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(The Dividend Champions spreadsheet has been updated through 8/31/10. Download the latest version of the US Dividend Champions spreadsheet or PDF here.)

In a separate article, I outlined all the changes that have been made to the Dividend Champions spreadsheet during August, and I wrote that I would discuss one particular change in a separate post, which I will do in this piece.

In both the Champions and Contenders listings, I have added a Quarterly Schedule column that may be of use to those seeking to spread out their holdings by Pay Dates throughout the typical quarter. It utilizes a simple A-B-C system to designate the three months of each quarter. So, for example, A represents January, April, July, and October; B represents February, May, August, and November; C represents March, June, September, and December. The number that follows the appropriate letter is based on the Pay Date of the most recent increase.

At some point, particularly when entering retirement, an investor might want to arrange his or her portfolio so as to spread out the dividends being received on a fairly even basis throughout each quarter, possibly to match spending needs. This could also be a specialized portion of a larger portfolio. For a more in-depth discussion of income investing in retirement, I suggest David Van Knapp's series on the subject, culminating in his “Cistern Analogy” article.

In brief, retirement investors need to consider income from sources such as dividends, which will match up with spending needs. If the income going into the “cistern” can be matched with the outflow, then the investor can maintain a certain degree of assets without having to resort to selling stocks, for example, in order to fund retirement. This contrasts to the notion of having a retirement “number,” which is the focus of commercials that ask, “What's your retirement number?”

My Cistern Runneth Over

In that popular ad campaign, investors are urged to consult with an “expert” in order to help determine the amount that they need to accumulate for retirement, but that model anticipates that the retiree would typically fund retirement by gradually liquidating his or her assets. The problem with that is that the retiree might have to sell stocks and other assets at very disadvantageous times and, if their retirement spending doesn't match the model, they might end up running out of funds well before running out of time.

Building a portfolio that will provide an adequate income stream without having to liquidate assets is clearly a better idea. While insurance companies might urge people to buy an annuity to provide the necessary income, that notion is imperfect, as well, in part because of the lump-sum that would be needed (again, possibly liquidating assets up front) and in part because of the fees, uncertain performance, and surrender charges built into most annuities. Building a “steady stream” income portfolio allows the investor to exercise full control over assets while enjoying the income that steady, or even rising, dividends can provide.

What follows is an exercise in building such a model portfolio, which I was tempted to call the Dividend Champions Annuity Model. But I came to my senses and realized that using the Annuity word simply wouldn't do it justice. I'll place a disclaimer up front: This model-building exercise is not intended as a recommendation of the stocks mentioned. I will purposely mix stocks that I don't own with some that I do, and will deliberately include securities from different industries so as to reflect a diversified approach, and will mix Champions and Contenders liberally.

The main thrust will be to come up with Quarterly Schedule dates that stretch from early in the first month (NYSE:A) of a quarter to late in the third month (NYSE:C). Because it is (in general) a model designed for immediate retirement use, I'll include only above average yields, but will aim for total dividend amounts that are fairly even over the course of each quarter.

The Exercise Begins

I started by choosing some of the stocks that I own, which have above average yields and represent different industries. I made sure these were spread throughout the quarter in terms of dividend dates. Next, I chose some complementary Champions and Contenders that would “fill in the gaps” in terms of payment dates, making sure that they also had above average yields and provided even more diversity. The result was a veritable hodgepodge of industries and a range of yields from 3.66% to 8.02%, with August 31 prices ranging from $16.90 to $64.40:

Company

Symbol

Price

Yield

Q Div

Q Sch

Kimberly-Clark

KMB

64.40

4.10

0.6600

A05

Altria Group

MO

22.32

6.81

0.3800

A12

Erie Indemnity

ERIE

52.50

3.66

0.4800

A20

RPM International

RPM

16.90

4.85

0.2050

A30

Enterprise Prod. LP

EPD

36.97

6.22

0.5750

B05

Nucor Corp.

NUE

36.78

3.92

0.3600

B11

Paychex Inc.

