A Buy & Hold Forever Dividend Stock Portfolio 41 comments
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This year's market turbulence has many investors calling the buy and hold strategy dead. Let's prove them wrong. My musings (here and here) on holding dividend paying stocks forever have inspired me to make a new, all dividend paying stock model portfolio.
It's composed of 43 stocks and one ETF, and is based on minimal research (more research is always better, but the goal here is to show how it doesn't take an investing maven to succeed with a relatively diversified dividend stock portfolio). Almost all the stocks were selected because they're household names that pay dividends.
The other criterion was to take a couple of companies from every industry that came to mind, so that they wouldn't be clustered in one area, as most dividend ETFs are. As far as energy pipeline companies go, I took the two that I've been hearing the most about. As REITs are not really household names, the portfolio will have a REIT ETF instead of separate stocks.
Here's a list of companies by type (note that some companies may be classified in a number of ways that aren't shown here, and I might be leaving out a few--they're all in the spreadsheet though):
Aerospace/Defense
Boeing (BA)
United Technologies (UTX)
Alcohol
Diageo (DEO)
Banks/Credit Cards
American Express (AXP)
General Electric (GE)
US Bancorp (USB)
Wells Fargo (WFC)
Beverage/Snacks
Coca Cola (KO)
Pepsi (PEP)
Chemicals
Du Pont (DD)
Dow Chemical (DOW)
Communications
AT&T (T)
Verizon (VZ)
Diversified
3M (MMM)
General Electric (GE)
Siemens (SI)
Food
Campbell Soup (CPB)
Kraft (KFT)
McDonald's (MCD)
Yum! Brands (YUM)
Healthcare
Johnson & Johnson (JNJ)
Pfizer (PFE)
Sanofi-Aventis (SNY)
Household Goods
Church & Dwight (CHD)
Johnson & Johnson (JNJ)
Procter & Gamble (PG)
Insurance
AFLAC (AFL)
China Life Insurance (LFC)
Oil
Chevron (CVX)
Exxon Mobile (XOM)
Pipelines/Energy Transport
Enbridge (ENB)
Frontline (FRO)
Oneok Partners (OKS)
Overseas Shipholding (OSG)
Railroads
Burlington Northern (BNI)
Union Pacific (UNP)
Real Estate
Vanguard REIT Index (VNQ)
Retail/Consumer
3M (MMM)
Target (TGT)
Walmart (WMT)
Technology
Intel (INTC)
Microsoft (MSFT)
Tobacco
Altria (MO)
Philip Morris International (PM)
Utility
Con Ed (ED)
Duke Energy (DUK)
The portfolio will work as follows. Three hundred fifty dollars worth of each stock was purchased at the close on Friday 10/31/08. Fractional shares were purchased, as can be done with discount brokers like SogoTrade (for $3.00 a trade), with the commission of $3.50 a trade. So, this portfolio starts out with around $15,400 worth of stock, and a loss of $154 for the 44 trades.
As this is a buy and hold forever portfolio, no position will be sold, even if it stops paying dividends. If there is a spinoff (e.g., Target spins off a REIT or Procter & Gamble gives some shares of Smuckers as a dividend) any new stock will be added to the portfolio's holdings and the cost basis of the original stock will be reduced by the amount of the dividend (for example, when Altria spun off Philip Morris International, the spin off was worth $51.06 a share. Had this portfolio existed then, Philip Morris International would be added, and the cost basis of Altria would be reduced by $51.06 a share).
If one of the stocks is bought out for cash (e.g., BUD), that cash will count as a dividend (even though it's a capital gain). That's the only way a stock can be sold in this portfolio. If a company in the portfolio is bought with stock, or if there is a merger, the new entity will replace the old in the portfolio. The idea is, buy the stocks and leave them alone. Just get the dividend checks.
Although I think all the stocks in the portfolio are good for the long haul (or else I wouldn't pick them), no doubt some of them (hopefully only a few) will go out of business, decrease, or suspend their dividends in the next few decades (a decrease at GE and probably PFE will come soon, but I think both companies will do well over the long term). Others, I'm sure, will do very well.
