Are you a retiree or an investor searching for income? Then check out this model portfolio we put together. Obviously every investor has different needs and time frames, so we’d advise you to use this portfolio as a starting point for your research as you build a portfolio passive income streams for retirement.
In our model portfolio we allocate 35% of the portfolio to cheap, high-yield dividend stocks, 25% in preferred shares of solid businesses or other fixed income funds, 25% in safe REITs or other physical income producing properties such as an apartment complex or commercial real estate property, 10% in precious metals and commodities and 5% in cash.
Below are some ideas to fill each bucket of the portfolio:
35% High-yield dividend stocks
Exelon (EXC): This dividend king is a utility holding company that provides electricity to 1.6 million customers in southeastern Pennsylvania and 3.8 million customers in Illinois. As well, it provides natural gas retail sales to half a million customers in Pennsylvania. With the largest nuclear fleet of any U.S. utility, Exelon’s 11 nuclear plants in the Midwest and Mid-Atlantic generate 17% of U.S. nuclear power and constitute 80% of Exelon’s generation output. Currently, Exelon trades at $41.04 and yields 5.12%. On a discounted cash flow basis, we believe shares are worth upwards of $70 apiece. Our full long thesis on EXC can be read here.
Verizon (VZ): Verizon is an extremely well run business that generates a ton of cash; cash that it uses to pay a hefty 5.37% dividend yield and quickly pay off the debt used to fund the Alltel acquisition. This market leader (the company serves around 94 million subscribers or approximately 25% of the US population) already has an extremely loyal consumer base, and with Apple (AAPL) iPhone pre-orders doing gangbusters thus far, we think those relationships will only grow stronger. While we think Verizon shares are approaching fair value, we believe Apple shares, on the other hand, are overvalued, as we outlined here. Coca-Cola Company (KO) has paid dividends since 1893. Right now, the yield is 2.9%. Recorded investors on March 15 will get their next dividend payment on April 1. Over the last five years, share prices are up over 50%. They currently trade at a P/E of 12.7. For 2010, reported net revenue was $35.1 billion. Over the past five years, EBT margins have consistently been in the upper 20s, whereas for Dr. Pepper Snapple (DPS), it has been between 14% and 15%. The ROIC for Dr. Pepper Snapple was 9.5% in 2010, but for Coca-Cola it was right near 20%. In 2010, the company returned $7.2 billion to shareowners in 2010, through $4.1 billion in dividends and $3.1 billion in share repurchases. In 2011, it expects to repurchase $2 billion to $2.5 billion in stock over the course of the year as part of a share repurchase program. The company expects its acquisition with Coca Cola Enterprises to have 2011 cost synergies of $140 to $150 million.
General Mills (GIS): A brand that you may be in touch with every day, especially in the morning, General Mills is another name levered to emerging markets. Of all the names, it seems the most likely to suffer from rising commodities prices as we spoke about here. Investors should weigh the countervailing theses of rising “ag” prices and the strength of a company with such brand omnipresence and product strength.
France Telecom (FTE): France Telecom is the fixed-line and wireless giant of France, with significant interests in Spain, Poland and the Middle East and Africa. What makes this company attractive to income seekers is its hefty dividend yield of 5.8%. Another factor we like about this company is that the dividend only eats around 46% of the firm's free cash flow, making it likely in the near term the company will be able to maintain dividend payment. Shares trade at 22.01 at the time of writing.
Coca-Cola Company (KO) has paid dividends since 1893. Right now, the yield is 2.9%. Recorded investors on March 15 will get their next dividend payment on April 1. Over the last five years, share prices are up over 50%. They currently trade at a P/E of 12.7.
For 2010, reported net revenue was $35.1 billion. Over the past five years, EBT margins have consistently been in the upper 20s, whereas for Dr. Pepper Snapple (DPS), it has been between 14% and 15%. The ROIC for Dr. Pepper Snapple was 9.5% in 2010, but for Coca-Cola it was right near 20%.
