Emphasizing dividends when constructing a portfolio generally has two positive side benefits. Risk or portfolio volatility is reduced and portfolio diversification is increased. The following portfolio is made up of 17 ETFs and two stocks. Annaly Capital Management, Inc. (NYSE:NLY) and Eli Lilly & Co. (NYSE:LLY) are included to enhance income and lower overall correlation among the various investments.
The following analysis assumes the S&P 500 will grow at an annualized rate of 7.0% over the next six to twelve months. Historical data included the last three years. I would have extended the time but not all ETFs had four-years of historical data.
The basic goals were to find a group of dividend instruments that would generate a projected return in excess of one percentage point above that projected for the S&P 500. Coming in at nearly 8.2%, the following portfolio meets this requirement. With a projected Standard Deviation of 13.5%, the Return/Uncertainty ratio is slightly greater than 0.60. This value meets another benchmark. The Return/Uncertainty ratio over the past three years was 1.36, but we don't expect to see such remarkable numbers over the next three years.
The desired Diversification Metric is to exceed 40% and the Portfolio Autocorrelation (PA) is to be as low as possible. The following portfolio meets those standards. It is unusual to see the PA in negative territory as values under 10% are quite desirable.
Over the past three years the following group of investments generated a yield just below 4% and this yield is expected to continue unless there is significant price improvement. One would not argue if that were to occur.
The following correlation matrix demonstrates why Annaly and Eli Lilly were selected for this portfolio. Note their low 40% and 54% correlations with the portfolio mix of ETFs. GLD, SLV, TIP, and TLT also drive down the overall portfolio correlation. These holdings help to control the portfolio volatility while not suppressing portfolio return.
Disclaimer: Keep in mind that projections are always subject to all the inherent problems related to data extrapolation. Nevertheless, this portfolio is likely to have less volatility than a portfolio made up only of U.S. Equities and international holdings.