Are you a retiree or an investor searching for income? Then check out this model portfolio we put together. Obviously every investor has different needs and time frames, so we’d advise you to use this portfolio as a starting point for your research as you build a portfolio passive income streams for retirement.
In our model portfolio we allocate 35% of the portfolio to cheap, high-yield dividend stocks, 25% in preferred shares of solid businesses or other fixed income funds, 25% in safe REITs or other physical income producing properties such as an apartment complex or commercial real estate property, 10% in precious metals and commodities and 5% in cash.
Below are some ideas to fill each bucket of the portfolio:
Chimera Investment (CIM) is the little engine that could. Trading in the $2-3 range, it beat earnings estimates for 7 of the last 11 quarters, and pays out an aggressive current yield of 16.7 percent. The share price has a median target price of $2.90 a share. Again, the play is not capital appreciation, it is for the dividend payments. The company invests in US government and private residential mortgage-backed securities representing interests in obligations backed by pools of mortgage loans.
Annaly Capital Management (NLY) has been around since 1997, and has paid a healthy quarterly dividend going back 10 years. The most recent dividend was $0.57, which is a 14 percent current yield. The company also is expected to see significant increases in revenue, with a 65% increase for the current quarter and 20% for the next quarter ending March 2012. The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and certificates guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae.
Starwood Property Trust (STWD) reflects that the commercial and residential real estate market has turned a corner. All quarters of 2011 net income came in as positives. With this optimism, investors should consider looking into adding a position. By the way, the current yield is a robust 9.4 percent. The company is focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments. It also invests in residential mortgage-backed securities and residential mortgage loans.
35% High-Yield Dividend Stocks
Verizon (VZ) is an extremely well run business that generates a ton of cash -- cash that it uses to pay a hefty 5.2% dividend yield and quickly pay off the debt used to fund its acquisitions and telecom upgrades. This market leader (the company serves around 95 million subscribers, or approximately 30% of the US population) already has an extremely loyal consumer base, and with Apple (AAPL) iPhone orders still going gangbusters, we think those relationships will only grow stronger. While we think Verizon shares are approaching fair value, we believe Apple shares, on the other hand, are slightly overvalued.
France Telecom (FTE) is the fixed-line and wireless giant of France, with significant interests in Spain, Poland and the Middle East and Africa. What makes this company attractive to income seekers is its hefty dividend yield of 9.2%. Another factor we like about this company is that the dividend only eats around 60% of the firm's free cash flow, making it likely in the near term the company will be able to maintain dividend payment. Shares trade around $15 apiece at the time of writing.
Exelon (EXC): This dividend stock is a utility holding company that provides electricity to 1.7 million customers in southeastern Pennsylvania and 3.9 million customers in Illinois. As well, it provides natural gas retail sales to half a million customers in Pennsylvania. With the largest nuclear fleet of any U.S. utility, Exelon’s eleven nuclear plants in the Midwest and Mid-Atlantic generate 18% of U.S. nuclear power and constitute approximately 80% of Exelon’s generation output. Currently, Exelon trades at $41 and yields 5.1%. On a discounted cash flow basis, we stilll calculate that shares are worth upwards of $70 apiece. We also like alternative nuclear fleet operators Southern Energy (SO) and FirstEnergy (FE).
Coca-Cola Company (KO) has paid dividends since 1893. Right now, the yield is 2.7%. Over the last five years, the share price is up over 50%. On a multiple basis, shares currently trade at a P/E of 12.5.
For 2011, reported net revenue was $46 billion. Over the past five years, EBT margins have consistently been in the upper 20s, whereas for Dr Pepper Snapple (DPS), it has been between 14% and 15%. The return on equity for Dr Pepper Snapple was also approximately 22% in 2011, but for Coca-Cola it was right near 40%.
In 2011, the company returned approximately $8 billion to share owners, through dividends and share repurchases. In 2012, it expects to repurchase an additional $2 billion to $2.5 billion in stock over the course of the year as part of its share repurchase program. The company expects its acquisition with Coca Cola Enterprises to have further cost synergies around $100 million in 2012.
General Mills (GIS): A brand that you may be in touch with every day, especially in the morning, General Mills is another name levered to emerging markets. Of all the names, it seems the most likely to suffer from rising commodities prices as we spoke about here. Investors should weigh the countervailing theses of rising agriculture prices and the strength of a company with such brand omnipresence and product strength.
