Creating an ideal dividend portfolio can be as simple as three simple investments.
Investors relying on dividend income need to count on the reliability of consistent payments in a timely fashion. They want to stay relatively diversified, sheltered from the volatile flows of the market’s day-to-day. Last of all, they also want to maximize their profits, thereby needing an above-average yield.
Negating the share price appreciation due to its inconsistency, controlling the yield return is the most practical aspect of choosing an income portfolio in which to invest. The typical dividend fund, whether it be an ETF or a mutual fund, offers investors somewhere between 2%-4%. As is the case with most funds, the typical fund has a management fee of about 0.5%-1%, which essentially is taken off the yield on an annual basis.
The most popular dividend ETFs tend to be the Vanguard Divdend Appreciation ETF (VIG), the iShares Dow Jones Select Dividend Index ETF (DVY), and the SPDR S&P Dividend ETF (SDY). The following table is ideal for comparison purposes. All values were as of 12/29/2011.
|VIG||$54.94||0.18%||2.1%||US Large Cap|
|DVY||$54.16||0.40%||3.4%||US Large Cap|
|SDY||$54.24||0.35%||3.2%||US Large Cap|
The cost of the management fee is an unfortunate consequence for the pursuit of protective diversification. Investors who choose individual stocks will likely find higher yielding assets at the cost of losing the protection of diversification and a fund manager with the experience of watching over the portfolio. ETFs and Closed-end Mutual Funds provide the ideal stability from effective diversification with the ease of choosing a single investment, thereby also benefiting in a single transaction cost when it comes to commissions.
The following is an ideal portfolio of three such funds, that collectively work together to offer stability and consistency while maximizing profitability. This portfolio includes the Nuveen Muni Value Fund (NUV), the Guggenheim Multi-Asset Income ETF (CVY), and the Guggenheim S&P Global Dividend Opps Indx ETF (LVL). All values were as of 12/29/2011.
|CVY||$20.47||0.60%||5.3%||US & Multi-Assets|
The portfolio itself provides a level of diversification beyond what a typical fund can provide by itself. NUV focuses on an array municipal bonds and settlement payouts. CVY provides general exposure to US stocks, REITs, MLPs, and various preferred stocks. LVL provides general exposure abroad (although still maintains a 25% exposure to the US equities) and taps into some of the highest-yielding equities trading in foreign markets.
Additionally, NUV pays out at a monthly rate whereby LVL and CVY pay out quarterly. While the Guggenheim funds are relatively new in creation, both they and the Nuveen Fund paid out income throughout the Great Recession (albeit at a reduced rate). All three funds have an average total management expense of about 0.6%, and a yield well over 4%. None of the funds appears to have fewer than 50 holding positions, and no fund has a weighting of more than 5% in a single holding.
Disclosure: I am long LVL.