Although I believe that reinvesting dividends regularly boosts returns (e.g., just have your broker buy you more shares for free when the dividend comes in), for sake of ease dividends here will be reinvested once a year--or when the portfolio accumulates $353.50, whichever is later. Dividends will be reinvested in the companies either with the lowest payout ratios or the lowest yields (depending on how lazy I am).
Since I'm taking the minimal research approach, such a simple rule would work better than trying to decide which stock to reinvest in by doing research. Lowest payout ratio seems to be the better approach, but it involves more mouse clicks. Lower yields are easier to find out, but reinvesting in these stocks might make me buy them when they're too expensive. Higher dividend yields mean lower investor confidence, so it's best (not necessarily for capital gains purposes) to add new money to the stocks that are in the best shape.
(This approach is the opposite of one I'd take with a diversified portfolio of index funds. It makes sense to add new money to the fund performing the worst, as this enables you to buy more shares when they're cheap and avoid buying shares of the funds that are doing better while they may be too expensive. As index funds are baskets of stocks and their composition changes over time, unless the financial system collapses these funds will not go to zero. Underperforming individual stocks can go to zero, however, so I'd like to avoid throwing new money at them.) Dividend reinvestment will not alter the cost basis.
Total return (capital gains + dividends) is always important. But because nothing will be sold in this portfolio, what I'm calling "Dividend Return" (dividends received divided by total invested and expressed as a percentage) will be the better measure. The portfolio will start out with a negative 1% return (that's the $154 spent on commissions).
The portfolio will be tracked in the spreadsheet here). The dividends received will be updated at the end of every month (probably over the weekend) here. For sake of ease, the ex-dividend dates will be used rather than the dates dividends are paid. Should a dividend not be paid after an ex-date, it will be subtracted from the portfolio.
Since all things are relative, the portfolio will be measured for total and dividend returns against the S&P 500, represented by the ETF SPY. Since buying SPY involves only $3.50 in commissions, it starts out with only a negative 0.02% return. Its dividends will be reinvested annually. When I get around to it, I might add the total bond ETF BND as a measure. Note that if the portfolio or SPY do reasonably well (at least 8% annualized total return) compared to CD rates, buy and hold is not dead. If the portfolio and SPY grow less than rates offered on CDs, (the highest 5 year CD rate I could find is 5.25%--I'll track these as time goes by), then I'll concede that buy and hold is dead.
Of course, this will take a few years.
Disclaimer: The above is for educational and entertainment purposes only. Do your homework before investing.
Disclosure: At the time of writing, I owned JNJ, PG, and PM. Some may ask, if all the above stocks are so great and you believe in buy and hold, why don't you own all of them? The bulk of my investments are in a target allocation mutual fund to which I contribute regularly without looking at the statement (that's so I don't stop contributing). Individual stocks are for play.
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This article has 41 comments:
www.dividendgrowthinve...
D4L
You won't prove them wrong. Buy and hold is deader than a door nail. Screen for stocks with a set criteria, buy at the proper entry point and monitor the portfolio regularly and SELL if it turns against you. That is the future for stocks.
keeping an eye on the biggest winners/losers on a regular basis might be prudent, although it looks like that might defeat the point of the buy and hope ideal... this market is getting more and more 'performance' driven rather than 'value' driven, so the buy and hold theme might be too spooky for a while.
tnx for the ideas - well worth the read.
--ikk
4 of my 5 best are included in your list. Good picks, I just don't personally like holding such a large amount of stagnant stocks.
Also, for readers, notice that dividends reported on stock quotes are not always what they will pay in the future (i.e. banks in this credit crisis may lower dividends).
FJP
and short discretionary/specialt... www.marketfolly.com/20...
warrenbuffettstocks.bl.../
Forget dividends until we hit bottom and then start picking through the survivors for a buy and hold portfolio.
Next I would put in asset allocations that actually reflect your expected expenditures to retain purchasing power. The dividends would be reinvested untill the portfolio actually needed to be tapped. This would place a higher allocation into REITS due to the fact that you'll spend more on real estate than say technology in your "real life". If REITs were to fall in price or yield, the price of real estate presumably would follow, same thing with the other allocations.
