Europe is a flashing red blip on everybody's RADAR screens. Brian Stoffel of the Motley Fool highlights European exposure of major companies who are likely to be responsible for a great deal of the dividends on which many will rely over the next few quarters. Brian started by selecting the Dow dividend stocks that could weather a eurozone meltdown. He wanted to throw out those with yields that were puny. He did this by eliminating from consideration any company that didn't at least offer its shareholders a 2.5% yield. In addition, he checked out the company's dividend payout ratio and eliminated all companies with payout ratios above 80%.
|General Electric (GE)||4.1%||48%|
|Home Depot (HD)||3.2%||43%|
|Intel (Nasdaq: INTC)||3.7%||32%|
|Johnson & Johnson (JNJ)||3.7%||54%|
|JPMorgan Chase (JPM)||3.5%||13%|
|Procter & Gamble (PG)||3.4%||51%|
|United Technologies (UTX)||2.7%||34%|
Source: Yahoo! Finance.
To further refine the list, he looks are European exposure. Wal-Mart, Travelers, and Microsoft didn't offer detailed enough information on European exposure in their reports, so they were thrown out of the equation for this exercise. Of the remaining 16 companies, here is how they stacked up, listed from least to most European exposure.
|Company||Payout Ratio||Dividend Yield||% of European Revenue 2010|
|Home Depot (HD)||3.20%||43%||0%|
|General Electric (GE)||4.10%||48%||21%|
|United Technologies (UTX)||2.70%||34%||25%|
|Johnson & Johnson (JNJ)||3.70%||54%||26%|
|JPMorgan Chase (JPM)||3.50%||13%||28%|
|Procter & Gamble (PG)||3.40%||51%||34%|
This is an interesting filter but there is a caveat -- does the European meltdown apply to these companies? Alternatively, will management in these companies be able to shift emphasis and reduce cost in the Eurozone, should that be necessary and offset this with increased focus in emerging markets. In all likelihood, they have done this already.
So, I am going to first of all compare the whole set of 19 stocks with our reference benchmark before we look at where to draw the line with European exposure. We will compare this with our dividend ETF benchmark.
|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)|
- Solid Dow Dividends -- 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||2%||9%||10%||78%||8%||54%|
|Solid Dow Dividends||8%||40%||11%||53%||4%||13%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-1%||-25%||13%||75%||2%||1%|
As I look at the long term returns and Sharpe ratios, I see that the solid Dow dividends portfolio sits right in the middle of the returns bracket. The TAA returns are the best because they moved into cash in the darkest days of the crash. If we look over a three year window, we see that SAA and TAA swap places but the equities stay in the middle. Given that the equities is fire and forget and the TAA and SAA have some selling involved, this is not a bad result.
This establishes our baseline which is fair. In the next article, we will drill down on European exposure and see if it might be sensible to prune the list. This isn't a bad starting point given the turbulence and desire for less risky portfolios.