The stock market was rough in 2022, as inflation, rising interest rates, and fears of a recession all added up to put incredible downward pressure on share prices. Yet through that mess, I managed to both beat the market and see my investment income rise faster than even the sharp inflation we faced. I did so by following a strategy I laid out around a decade ago when I launched the Inflation-Protected Income Growth (iPIG) portfolio.
That portfolio was initially launched in December 2012 with $30,000 of cash. No new capital has been added or removed from the account since then, and it has been relying entirely on internally generated returns since launch. Its primary objective was to attempt to provide an income stream that grew at least as fast as inflation. To do so, it was designed around the principles of dividend growth, balance sheet strength, valuation, and diversification.
Unfortunately, the article series around that portfolio was eventually cancelled. Still, the investing strategy remains solid. As a result, I kept investing the money in that account using generally the same principles. Following that strategy was by far the best thing I did in this bear market. I credit it with how I've been able to start off 2023 in a much better place than I would have otherwise.
Image source: Getty Images.
The numbers speak for themselves
The table below shows the total performance of the iPIG portfolio in 2022, compared with the S&P 500 and the SPDR S&P 500 ETF Trust with dividends reinvested. The SPDR S&P 500 ETF trust is a low-cost and easy to invest in fund that attempts to track the S&P 500. That makes it a great fund for people who want the market's long-run returns without the hassle or additional complications and risks of individual stock selection.
In the table, the values for the iPIG portfolio represent the year-end brokerage account statements for both 2021 and 2022. The values for the SPDR S&P 500 ETF are based on the adjusted closing prices for the ETF at the end of both years as listed by Yahoo! Finance. It enables a decent estimate for "what would have happened if I had bought one share of the ETF at the market close at the end of 2021, reinvested my dividends along the way, and looked at my account balance at the end of 2022?" The values for the S&P 500 index represent the closing values as reported on Yahoo! Finance at the end of 2021 and 2022.
| Investment | Year-End Value, 2021 | Year-End Value, 2022 | Change |
|---|---|---|---|
| iPIG Portfolio | $124,295.22 | $109,221.38 | (12.1%) |
| S&P 500 Index | 4,766.18 | 3,839.50 | (19.4%) |
| SPDR S&P 500 ETF -- dividends reinvested | $467.38 | $382.43 | (18.2%) |
Data sources: The iPIG portfolio's brokerage account and Yahoo! Finance. Table by author.
Even though the iPIG portfolio lost money in 2022, the account beat the S&P 500 by 7.3 percentage points and the SPDR S&P 500 ETF Trust with dividends reinvested by 6.1 percentage points.
More importantly for those of us who had to deal with the pain of inflation, the account's dividend-like income -- dividends and money from distributions -- increased from $2,679 in 2021 to $3,030 in 2022. That's an increase of roughly 13%, which doubled the U.S.' official inflation rate of 6.5% from December 2021 through December 2022. As a result, that account did an incredible job of helping protect my purchasing power at a time when virtually every investment was headed in the wrong direction.
Almost no effort involved to get those returns
As if beating the market and inflation weren't enough, managing the account continued to be a fairly low-maintenance effort. I only made four transactions in the account throughout the year -- two buys and two sells -- and otherwise relied on the management of the companies in the account to do the heavy lifting on my behalf.
The sells were companies that had completely eliminated their dividends a few years back -- one due to the COVID-19 pandemic, and the other due to the loss of patent protection on a key product. Although I gave both time to recover, neither company looked like it was willing to reinstate its payment. That makes them a poor fit for a portfolio designed for dividend growth.
The buys were businesses that maintained strong track records of dividend growth, including increases in 2022. They fit the portfolio's objectives not only thanks to their dividends, but also due to their solid balance sheets, their reasonable valuations, and from a diversification perspective.
Beyond that, the companies in the account continued to pay -- and often increase -- their dividends. That's all it took to end up with a portfolio that beat the market overall and whose income grew faster than some of the worst inflation that we've seen in decades.
Even better, the iPIG portfolio received $793.95 in dividends during the October through December quarter of 2022. If the companies in the account continue to pay quarterly dividends at that same rate throughout 2023, that would work out to $3,175.80 in dividends for the year. That's a decent head start on the portfolio's chances of seeing its dividend-like income keep up with inflation for 2023. It gives hope that once again, I can meet that key investing objective with very little effort required.
A solid foundation in good times and in bad
When stocks are rising rapidly, this strategy looks like nothing special. When uncertainty and risk rule the market -- as they did in 2022 -- it turns out to be a low-effort way to outperform the overall market and stay ahead of some of the worst inflation we've seen in decades.
If the market's rough 2022 has helped you recognize the importance of focusing on the fundamentals when it comes to staying invested even in tough times, then now is a great time to get started. This strategy is not likely to outperform a rapidly rising market, but that's not really the point of it. By giving you a shot at staying invested even in tough markets, it just might be the foundation you need to help you stay invested long enough to benefit from the market's long-term potential returns.