Using this methodology your allocations might look something like this.
20% REITS
10-15% energy/transports
10% healthcare/drugs
10% food
10% tech/telecom
10% retail
15% cash
15% hard assets
Once again dividends should be reinvested (preferably in a tax defered account). And idexing is recommended for both diversification and low management fees.
dividends from the stock.
I "SHOULD" be happy with it, but I'm not entirly, because I've seen 0%
growth from the stock in a year, true there was a stage I was up 20%, but
it's pulled back since then and I sticked to my original reason to hold it
for the dividend. I've heard of another story where someone bought a
dividend ETF on listing and it has not grown in the last 1-1,5 years or so.
Hope that helps you.
On Nov 06 04:48 PM DVW wrote:
> Ok, so why dont you just buy a "dividend stock" ETF?
4 the dividends, the problem I have with this stock is over 1,5 years
I've received 0% growth. I've also heard of another dividend ETF that
has shown 0% growth since listing (also about 1-1,5 years).
Just take that in mind. Hope it helped you
On Nov 06 04:48 PM DVW wrote:
> Ok, so why dont you just buy a "dividend stock" ETF?
www.bloomberg.com/apps...
Sure... Go down and invest in stocks. That would be really SMART! The company you are investing in may be living on borrowed time courtesy of loans from John Q. Public!
And the sham continues! How in the hell do they expect to EVER bring confidence to the markets by doing these insane things?
Maybe you can hold on to these stocks long enough and they will become fossils that future generations will discover and will help answer the question of what really caused our ultimate extinction!
On Nov 04 06:11 AM XeroJ. wrote:
> Took advice years ago and bought GM. Look what happened, worth less
> & less each day. Big industries nowadays are all facing union
> problems and one by one slowly moving overseas. There will be Strikes
> again at Boeing a few years from now. They seem to love that. GM's
> future is uncertain, and almost nothing is certain. Even what the
> new President is going to do is uncertain, whoever he is !!
Back testing would make no sense since these are all companies that did pretty well in the period back tested. A list from 20 years ago might have included Kodak (EK), last year's list would have probably included AIG.
For back testing, check the XMI index a group of 20 stocks, many on this list. I do not think there has been many changes over time. WalMart and MSFT were not original in 1983.
COMPONENTS FOR ^XMI
Symbol Name Last Trade Change Volume
AXP AMER EXPRESS INC
CVX CHEVRON CORP
DD DU PONT E I DE NEM
DIS WALT DISNEY
DOW DOW CHEMICAL
EK EASTMAN KODAK
GE GEN ELECTRIC CO
GM GEN MOTORS
IBM INTL BUSINESS MACH
IP INTL PAPER
JNJ JOHNSON AND JOHNS
KO COCA COLA CO
MCD MCDONALDS
MMM 3M COMPANY
MO ALTRIA GROUP INC
MRK MERCK CO INC 27.55
MSFT Microsoft Corporation
PG PROCTER GAMBLE CO
WMT WAL MART STORES
XOM EXXON MOBIL CP
AIG, FannieMae, FreddieMac, Citigroup - you name it.
Buy and hold was dead in 1982 I guess? After 16 years of flat markets? In fact equities in general were declared dead that year by Businessweek.
From 1982 until 2000 the dow went up 16X. So much for buy and hold being dead.
We're in a secular bear here. During flat markets your gain is 90% in the dividend. Except if you are an expert market timer, which everyone on this board is.
And when the next bull starts, look out.
Warren Buffet, the richest man in the world uses that strategy. I don't see where it has changed. It's just another recession. He has been through many of them and his strategy seems to, not only have survived them all, bu he comes out even more ahead in the end. :)
On 2008 Nov 04 08:31 AM Stocksniper wrote:
> " many investors calling the buy and hold strategy dead. Let's prove
> them wrong. "
> You won't prove them wrong. Buy and hold is deader than a door nail.
> Screen for stocks with a set criteria, buy at the proper entry point
> and monitor the portfolio regularly and SELL if it turns against
> you. That is the future for stocks.