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As the new normal becomes familiar, we will see a shifting emphasis on stock selections. Jim Royal of the Motley Fool comes up with three stocks to own and one to avoid. We will look at his selections and see whether they are worth considering.

Kimberly-Clark (KMB) has a long history and brand strength. However, its income has been flat over the past few years. The company has maintained its dividends by using free cash flow and debt to reduce share count, and increasing its dividend payout ratio from 37% in 2001 to 65% in the last four quarters. This is not sustainable and could impinge on stock value and prospects. This is the one that Jim recommends you ditch.

McDonald's (MCD) remains a favorite and constantly comes up as a company with a strong commitment to dividends. It has upside potential in Asia, with a product that fares well even in tough times. Its stability and longevity is a welcome harbor in these stressful times.

Southwestern Energy (SWN) is facing natural gas prices at multiyear lows. This is a time when the best are the only ones left standing. Southwestern is one of the most efficient companies out there and will likely emerge as a winner in a key market. Southwestern should be able to keep those profits pumping in 2012.

Annaly Capital (NLY) will benefit from low funding costs which should enable it to improve returns. Annaly also appears to be one of the strongest REIT companies.

I am going to include Kimberly-Clark in our portfolio and compare it with our dividend ETF benchmark.

AssetFund in this portfolio
REAL ESTATE(ICF) iShares Cohen & Steers Realty Majors
CASHCASH
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 Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate1%9%9%72%8%55%
3 Must-Own Stocks for 2012 and 1 to Avoid3%15%14%56%14%37%
Retirement Income ETFs Strategic Asset Allocation Moderate1%6%16%98%2%7%

First of all, the fact that there are only four equities in the selection which will increase volatility. We can see that the returns from this selection beats the benchmark in returns but not in terms of the risk adjusted returns.

Current Holdings of the portfolio

Fund in this portfolioPercentage
KMB13.07%
MCD35.92%
SWN35.14%
NLY15.87%

We also note that Kimberly-Clark is the smallest component of the portfolio indicating that the value is already dropping.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

Over the longer term, we can see that although the performance is choppy, it beats the benchmark as we noted above. The conclusion I draw is that I would keep McDonald's and Southwestern Energy and jettison Kimberly-Clark. I think that I would also keep Annaly as it is good to have a company that is in the REIT business for added diversification.

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.

Source: 3 Must-Own Stocks For 2012 And 1 To Avoid