On Dividends and Portfolio Building

by: Roger Nusbaum

I wanted to carry the dividends idea forward a little bit, as there are some enormous dividends out there to be had. What I thought I would do is construct a portfolio where for each sector there is one very high yielding stock and one ETF. For compliance reasons I need to shy away from specific percentages allocated to each holding as the rules around this stuff assume that people add 2+2, get 22 and go out an implement the portfolio.

Westpack Banking (NYSE:WBK) yields 5.80%
iShares S&P Global Financials (NYSEARCA:IXG) yields 2.16%

Merck (NYSE:MRK) yields 4.40%
Pfizer (NYSE:PFE) yields 4.50%

YPF Sociedad Anonima (NYSE:YPF) yields 7.10%
Energy Sector SPDR (NYSEARCA:XLE) yields 1.87%

Nordic American Tanker (NYSE:NAT) yields 8.90%
Industrial Sector SPDR (NYSEARCA:XLI) yields 1.91%

Kimberly-Clark (NYSE:KMB) yields 4.10%
Staples Sector SPDR (NYSEARCA:XLP) yields 2.74%

VF Corp (NYSE:VFC) yields 3.20%
Time Warner (NYSE:TWX) yields 2.80%

Intel (NASDAQ:INTC) yields 3.40%
Taiwan Semi (NYSE:TSM) yields 3.90%

National Grid (NYSE:NGG) yields 6.70%
Utilities Sector SPDR (NYSEARCA:XLU) yields 4.14%

Lafarge (OTCPK:LFRGY) yields 5.74%
BASF (OTCQX:BASFY) yields 4.28%

AT&T (NYSE:T) yields 6.30%
NZ Telecom (NZT) yields 9.80%

For a couple of the sectors I used two stocks instead of one stock and one ETF. A couple of the yields are very high, it would make me very nervous if every stock I owned yielded more than 7%. The way I did the math the mix yields 4.2% but you can play around with the numbers and weight this out however makes sense to you or better yet look at names in the context that are of interest to you. In general terms the payout ratios are very reasonable other than maybe NZT and WBK. The debt levels for these companies is generally decent except for sectors where you typically see high debt levels like telecom, utilities and financials.

A rundown of sorts on these stocks: WBK did not go down anywhere near as much as a broad financial sector ETF during the worst of the bear market and is now much farther ahead, both PFE and MRK did much worse than a broad sector fund during the worst of the bear and are still quite a ways behind, YPF did about the same as XLE in terms of decline but on a slightly different timetable and has come back much quicker, NAT went down much less than XLI but both are down the same 30% from the peak, KMB has done a little worse than XLP since the peak, VFC did a little better than a broad sector fund and TWX has done a little worse, INTC had performed very similarly to a broad tech fund trailing off lately while TSM has done much better, NGG has done quite a bit worse than XLU, LFRGY has done much worse and BASFY about the same as a broad materials fund and finally T did a little better and NZT quite a bit worse than IYZ.

The purpose of that last paragraph is to demonstrate how a portfolio of semi-randomly chosen (I believe all of them are decent companies even if I don't own any of them) high yielding stocks chosen as the Red Sox were losing in extra innings fared through what might turn out to be the worst stretch for equities for a long time. So using the bear market as a barometer of sorts. Assuming none of the are fraudulent companies and there are no dramatic changes to the structure (good or bad) of these companies what you'd see if you charted all of them could give a reasonable idea in the event of another top down market scare.

With a little more time and thought there should be more foreign names in the mix more specifically better country diversification. There are more and more CIVETS stocks with ADRs such that maybe one or two could be worked in. I would note that a portfolio full of American and Western European dividend payers bears out as not being very desirable here. Other than NZT, this is where most of the laggards are from (I was surprised that KMB lagged a little).

This really was just a thought exercise; notice no need for any ownership disclosures, as many people seem to love the idea of buying "great companies with high dividends" and just holding on, which I disagree with. Buying and hoping to hold is valid but market conditions sometimes dictate reducing net long exposure.

Disclosure: None