In the pursuit of a growing return at a minimal level of risk, an investor can create a portfolio of high-quality companies with a long history of steadily increasing dividend.
In this article, I will show such a portfolio, which yields over 4 percent, with a good chance to maintain this yield for many years, at a low level of risk.
First, as diversification helps investors to reduce risks, I decided to build a portfolio of eight companies from eight different industries. This portfolio's size is not too big to control and it gives quite a good diversification.
Second, in order to limit downside risk, I selected only stocks of big companies that are included in the S&P 100 index.
The S&P 100 Index, a sub-set of the S&P 500®, measures the performance of large cap companies in the United States. Known by its ticker symbol, OEX, the index is comprised of 100 major, blue chip companies across multiple industry groups. The primary criterion for index inclusion is the availability of individual stock options for each constituent.
Third, I searched for companies with a forward annual dividend yield greater than their five-year average dividend yield. A good time to start a long-term investment in a blue-chip company, which has a long history of steadily increasing dividend payments, is when due to temporary weakness its dividend yield is historically high.
In addition, all stocks in the portfolio have to comply with all the following demands:
- Dividend yield is greater or equal 2.80%.
- Annual rate of dividend growth over the past five years was positive.
- Trailing P/E is less than 22.
- Forward P/E is less than 15.
I discovered eight stocks that comply with all the above demands, and I used them to create the long-term strong dividend portfolio. All the data for this article were taken from Yahoo Finance on February 18. The eight stocks are: Exelon Corporation (EXC), Lockheed Martin Corporation (LMT), ConocoPhillips (COP), Intel Corporation (INTC), Raytheon Co. (RTN), Microsoft Corporation (MSFT), McDonald's Corp. (MCD) and Norfolk Southern Corp. (NSC).
The three tables below present some important valuation metrics and dividend information, for the eight stocks in the portfolio.
The average forward annual dividend yield of the portfolio is 4.26%, the average payout ratio is 56.3%, and the average annual rate of dividend growth over the past five years was 13.6%.
The charts below present the dividend rate and the dividend yield for the last five years for the eight companies.
EXC Dividend data by YCharts
EXC Dividend Yield data by YCharts
RTN Dividend data by YCharts
MCD Dividend Yield data by YCharts
The table below presents the total return and the compound annual growth rate (CAGR) of holding the portfolio for the last 10 years.
The table below presents the total return and the compound annual growth rate (CAGR) of holding the portfolio for the last 20 years.
Holding the suggested portfolio during the last 10 years has given a nice average annual return of 11.3% and during the last 20 years a nice average annual return of 10.4%. Although the past guarantees nothing, it does provide insight into how these eight blue-chip stocks have performed under various economic conditions over varying time frames. In my opinion, creating a portfolio of these eight stocks now, and holding this portfolio for many years will reward an investor with a nice return.