In 2010, the company returned $7.2 billion to shareowners in 2010, through $4.1 billion in dividends and $3.1 billion in share repurchases. In 2011, it expects to repurchase $2 billion to $2.5 billion in stock over the course of the year as part of a share repurchase program. The company expects its acquisition with Coca Cola Enterprises to have 2011 cost synergies of $140 to $150 million.
Fidelity National Financial (FNF): Fidelity National provides title and specialty title insurance, claims management and information services throughout the United States. It currently holds the largest market share in the title insurance market, at 38%. It currently yields 3.49%. Shares are worth $22 apiece using a discounted cash-flow analysis. Title insurance premium growth will likely remain strong due to bursts of refinancing and foreclosure sales. Margins will benefit from Fidelity’s further use of cost-cutting technology, and should remain around 9-10% as a result. For more details on FNF, see our full article here.
As an alternative in the title insurance industry, we like First American (FAF), the number two in the industry by market share.
R.R. Donnelley (RRD) has paid a dividend of $0.26 per quarter since Q3 2003. The current yield is 5.75%. Q4 2010 results are to be reported on Tuesday, February 22. For the first nine months in 2010, EPS is $0.93 versus $0.25 for the same period in 2009, and the respective revenue numbers are $7311.8 million and $7274.3 million. Share price is up 3% over the last 5 days. The 52 week trading range is $14.87 - $22.83, and shares trade currently under $20. The company provides premedia, printing, logistics and business process outsourcing products and services.
Abbott Laboratories (ABT): This pharmaceutical powerhouse yields 4.03% and has a history of raising its dividend. The company's portfolio of patent protected drugs, along with its excellent nutritional and diagnostic groups and its history of strategic acquisitions, have dug ABT a wide economic moat, which is one of the reasons we think Warren Buffett might buy this stock.
Deutsche Telekom AG ADR (DTEGY.PK): Another telecom name on the list, DT is Germany’s incumbent telephone provider with operations throughout Europe and the United States (T-Mobile). The company's fixed-line networks serve 37.2 million voice lines and 15.9 million Internet access lines. And the company’s wireless business has 131.1 million customers. But what drew our attention to this name was the company’s 7.63% dividend yield, and DT’s joint venture with France Telecom (FTE) (one of our dividend “kings”) in the U.K, which should help margins in a difficult country. Shares trade at $13.53 at the time of writing.
AstraZeneca (AZN): This British based company sells a suite of pharmaceutical products to treat a number of gastrointestinal, cardiovascular, and respiratory ailments, cancer and other infectious diseases. Though the company’s drug pipelines is one of worst among the large cap pharmaceutical player, the company has been paying dividends since 1993 and has a hefty 7.58% for yield seekers looking for reliable income. Shares trade at $48.51 at the time of writing.
Medtronic (MDT): Another dominating business, his company produces medical equipment and holds market leading positions in heart devices, insulin pumps, and spinal products. Known once for its leaning too much on its heart disease business, the company has moved into other therapeutic areas, a good move in our opinion. Shares have appreciated over the past three months since we first wrote about the company here and again where we declared it one of our 10 dividend "kings" here.
Novartis (NVS): The Swiss-based pharmaceutical maker has a healthy balance sheet and a free cash flow yield of ~ 8%. As well, NVS has a dividend yield of 2.9% and over the past five years, that dividend has shot up from 1.6% to where it stands today. The company's healthy intellectual property portfolio has created a wide moat for itself, which will likely remain as long as Novartis can continue to fuel its late stage pipeline and keep making targeted acquisitions. But like AstraZeneca, Novartis faces tougher competition and difficult times ahead. Coupled with this, is the fact that everyone seems to hate pharma these days. The market is essentially pricing in minimal growth to many of the bigger names in this industry, so if any of these large caps can surprise on the upside, the sector could give investors okay capital appreciation on top of solid dividend yields.
Apollo Commercial Real Estate Finance (ARI) is a young company that came into being in the post-2008 world. It made all dividend payments in 2010, and the current yield is 8.9 percent. The 52 week low is $15.75, 52 week high is $18.49, 200 day moving average is $16.58, and trades currently in the upper 16s. The Company originates, acquires, invests in and manages performing commercial first mortgage loans, commercial mortgage-backed securities, mezzanine financings and other commercial real estate-related debt investments in the US.
