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. We reviewed this in a previous article.
He started with strong dividend payers and then started to weed out those with too much European exposure.
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%. Then he looked at European contribution to 2010 revenue.
|Company||Payout Ratio||Dividend Yield||% of European Revenue 2010|
|Home Depot (NYSE:HD)||3.20%||43%||0%|
|General Electric (NYSE:GE)||4.10%||48%||21%|
|United Technologies (NYSE:UTX)||2.70%||34%||25%|
|Johnson & Johnson (NYSE:JNJ)||3.70%||54%||26%|
|JPMorgan Chase (NYSE:JPM)||3.50%||13%||28%|
|Procter & Gamble (NYSE:PG)||3.40%||51%||34%|
Source: Yahoo! Finance.
This is an interesting filter but what impact does the European metldown have on these companies?
We started by comparing the whole set of 19 stocks with our reference benchmark. We saw that the solid Dow dividends portfolio sits right in the middle of the returns bracket -- which is a good result. We now move to refining this further.
I want to create a blind filter that scores the companies in terms of European exposure. I created a score that was the Payout Ratio/Dividend Yield multiplied by (1-European contribution to revenue).
Dividing the payout ratio by the dividend yield gave me the choice of the best and most stable payouts and I then used the European exposure to derate the performance. This is not the basis of any research but an intuitive approach that I used to create a scoring to rank the companies. The outcome is shown in the table below.
|Company||Payout Ratio||Dividend Yield||% of European Revenue 2010||Score|
|JPMorgan Chase (JPM)||3.50%||13%||28%||19%|
|Intel (Nasdaq: INTC)||3.70%||32%||13%||10%|
|Home Depot (HD)||3.20%||43%||0%||7%|
|General Electric (GE)||4.10%||48%||21%||7%|
|United Technologies (UTX)||2.70%||34%||25%||6%|
|Johnson & Johnson (JNJ)||3.70%||54%||26%||5%|
|Procter & Gamble (PG)||3.40%||51%||34%||4%|
Those with a score of 7% and above went into one group and 6% and below went into another. Again, the split was arbitrary and the purpose is to measure whether the selections perform differently.
We kept our reference ETF dividend portfolio.
|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
- Solid Dow Dividends With Highest European Exposure -- Total of $10K invested equally in each stock
- Solid Dow Dividends With Least European Exposure -- 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||1%||7%||10%||76%||8%||54%|
|Solid Dow Dividends With Highest European Exposure||11%||52%||17%||70%||7%||27%|
|Solid Dow Dividends||11%||40%||16%||53%||5%||13%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||0%||0%||15%||87%||2%||6%|
|Solid Dow Dividends With Least European Exposure||11%||34%||15%||38%||2%||2%|
We can see from the table that the best returns both in absolute terms and also based on the risk adjusted returns comes from the equities that have the highest European exposure. To be fair, it could be that my method of ranking the companies does not work and there may be a better way of doing that.
However, I would like to give the benefit of the doubt to the management of each of these companies. They know that markets go up and down and they are able to shift resources and budgets to batten down the hatches when needed. I also think that those with the broadest worldwide exposures will do best as this gives the best diversification and we know that emerging markets will make an increasing contribution to company revenues.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.