Dividend Triplers and Volatility

 |  Includes: DVN, INTC, MCD, MDT, ROST, TXN, UTX
by: MyPlanIQ

Life moves quickly. Already this year we have seen troubles in Egypt being supplanted by Tunisia, Bahrain and Libya. Japan's triple disasters captivated us for a period before dropping to a nagging worry about rebuilding and nuclear fallout. Tax season has come and gone and the royal wedding will soon be plastered across the media -- and we are barely out of the first quarter of the year. The tyranny of the urgent can often push the important into the background.

Living on borrowed time: nuclear reactors, oppressive governments, levees that keep out flood waters -- keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

We continue to examine different portfolios to see what we can learn and use to further our investment portfolios.

Dan Caplinger of the Motley Fool recently wrote an article titled "You Should Own These 7 Dividend Triplers."

If you want income from your stock portfolio, there's no better place to look than top dividend-paying stocks. Fortunately, you don't have to sacrifice quality or safety to find stocks that have increased their dividend payouts substantially in recent years.

To get a sense of what sorts of stocks we're talking about, I went back 10 years to find stocks that had tripled their payouts over the decade. Surprisingly, I found dozens of stocks in the S&P 500 that fit the bill. Here are seven stocks that particularly caught my eye:

Fund in this portfolio Price Percentage
UTX (United Technologies) 82.36 13.50%
MCD (McDonald's Corp.) 76.6 13.89%
MDT (Medtronic Inc) 40.79 10.92%
INTC (Intel Corporation) 19.86 10.77%
DVN (Devon Energy) 86.97 15.83%
TXN (Texas Instruments) 34.54 16.95%
ROST (Ross Stores Inc) 70.57 18.14%
Click to enlarge

We entered these funds into our system and then compared it with a balanced portfolio of dividend producing ETFs for comparison. We have only tracked the stocks back one year but it is possible to go further.

Asset Fund in this portfolio Original Fund Description Price Percentage
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors) iShares Cohen & Steers Realty Majors 70.77 13.34%
FIXED INCOME TIP (iShares Barclays TIPS Bond) iShares Barclays TIPS Bond 110.77 19.73%
Emerging Market VWO (Vanguard Emerging Markets Stock ETF) Vanguard Emerging Markets Stock ETF 49.05 13.23%
U.S. EQUITY DVY (iShares Dow Jones Select Dividend Index) iShares Dow Jones Select Dividend Index 51.72 4.16%
U.S. EQUITY VIG (Vanguard Dividend Appreciation ETF) Vanguard Dividend Appreciation ETF 55.41 3.14%
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx) iShares Dow Jones Intl Select Div Idx 36.05 17.27%
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd) iShares iBoxx $ High Yield Corporate Bd 91.84 16.51%
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond) iShares JPMorgan USD Emerg Markets Bond 106.41 12.55%
Click to enlarge

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Strategic Asset Allocation Moderate 10% 84% 3% 17% 5% 24%
Retirement Income ETFs Tactical Asset Allocation Moderate 6% 51% 9% 73% 9% 64%
The Fools You Should Own These 7 Dividend Triplers 15% 85%
Click to enlarge

Full Comparison

Three Month Chart
(Click to enlarge)

The three month chart shows the two buy and hold strategies running neck and neck although the volatility of the stock portfolios is much higher. This is to be expected as the level of diversification is significantly less and there is no fixed income component.

One Year Chart
(Click to enlarge)

The one year chart shows the stock portfolio outperforming the more moderate portfolios -- again at the cost of significant volatility.

For the active traders, this may be an interesting portfolio to be able to pick and choose when to enter and exit the market. For those who are looking over the longer term, it seems clear that having a balanced portfolio is going to lead to a much less stressful life.

If you want to have some equity exposure in your portfolio, perhaps the best way of doing that is to have a core based in a balanced, low cost portfolio and then take some of your investments and explore further out on the edge of risk and return. An alternative portfolio covered in "Barrington's Best Stock Picks for 2011 Deliver?" gives you an alternative portfolio that has impressive short term returns.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.