Seeking Alpha
Dividend Focus, CFA
Profile| Send Message|
( followers)  

Over the past couple of weeks the market has been very turbulent and investors' fear levels have risen, as indicated by the VIX, which currently stands at 34 points, much higher than the 17-22 point range it has traded during recent history. With this increased volatility, what are investors to do? Sit back and collect their dividends, of course! In the modeled portfolio below, I have created a relatively diverse portfolio that has a weighted average yield of approximately 5%. As a surprise, mREITs (CIM, NLY and the like) are nowhere to be found!

Investment Universe

Nothing has really been excluded here; there’s a preference for dividend champions / aristocrats, but there are no set limitations. The portfolio was constructed utilizing popular dividend stocks mentioned here on Seeking Alpha and my own personal preferences. Somewhat under-represented here are MLPs (only 5 are included, there are many good choices out there) and REITs (only HCN and O were included - unfortunately my knowledge of good REITs is limited). Missing from the mix are preferred stocks which can be mixed in with this investment portfolio. For those of you whoare interested in preferreds, seek out Five Plus Investor’s articles on the subject - they are superb and contain great ideas.

Portfolio

Ticker Shares Price Yield Dividend Income Market Value
ABT 104 $ 49.40 3.9% 199.68 5,138
AEP 109 $ 36.86 5.0% 200.56 4,018
ARCC 143 $ 14.55 9.6% 200.20 2,081
BPL 49 $ 62.20 6.5% 198.45 3,048
BWP 95 $ 25.98 8.1% 199.50 2,468
CINF 125 $ 26.17 6.1% 200.00 3,271
CLX 83 $ 68.77 3.5% 199.20 5,708
COP 76 $ 67.40 3.9% 200.64 5,122
ETE 80 $ 38.23 6.5% 200.00 3,058
ETP 56 $ 45.24 7.9% 200.20 2,533
GBDC 156 $ 14.95 8.6% 199.68 2,332
GPC 111 $ 49.88 3.6% 199.80 5,537
HCN 70 $ 47.03 6.1% 200.20 3,292
HNZ 104 $ 51.31 3.7% 199.68 5,336
INTC 238 $ 20.72 4.1% 199.92 4,932
JNJ 88 $ 63.76 3.6% 200.64 5,611
KMB 71 $ 65.40 4.3% 198.80 4,643
KMP 43 $ 71.15 6.5% 197.80 3,059
LEG 185 $ 20.44 5.3% 199.80 3,781
MO 132 $ 25.42 6.0% 200.64 3,355
O 115 $ 32.55 5.3% 199.93 3,743
PAYX 161 $ 26.81 4.6% 199.64 4,316
PG 95 $ 61.22 3.4% 199.50 5,816
PM 78 $ 67.07 3.8% 199.68 5,231
SO 106 $ 39.92 4.7% 200.34 4,232
SYY 192 $ 27.74 3.7% 199.68 5,326
T 116 $ 28.66 6.0% 199.52 3,325
VVC 145 $ 25.84 5.3% 200.10 3,747
VZ 103 $ 34.75 5.6% 200.85 3,579
WM 147 $ 31.08 4.4% 199.92 4,569
Total $ 5,995 $122,206

Security Weighting

As a divergence from standard methodologies concerning security weightings I take an income weighed approach. Typically you see recommendations to weight securities by their market cap (the standard index weighting technique) or occasionally a recommendation to equal weight your securities by their market value (i.e. put $x into each security in your portfolio).

The problems with these approaches is that many investors have their income dependence concentrated on only a few securities (those with the higher yields typically) creating additional risk to dividend cuts severely impacting their portfolio. In the two examples below (right click to enlarge each image) you can see how the income concentration changes by comparing an equal weighted market value portfolio and an equal weighted income portfolio.

It’s easy to see that the removal of any pie slice in the equally weighted income portfolio is less likely to have an impact than the removal of a slice in the market value weighted portfolio. Also, it’s important to note that the larger slices in the market weighted portfolio tend to be the slices that are more “at risk” as higher yielding securities tend to have lower dividend coverage ratios.

Dividend Safety

Dividend safety is relatively high in the portfolio as well, using dividend coverage (EPS/Dividend) or distributable cash flow coverage (distributable cash/dividend). I’ve pulled together a chart that outlines how well the dividends are covered. Note: Excludes ETE, GBDC, HCN and O from the analysis as data was not available. The chart below covers 87% of the portfolio’s income.

Concluding Thoughts

Given the recent market declines there are many opportunities out there to pick up solid companies at great yields. A patient and methodical investor can put together a portfolio that yields 5% today, has income growth opportunities and reduced risk to potential dividend cuts.

Source: A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts