Core Portfolio For The 58 Year Old

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 |  Includes: INTC, KMB, NUE, SPY
by: Norman Tweed

When I was a kid in the 1950s, we had all kinds of projects. We made skateboards with real roller skates and a piece of wood. We made go-carts from lawnmower engines and soap box derby wheels and axels. I bought a REO lawnmower engine and my neighbor's father up the street helped me put the gocart together, including a manual clutch. REO was the company that became Nucor (NYSE:NUE) in 1955.

What do Intel (NASDAQ:INTC), Nucor and Kimberly-Clark (NYSE:KMB) have in common? They symbolize the transition from the Industrial Age to the Age of Knowledge. Nucor evolved into a recycling steel maker from a lawnmower manufacturer, Kimberly-Clark progressed from making Kleenex and Kotex in 1924 to disposable diapers (one of the best things that ever happened to my second child) and surgical wipes. Intel formed in 1968 (one of the founders was Gordon E. Moore of Moor's law fame) has been a major supplier of chips for computers, bringing the world into the computer age.

In this series of pre-retirement years, I have concentrated on core stocks in various sectors as well as core foreign stocks. In today's article, I will look at 3 companies that should be stable for many years in the future. These stocks have a large moat, good dividends, and provide safety of capital. (Data from Market Edge, Zacks, Yahoo Finance, Fidelity and David Fish's CCC charts).

  1. Intel -- Technology sector. Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. This Dividend Challenger has 8 years of increasing dividends. The current yield is 3.5%*. The 5-year annual average dividend growth rate is 14.5%. The current p/e is 10.1. The projected earnings per share growth rate for next year is 4.49% and 23.3% for the next 5 years.

  2. Kimberly-Clark -- Consumer Staples sector. Kimberly-Clark Corporation, together with its subsidiaries, engages in the manufacture and marketing of health care products worldwide. This Dividend Champion has 39 years of increasing dividends. The current yield is 4.01%. The 5-year annual average dividend growth rate is 9.1%. The current p/e is 14.8. The projected earnings per share growth rate for next year is 8.92% and 3.7% for the next 5 years.

  3. Nucor -- Basic Materials sector. Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. This Dividend Champion has 38 years of increasing dividends. The current yield is 3.72%*. The 5-year annual average dividend growth rate is 36.9%. The current p/e is 19.6. The projected earnings per share growth rate for next year is 29.34%. Due to the ending of this business cycle, the projected earnings per share growth for the next 5 years is -35.5%.

    *Yield on these stocks does not meet my minimum 4% threshold for strategic investment. I would hold out in purchasing these stocks until they have 4% yield due to increased dividend payment.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).

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(Click to enlarge)

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

INTC

$.158

488.28

$77.14

KMB

$.66

161.47

$106.57

NUE

$.363

225.98

$82.03

Click to enlarge

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (November 2010-November 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 504.96 $375.46 16.68
INTC 11/03/11 $0.21 500.61 $105.13 $24.20 4.34 $12,219.92
08/03/11 $0.21 495.84 $104.13 $21.81 4.77 $10,918.33
05/04/11 $0.18 492.05 $89.06 $23.50 3.79 $11,652.17
11/03/10 $0.16 488.28 $77.15 $20.48 3.77 $10,077.12
Totals 168.43 $452.99 6.96
KMB 09/07/11 $0.70 166.73 $116.71 $68.48 1.70 $11,534.19
06/08/11 $0.70 164.96 $115.47 $65.46 1.76 $10,913.97
03/02/11 $0.70 163.19 $114.23 $64.45 1.77 $10,631.88
12/08/11 $0.66 161.47 $106.57 $61.93 1.72 $10,106.41
Totals 234.34 $332.19 8.36
NUE 09/28/11 $0.36 231.71 $84.11 $31.91 2.64 $7,477.90
06/28/11 $0.36 229.61 $83.35 $39.69 2.10 $9,196.48
03/29/11 $0.36 227.83 $82.70 $46.62 1.77 $10,704.32
12/29/11 $0.36 225.98 $82.03 $44.25 1.85 $10,081.65
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At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

INTC

$77.15

$89.06

$104.13

$105.13

KMB

$106.57

$114.23

$115.47

$116.71

NUE

$82.03

$82.70

$83.35

$84.11

Click to enlarge

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

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(Click to enlarge)

It can be seen from the table that the income for the year was $265.75+$285.99+$302.95+$305.95 = $1160.64. On the initial investment of $30k, this was 3.86% yield — which does not meet my minimum 4% yield for a core dividend growth stock portfolio. However, NUE was severely depressed, due to their position in the business cycle. Their dividend growth rate did not show up during the 4 quarters plotted and the stock price was severely depressed. I picked it up at the 4% yield point ($36.25) in August 2011 for the rebound and increasing dividends going forward. In addition, it can be seen from the Total Portfolio Value chart that the ending portfolio value was $31,232.01. This computed out to a capital gain of $1232.01 or 4.1%.

It should be comforting to the investor that diversification in just these three sectors made a positive out of NUE's severe price erosion. INTC and KMB rose back to positive territory, while NUE continued in the doldrums. In the secular bear market in which we find ourselves, steady dividend growth stocks, like INTC cushion the accentuated moves and low dividend growth of more cyclical sectors (Basic Materials). Going forward, NUE has been growing at a rapid clip and has already gained 9 1/2% from this summer's purchase. The key with cyclical stocks is to buy at your yield point because once earnings start coming in, the price runs away from you.

Conclusion: At age 58, one should be actively contemplating retirement. In this changing economic environment, structural unemployment is a real possibility. We now have 4 years of portfolios added together for a 12 stock portfolio. In the next article I will have additional stocks that could be added to this core. Ideally, one would have all 10 sectors of the S&P 500 represented in their portfolio. Foreign stocks need to be included today, due to the global nature of the economy. Concentration on the best industry in a sector and the best stock in that industry should be one's goal. I haven't stressed enough the part that due diligence plays in investing. With global markets in turmoil and extremely choppy, like they are now, one must be sure that they can live with their decisions to invest now. I, myself am moving toward a cash position of 30% by the end of 2012.

Disclosure: I am long INTC, NUE. I may initiate a position in KMB in the next 72 hours.