We continue to investigate equities that are being recommended to us in the light of the turbulent times we are facing. Ilan Moscovitz is one of the Motley Fool's regular contributors and he suggests a filter for safe dividend stocks for a shaky economy. His selections are based on the following four criteria:
- Defensive industries: Companies that sell necessities tend to have more stable sales when customers are cutting back
- Low debt burden: Low inflation is great for creditors but painful for debtors because their debt is more expensive
- Increasing sales: It's a good sign if a company is able to increase sales despite a slow economy.
- Healthy dividends: Periods of low inflation and low interest rates leave many investors scrambling for dividends
Using this filter, he selects five of the strongest:
Interest / Operating Income
1-Year Revenue Growth
Johnson & Johnson
|Kimberly-Clark (NYSE: KMB)||Personal products||10%||4%||4.0%|
|AT&T (NYSE: T)||Diversified telecommunications||16%||2%||6.0%|
|Soft drinks and snack food||10%||29%||3.3%|
Source: Capital IQ, a division of Standard & Poor's.
Intuitively we recognize that in times of financial stress, we expect people to cut spending on big items but maintain the staples, and perhaps increase on little luxuries. This is a bunch of strong names in mixed markets. It will be interesting to compare this with our ETF benchmark of a balanced portfolio of Dividend producing ETFs.
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors)|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond)|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF)|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index)|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF)|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx)|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd)|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond)|
- 5 dividend stocks for a shaky economy -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||-3%||-18%||9%||74%||8%||58%|
|5 dividend stocks for a shaky economy||3%||27%||10%||49%||3%||9%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-3%||-29%||11%||44%||2%||7%|
This is a set of equities that has done relatively well in these turbulent times. Having a set of solid performers is comforting, although we can quickly forget this when times are better and we start wanting more risk for higher returns. This set is definitely worth consideration.
One Year Chart
Three Year Chart
Five Year Chart
The more detailed analysis and graphs give you a visual view of the volatility.
Having only five companies in a portfolio will naturally drive volatility higher, but I think that this approach certainly has merit. Given that this is a fire and forget portfolio, it behaves well compared to the buy and hold ETF portfolio and has performed well in these stressful times.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: 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.