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Austin Smith of the Motley Fool suggests three bargain companies that also have strong dividends. In this environment, this is an appealing combination.

We have already mentioned that high yields may mask underlying problems so it's important to ensure that the companies are fundamentally strong.

Austin's three picks are:

  • Johnson & Johnson (NYSE:JNJ). The health-care giant yields an impressive 3.7%, well above the market average of 2%
  • Intel's (NASDAQ:INTC) is the world's largest semiconductor company, it has the money -- $15 billion in cash and short-term investments
  • Philip Morris (NYSE:PM) has yields a solid 4.2% and has the ingredients of a long-term winner if you can overlook their product

This is not a balanced portfolio with only three choices but we will compare this with our ETF benchmark of a balanced portfolio of Dividend producing ETFs and see what conclusions we can draw.

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)

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%
Retirement Income ETFs Strategic Asset Allocation Moderate 0% 0% 15% 87% 2% 6%
3 Bargain Dividends Investors Should Buy Today 21% 118% 21% 116%

Given, the fact that the selection is only three equities which can't be considered a portfolio, the actual and risk adjusted returns for as long as there is history is very good. In particular, the returns over the past year have been good -- even over the last three months it has performed well.

Three Month Chart
(Click to enlarge)

One Year Chart
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Three Year Chart
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Five Year Chart
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The more detailed analysis and graphs give you a visual view of the volatility.

The returns are reasonable. Personally, I can't get past the product that Philip Morris sells and so I wouldn't own that particular equity but the performance of the selection given that it is dividend bearing is hard to argue.

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.