A Speculative Dividend Portfolio Offering 14% Income Annually

by: Nicholas Pardini

Do you think the market is going to be sideways for the year or want to build up wealth through income? Trying a leveraged dividend portfolio may be a good idea. For most risk averse investors, the portfolio in my previous column is the better choice. However, the income potential here is staggering even with using reliable companies with a low likelihood of dividend cuts.

Philip Morris International (NYSE:PM) is the world's leading producer of cigarettes. Unlike Altria Group (NYSE:MO), Philip Morris has no exposure to U.S. markets and is focused in tobacco addicted countries in Europe, Asia, and Latin America. Philip Morris is well run with a ROIC of 37% and growing annually at an 11% rate. For more on Philip Morris' fundamentals, read here.

Intel (NASDAQ:INTC) is also a uniquely safe tech dividend stock in the wild tech sector. Intel expects to grow its dividend by 16% on average per year over the next five years, which is an excellent prospect for shareholders. Although Intel lacks a presence in the mobile devices industry, Intel will be able to maintain its growth due to the adoption of PCs by emerging market consumers and businesses.

Bristol Myers Squibb (NYSE:BMY) has the best prospects of pharmaceutical companies as it recently has announced a fresh pipeline of drugs to replace its current best sellers that are about to lose patent exclusivity. The company is also efficient highly profitable with a ROIC of 20% and 24% profit margins.

Stock: Yield: Industry: Allocation Beta
PM 3.57% Cigarettes 20% 0.84
INTC 3.73% Technology 20% 1.13
CH 9.78% Chile 20% 0.83
CYS 19.08% REIT 20% 0.9
TNH 6.44% Fertilizer 20% 0.68
CVX 2.94% Oil 20% 0.76
IAF 9.53% Close End Fund 20% 1.46
VE 6.93% Utility 20% 1.78
FTE 9.31% Telcom 20% 0.79
BMY 4.61% Pharma 20% 0.61
Unlevered Mean 7.59% Average Beta: 0.978
Levered Mean 15.18% Levered Beta: 1.96
Subtract Margin Rate 0.79% half of current margin rate of 1.57%
Net Dividend Return 14.39%

The inherent risk with this dividend portfolio is the two to one leverage ratio of the portfolio. For those with short term horizons, this portfolio may not be the best choice due to the risk of severe capital losses. However, for investors primarily interested in income, this portfolio will provide over 14.39% (after cheap margins available on interactive brokers), this is a cheap strategy to raise returns.

Overall, the combination of low cost leverage and dividend income stocks may be a new way to gain alpha for investors with a long term horizon.

Disclosure: I am long PM, VE, INTC, CH, IAF, CYS.