Nine letters that's all it takes. No watching of companies. No need to concern yourself with what companies are missing on earnings, cutting their dividend, eliminating their dividend or freezing their dividend. Just punch in three numbers and rebalance with the income that the portfolio generates. Adding new monies on a regular basis is also the greatest favour you can do for yourself as well, of course.
Here's an income producing portfolio that you can hold until and through retirement. Here are those nine letters.
Those nine letters will give you broad exposure to U.S. and international dividend payers and sectors such as REITs and MLPs with a sprinkling of some Canadian energy companies. It simplifies the multiple dividend growth ETF I put together that added REITs and MLPs in this article here.
At the core of the dividend growth ETF portfolios that I've been suggesting readers consider is Vanguard's VYM. It's a broad based "higher yielding" dividend growth ETF. It holds many or most of the U.S. based stalwarts that we see in the portfolios of dividend growth investors who write or comment on Seeking Alpha.
VYM - Top Holdings
Exxon Mobil (XOM), Microsoft (MSFT), General Electric (GE), Chevron (CVX), AT&T (T), Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT), Pfizer (PFE), Coca-Cola (KO), Philip Morris (PM), Merck (MRK), Verizon Communications (VZ), PepsiCo (PEP), Intel (INTC), Abbott Laboratories (ABT), Home Depot (HD), McDonald's (MCD), United Technologies (UTX), ConocoPhillips (COP), 3M (MMM), Altria Group (MO), Eli Lilly (LLY) Colgate-Palmolive (CL), Emerson Electric (EMR), Illinois Tool Works (ITW).
From there I would suggest that dividend growth investors add some international exposure with KXI, an ETF from iShares - a Global Consumer Staples ETF. This sector is prime breeding ground for dividend companies. There is certainly some overlap between the U.S. VYM and International holdings, but it does offer some broader international exposure. Investors can sometimes forget that the U.S. markets can underperform at times. Here's how a combination of Canada (EWC) and the international index EAFE (EFA) outperformed the U.S. markets from January of 2003 through to the end of 2007. Adding some international exposure can pay off.
Here's a list of some of the top holdings and their percentage of the global ETF KXI.
From there I would suggest some yield chasing with a multi asset class ETF from Guggenheim - CVY.
This from Guggenheim … The Fund, using a low cost "passive" or "indexing" investment approach, seeks to replicate, before fees and expenses, the performance of the Zacks Multi Asset Income Index. The Zacks Multi Asset Income Index is comprised of approximately 125 to 150 securities selected, based on investment and other criteria, from a universe of domestic and international companies. The universe of securities within the Index includes:
- U.S.-listed common stocks
- American depositary receipts ("ADRs") paying dividends
- Real estate investment trusts ("REITs")
- Master limited partnerships ("MLPs")
- Closed-end funds
- Canadian royalty trusts
- Traditional preferred stocks
Here is the sector breakdown and the top ten holdings.
The fund offers a 12-month yield of 5.15%. While the yield took a hit in the financial crisis, the ETF has delivered some nice income growth from June of 2009. The dividends have increased from .22 cents a quarter to .32 cents a quarter representing a 9.82% dividend growth rate over that 4 year period. Though the income has now only returned to its 2006 levels.
I was enticed to look for a U.S. multi-asset class ETF as I use a similar product up here in the great white north. My multi-asset class ETF now offers a current yield of just under 7.4%. Interest rate worries have certainly hammered the interest rate sensitive high yield bonds, utilities and REITs that it holds. I am looking to add to this position within normal reinvestment of investment income. One of my main Canadian dividend growth ETFs also offers a yield of 5%. There is some decent value up here in Canada as our markets have lagged.
Of course CVY will also present its own risks in relation to interest rates and sector exposure.
So what happens when you put those nine letters together in a portfolio? Let's have a look at some historical (but brief) returns. The portfolio is limited to November of 2006 - VYM's inception date. The ETFs each get equal weighting of 33.3% each.
The Nine-Letter ETF portfolio total return was 49% from November 2006 to present, outperforming the S&P 500's total return of 33.4%. That's a significant outperform by 47%.
And what would have happened with this portfolio mix on the income front? As stated above CVY has some decent income growth over a 4-year period - a 9% compound average growth rate to go with that 5% plus yield. VYM offers an SEC yield listed at 3.15% and a dividend growth rate of 8.5%. KXI offers a current yield of 2.4% and a dividend growth rate of 11% over five years.
Put them together and here's an estimate of dividend growth history. Calculating or estimating dividend growth rates of ETFs is not an exact science to be sure. I will take averages of a year or 2-3 quarterly dividend payment of an ETF to smooth out ETF dividend payments that can fluctuate with regularity.
|ETF||Yield||Dividend Growth Rate|
And yes, I have blended some time frames to make this projection. Again, the CVY growth rate is shorter term coming out of the recession and is calculated from the bottom of its income history. As the ETFs themselves do not offer 10 and 15 year histories, we are limited. That said, one can look at the underlying holdings of these ETFs and see long term histories of dividends and dividend growth.
This may be a simple three ETF portfolio, but it offers broad sector and international exposure. It has some nice numbers on total return and income generation.
For those who want to temper price volatility (that's most everyone), they can balance the holdings with a bond ETF or two. If one wants the classic balanced portfolio they may consider holding 60% of the above ETFs combined with 40% from a broad based bond ETF such as (AGG). For those concerned with rising interest rates and that effect on bond ETF prices, they may select a bond ETF with a shorter average maturity. Of course, there's no guarantee that equities and bonds will continue to offer low or negative correlation.
And there you have it. Three ETFs, nine letters, one very simple but likely effective portfolio over the longer term.