PAYX

24.89

4.98

0.3100

B15

Artesian Resources

ARTNA

17.91

4.20

0.1882

B21

ConocoPhillips

COP

52.43

4.20

0.5500

C01

Diebold Inc.

DBD

25.94

4.16

0.2700

C08

Johnson & Johnson

JNJ

57.02

3.79

0.5400

C15

CenturyLink Inc.

CTL

36.16

8.02

0.7250

C22

As you can see, there are four stocks in each month, and each month has a very high yielding stock, as well as one that yields less than 4%. I picked seven Champions and five Contenders, and personally own half of the stocks. Again, I'm not recommending that anyone adopt this particular mix of stocks, nor do I plan to build such a portfolio for myself at this time. This exercise is for demonstration purposes only. Please ... no wagering.

Solidifying the Model

In order to put this model into more concrete terms, I used a least-common-denominator method of assigning dollar amounts. That basically means that I started with the highest-priced stock, which happened to be Kimberly-Clark (NYSE:KMB), and specified an investment of 100 shares. After determining the quarterly dividend that would be produced by 100 shares, I calculated how many shares of each remaining stock it would take to produce roughly the same dividend amount. The results appear in this table:

Company

Symbol

Price

Yield

Q Div

Q Sch

Shares

Dividend

Cost

Kimberly-Clark

KMB

64.40

4.10

0.6600

A05

100

66.00

6,440

Altria Group

MO

22.32

6.81

0.3800

A12

174

66.12

3,884

Erie Indemnity

ERIE

52.50

3.66

0.4800

A20

138

66.24

7,245

RPM International

RPM

16.90

4.85

0.2050

A30

322

66.01

5,442

Month A Totals:

734

264.37

23,011

Enterprise Prod. LP

EPD

36.97

6.22

0.5750

B05

115

66.13

4,252

Nucor Corp.

NUE

36.78

3.92

0.3600

B11

183

65.88

6,731

Paychex Inc.

PAYX

24.89

4.98

0.3100

B15

213

66.03

5,302

Artesian Resources

ARTNA

17.91

4.20

0.1882

B21

351

66.06

6,286

Month B Totals:

862

264.10

22,571

ConocoPhillips

COP

52.43

4.20

0.5500

C01

120

66.00

6,292

Diebold Inc.

DBD

25.94

4.16

0.2700

C08

244

65.88

6,329

Johnson & Johnson

JNJ

57.02

3.79

0.5400

C15

122

65.88

6,956

CenturyLink Inc.

CTL

36.16

8.02

0.7250

C22

91

65.98

3,291

Month C Totals:

577

263.74

22,868

Portfolio Totals:

2,173

792.21

68,450

Note that the cost does not include commissions and is based on the August 31 closing prices. The numbers may not seem impressive, but remember that I started with a lowest-common-denominator approach. The dividend for four quarters would total $3,168.84, based on an investment of $68,450, so the composite yield is 4.63%, even without dividend increases, which all of these companies have a history of declaring year after year. So the yield-on-cost (YOC) would tend to rise steadily from that starting point.

Also, of course, investing a multiple of the $68,450 outlay would result in a multiple of the resulting dividend. For example, someone who could invest five times that amount ($342,250) would enjoy an initial annual dividend rate of $15,844.20, which would immediately start growing. That compares favorably to an annuity, without surrendering a penny of capital. And, although the focus of this exercise was the income stream, remember that these companies are quite likely to appreciate nicely over time.

Conclusion

This model-building exercise was meant as a thought-provoking demonstration of using dividends to fund retirement needs and, perhaps more important, how such a method compares with alternatives, such as buying an immediate annuity.

There are any number of variations that can be performed, such as using other Dividend Champions and Contenders, building a model for younger investors aiming to gradually construct something similar, or mixing in other income sources, such as Social Security (which is paid at the start of each month).

Hopefully, it demonstrates that the new Quarterly Schedule column in the spreadsheet (and PDF) can be a useful tool for planning purposes...even if it provides a bad example to avoid! As always, suggestions are welcome.

Disclosure: Author long KMB, MO, RPM, PAYX, JNJ, and CTL

Source: Dividend Champions: A Steady-Stream Model