Earlier this year I started an article series that outlined my income portfolio investing strategy and holdings. You can view that original article here. I have also been releasing quarterly updates which can be viewed here for Q1, Q2 and Q3. As part of this article series I also decided to write about the addition of new stocks to my portfolio as well as the thought process behind why I chose them. The investment strategy for this portfolio was outlined in my original article to which I previously provided a link. One of my goals was to raise each income investment on a cost basis evenly. I have currently raised 14 of my 20 holdings to the $2,000 range and planning on raising the remaining 6 to the same cost level at some point in the 4th quarter. Once this has been achieved the next step based on my investing strategy is to pick 5 new investments to add to my portfolio further increasing my diversification. This article is a prelude to the purchase of those stocks where I will outline what stocks I am looking to purchase, why I want them in my portfolio, and how their addition will affect my portfolios diversification.
Stock Selection Criteria:
- Fundamental Data
The next five stocks will be picked based from stocks that fall into three different focus areas: Diversifying Stocks, Income Producing Stocks or Personal Choice Stocks. Diversifying stocks are stocks that cover areas of needed exposure in my portfolio. Stocks will be selected based on need first. The second category is based on selecting investments that help to increase my overall income levels. Stocks that fall into this category will only be considered once diversification needs are met. The last category is a very broad category since I am allowing myself to pick a stock of my choosing. Personal stock selections will only be made after diversifying and income stock selections have been made. Stocks within each category also get analyzed on a technical basis as well.
- Technical Data
P/E - I look for stocks with P/E's of less than 18 the S&P historical average for dividend style investments.
Dividend Yield - I look for stocks that have a dividend yield of more than 2%
Dividend Growth - I look for companies that have a history of raising dividends currently or recent history. They may not be in a dividend growth cycle currently but must have some history of commitment to dividend raises.
Note: Stocks must meet at least 2 of the above requirements to be considered for my portfolio. Stocks that meet all three requirements take precedence over investments that do not. ETF's are not assessed in the same manner are prim targeted based on
Diversification is not the only reason to add new stocks to your holdings but it is a very important one and I have identified three areas to which I need some exposure. Ideally the next 5 stocks that I purchase would cover these areas.
- Municipal Bonds
The three items listed above have been deemed the most important areas to which my portfolio needs some exposure. These are not the only additional sectors that I need coverage of, but are the most pressing needs. I will address the chosen investments that meet each requirement below.
There are many ways I could have chosen to invest in the housing market. First I considered home builders such as Lennar Corp. (NYSE:LEN), DR Horton (NYSE:DHI) and PulteGroup Inc. (NYSE:PHM). I decided against direct investment however for the simple reason that homebuilders sometimes suffer from local market issues as well as global and I did not want to have to factor local market changes into my decision making process as to which investment was better. Second I considered investing in building materials retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD). I decided against these investments however since they derive a large portion of their income from home improvement efforts. I was looking for a larger play on the general housing market. For this reason I decided to go with a building products producer in Weyerhaeuser (NYSE:WY).
Weyerhaeuser - WY
P/E - 27.97
Dividend Yield - 2.9%
Dividend Growth - Raised its dividend by 46% over the last year
Note: As you can see WY does not meet my requirements for P/E levels but it does satisfy the other 2 requirements. I will ignore the P/E for this investment since it covers the proper scope of a targeted market that I identified as a needed investment.
- Municipal Bonds
Municipal bonds are a must for every income portfolio and until recently the only bond exposure I hold in my portfolio is that of high yield corporate bonds currently held in the iShares iBoxx $ High Yield Corporate Bond (NYSEARCA:HYG) ETF. Since Detroit declared bankruptcy earlier this year, municipal bonds have become an unfavorable investment. This looks like a good time to buy some exposure at discounted rates. I originally considered a state specific bond fund for the state of Virginia, the BlackRock Virginia Municipal Bond Trust (NYSEMKT:BHV), since I currently live in Virginia but I decided against it since it only exposed me to Virginia municipalities. Finally I settled on a larger municipal bond ETF, the Market Vectors High-Yield Muni ETF (NYSEARCA:HYD).