Fidelity National Financial (FNF): Fidelity National provides title and specialty title insurance, claims management and information services throughout the United States. It currently holds the largest market share in the title insurance market, around 40%. Shares currently yields 3%. Shares are worth $22 apiece using a discounted cash-flow analysis. Title insurance premium growth will likely remain strong due to bursts of refinancing and foreclosure sales. Margins will benefit from Fidelity’s further use of cost-cutting technology, and should remain around 9-10% as a result. As an alternative in the title insurance industry, we like First American (FAF), the number two in the industry by market share.
Abbott Laboratories (ABT): This pharmaceutical powerhouse yields 3.4% and has a history of raising its dividend. The company's portfolio of patent protected drugs, along with its excellent nutritional and diagnostic groups and its history of strategic acquisitions, have dug ABT a wide economic moat, which is one of the reasons we think Warren Buffett might buy this stock.
AstraZeneca (AZN): This British-based company sells a suite of pharmaceutical products to treat a number of gastrointestinal, cardiovascular, and respiratory ailments, cancer and other infectious diseases. Though the company’s drug pipelines is one of worst among the large cap pharmaceutical player, the company has been paying dividends since 1993 and has a hefty 3.7% for yield seekers looking for reliable income. Shares trade around $46 at the time of writing, and, on a discounted cash flow basis, are worth around $52 apiece.
Novartis (NVS): The Swiss-based pharmaceutical maker has a healthy balance sheet and a free cash flow yield of approximately 10%. As well, NVS has a dividend yield of 3.5% and over the past five years, that dividend has shot up from 1.5% to where it stands today. The company's healthy intellectual property portfolio has created a wide moat for itself, which will likely remain as long as Novartis can continue to fuel its late stage pipeline and keep making targeted acquisitions. But like AstraZeneca, Novartis faces tougher competition and difficult times ahead. Coupled with this, is the fact that everyone seems to hate pharma these days. The market is essentially pricing in minimal growth to many of the bigger names in this industry, so if any of these large caps can surprise on the upside, the sector could give investors okay capital appreciation on top of solid dividend yields.
Cash is often one of the least understood species in a portfolio. Liquidity is paramount here. Investors often assume that one must be fully invested to achieve high returns. This is nonsense, and we can point to any great investor, including Seth Klarman and Warren Buffett, as examples to the contrary. You always want some cash in your portfolio to pounce on opportunities when they arise.
25% Preferred Shares
Always view your preferred shares through the lens of a bondholder. Do read Intelligent Investor and Security Analysis from the Benjamin Graham bookshelf to refresh your knowledge of current ratios and the importance of not overreaching for yield.
Bank of America Series I Preferred (BAC-I) has consistently made all dividend payments since inception. The current yield is 7.8%. The shares trade around $21, and the 52-week range is between $15 and $25. The next dividend payment will occur on April 2, and it goes ex-dividend on March 13. For this name, volume has been rather heavy, so pick this up when you notice weakness in these preferred shares.
JP Morgan Chase Series J Preferred (JPM-I) exhibits stability, as it has traded between $25 and $29 over the past 52 weeks, and in the $27s over the past few months. The current yield is 7.8%. The next dividend payment is in March, and will likely go ex-dividend again on January 31. Because preferred stocks tend to have higher bid-ask ranges closer to ex-dividend dates, consider buying it at lower levels as soon as practical to reap an even higher yield.
Regions Financial Series Z Preferred (RF-Z) pays out a dividend of $0.55 per quarter and has a 8.7% yield. It has also been trading sideways since 2011, and trading 5 to 6 points above mid-September 2008 prices. The next dividend payment occurs in March, and it goes ex-dividend at least two business days before then.
10-15% Precious Metals
Precious metals don’t pay income, but they do provide a hedge against the unknown. And into today’s market it’s well advised to at least a portion of your retirement portfolio in some precious metals and commodities. We advice holding physical gold bullion, if you are going hold gold. But if you must buy via an exchange traded fund, SPDR Gold Trust (GLD) and ETFS Gold Trust (SGOL) are both good bets. And if you want to diversify outside of gold, silver bullion is good, as is the iShares Silver Trust (SLV).