of my life, I would gain several hours each year to do other things than manage my portfolio and reading about the stock market. Let’s take the Vanguard Appreciation ETF (VIG) dividend growth and compare it to JNJ again:


I’ve taken the 5 year view as there were unrealistic increases back in 2007 (dividends doubled within 3 quarters) and it wasn’t giving a good comparable. Still, even by using the 5 year dividend growth period, we can see how JNJ shows a pure and systematic dividend increase while the VIG payment increase is quite hectic. Nonetheless, VIG dividend payment growth is double that of JNJ, one of the most appreciated dividend growth companies on the market. As far as stock price goes, we are at the same pace:

VIG vs JNJ price change

In other words; while VIG dividend growth is hectic, any investors would have been better with the ETF than with JNJ. However, it is unfair to compare a diversified ETF with a single company. This is why I did the exercise with my top 10 dividend growth stocks as a portfolio vs the same ETF:

top 10 div growth stocks

Unfortunately, I can’t perfectly compared this growth portfolio with the VIG as not all data can be used in 2011 and DIS decided to pay dividends twice per year instead of once a year explaining the virtual drop on the graph (but it will go back up once the year ends as a second dividend payment will be issue.

One thing you can see is that the dividend payment for most companies is steadily increasing without any big jump (besides BLK in 2011). However, I can compare the price evolution of the portfolio:

top 10 div growth stocks price change

The average stock price gain is 114.65%, more than double the VIG.



The conclusion of using ETFs vs handpicked dividend stocks is similar to the conclusion of my previous post:

First and foremost; as long as you reach your financial goals – you probably have the right method,

Second; market index ETFs such as SPY are too wide to represent a dividend growth investing strategy. They are good products, but not for dividend investors,

Third; similar to market index ETFs, dividend ETFs often includes a too wide number of companies. Handpicked dividend growth stocks, if done wisely, can beat such products.

In order to make sure my investment strategy works, I use the VIG as a benchmark. So far, I’m very happy with my results and they justify the efforts I make to manage my portfolio. I think dividend ETFs can help you achieve your financial goals as well if you are not interested in taking the time to manage your own portfolio but still wish to invest in a vehicle paying dividends. Then again; there are no right answers besides the one that makes you comfortable with your financial objectives!


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