Starwood Property Trust (STWD) reflects that the commercial and residential real estate market has turned a corner. 2010 Q1, Q2, and Q3 net incomes came in as positives. With this optimism and because Q4 earnings will be announced on March 1, investors should consider looking into adding a position. By the way, the current yield is a robust 5.25 percent. The Company is focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments. It also invests in residential mortgage-backed securities and residential mortgage loans.
Colony Financial (CLNY) pays out a healthy current yield of 4.3 percent. Four out of six analysts rate it as a market outperform or buy, while the other two suggest holding onto it. Just like Starwood, the companyturned a profit in 2010. The 52 week range is $16.50 to $21.03. Since August 2010, there is a strong and technically upward trend. The Company acquires, originates and manages commercial mortgage loans in the US and Europe.
Chimera Investment (CIM) is the little engine that could. Trading in the low 4s, it beat earnings estimates for 6 of the last 9 quarters, and pays out an aggressive current yield of 16.5 percent. The share price has been consistently above $4 since September 2010, and the median target price is $4.50 a share. Again, the play is not capital appreciation, it is for the dividend payments. The Company invests in US government and private residential mortgage-backed securities representing interests in obligations backed by pools of mortgage loans.
Annaly Capital Management (NLY) has been around since 1997, and has paid a healthy quarterly dividend going back 10 years. The most recent dividend was $0.64, which is a 14.7 percent current yield. The Company also beat 2010 earnings expectations, reigning in $2.60 per share compared with $2.44 in analyst estimates. The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and certificates guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae.
25% Preferred Shares
Always view your preferred shares through the lens of a bondholder. Do read Intelligent Investor and Security Analysis from the Benjamin Graham bookshelf to refresh your knowledge of current ratios and the importance of not overreaching for yield.
Bank of America Series I Preferred (BAC-I) has consistently made all dividend payments since inception. The current yield is 7%. The 52-week range is $19.43 to $24.55. The next dividend payment will occur on April 1, and it goes ex-dividend on March 11. As of late, volume has been rather heavy, so pick this up when you notice an inverse head-and-shoulders formation.
JP Morgan Chase Series J Preferred (JPM-I) exhibits stability, as it has traded between $25 and $29 over the past 52 weeks, and in the 27s over the past 3 months. The current yield is 7.8%. The next dividend payment is on March 1, but it already went ex-dividend on January 27. Because preferred stocks tend to have higher bid-ask ranges closer to ex-dividend dates, buy it at lower levels ASAP to reap an even higher yield.
Fifth Third Bank Series C Preferred (FTB-C) is paying out $2.21875 in total dividends, which is a current yield of 8.4 percent. Since January 2010, it has been virtually trading sideways. It is also trading $10 above mid-September 2008 levels. The most recent dividend payment was February 15, so pick it up soon at lower price levels.
Regions Financial Series Z Preferred (RF-Z) pays out the same dividend amount as Fifth Third and has virtually the same current yield. It has also been trading sideways since January 2010, and trading 5 to 6 points above mid-September 2008 prices. The next dividend payment occurs on March 15, and it goes ex-dividend at least two business days before then.
10-15% Precious Metals
Yes, we know. Precious metals don’t pay income, but they do provide a hedge against the unknown. And into today’s market it’s well advised to at least a portion of your retirement portfolio in some precious metals and commodities. We advice holding physical gold bullion, if you are going hold gold. But if you must buy via an exchange traded fund, SPDR Gold Trust (GLD) and ETFS Gold Trust (SGOL) are both good bets. And if you want to diversify outside of gold, silver bullion is good, as is the iShares silver trust (SLV).
Cash is often one of the least understood species in a portfolio. Liquidity is paramount here. Investors often assume that one must be fully invested to achieve high returns. This is nonsense, and we can point to any great investor, including Seth Klarman and Warren Buffett as examples to the contrary. You always want some cash in your portfolio to pounce on opportunities when they arise.
Disclosure: I am long EXC.