Market Vectors High-Yield Muni ETF - HYD
Dividend Yield - 5.6%
Note: Since this is an ETF that satisfies exposure to targeted market segment we will not consider the P/E or dividend growth factors because of the nature of ETF's. For ETF style investments I like investments that yield more than 5% and pay out on a monthly basis. This allows us to take advantage of the compounding of principal, which is secondary goal for ETF style holdings.
Transportation is a very large portion of our economy to which I also no exposure. Transportation just like the other segments can be invested in through a variety of stocks. I considered parcel delivery service such as FedEx Corp. (NYSE:FDX) and United Parcel Service(NYSE:UPS). These stocks had to large of a P/E considering their growth prospects are deemed pretty low. I considered trucking companies like JB Hunt (NASDAQ:JBHT) and Landstar Systems (NASDAQ:LSTR). Due to the volatile nature of trucking costs I did not view the trucking industry in a positive light. I finally settled on the train transport industry due to better control over cost structures and sheer volume of transported materials. I decided to target Norfolk Southern (NYSE:NSC) from the train segment due to its low P/E and forward looking integration with new locomotive technology specifically that of natural gas. I feel that natural gas locomotives will allow railroad companies to further control their costs.
Norfolk Southern - NSC
P/E - 15.4
Dividend Yield - 2.5%
Dividend Growth - NSC has shown an extraordinary commitment to raising dividends having done so for 11 straight years.
Note: As you can see NSC meets all of the requirements for a stock selection as well as meeting my desire for a transportation stock.
Income Producing Stocks:
I have been keeping an eye on a stock that I previously held and sold at profit that currently yields a little over 6% in annual dividend payments. The stock is the Alerian MLP ETF (NYSEARCA:AMLP) which is an ETF that tracks the top 25 pipeline MLP companies in the USA. I held them previously but was unsure what the popularity of the natural gas revolution would mean for these companies. It appears that the natural gas revolution will be a positive addition to the bottom line performance of these companies. I am therefore looking to re-open a position in this ETF. I decided against picking individual pipeline companies for the simple reason that I believe in the broader pipeline market instead of any one specific company. This way I provide some cushion in my portfolio against picking a potential loser or sub-par performer.
Alerian MLP ETF - AMLP
Dividend Yield - 6.0%
Note: Just like the investment in HYD above I do not care about P/E or dividend growth for this specific investment, although AMLP has shown that the broader MLP pipeline segments commitment to raising payouts is reflected in this ETF's dividend payment history.
Personal Choice Stocks:
I have been very interested in the agriculture market for some time. I firmly believe that the next market segment that will suffer a Boom, Bubble Bust scenario is that of agriculture. I am currently invested in the agricultural sector through my Archer Daniels Midland (NYSE:ADM) and DuPont (NYSE:DD) holdings. I have looking for a while for another investment that is another play on agriculture but less directly related. For that reason I have decided to invest in Deere & Co. (NYSE:DE). I view DE as an investment that spans both the agriculture and industrial manufacturing sectors.
Deere & Co - DE
P/E - 9.6
Dividend Yield - 2.4%
Dividend Growth - DE has shown a commitment to raising dividends having done so for 9 straight years.
Note: DE is a solid company with a fairly low value based on forward looking P/E values. DE also meets all three technical requirements in order to be added to my portfolio.
I have discussed the next five stocks that I am looking to add to my portfolio and why I chose those particular ones. I have been researching these and other stocks for the last 4 months and am very pleased with the choices that I have made. Please comment in the section below with any opinions about the chosen stocks.
Disclosure: I am long ADM, DD, HYG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I do not currently hold positions in DE, NSC, WY, AMLP or HYD but I plan on opening positions in these stocks during Q1 2014.