Retirement Portfolio Fundamentals, Part 2

Includes: GE, JNJ, NLY, T, XOM
by: Regarded Solutions

In the first part of this series for our newbies to SA or retirement investing, we went over the basics to open up a core portfolio of dividend paying blue chip stocks. (Review part 1 here). Now we can move on to the next phase.

Asset Allocation In the Core Portfolio

A big question from new investors is how many shares of a particular company should we buy? It boils down to comfort levels, risk, and how we decide to balance our portfolio.

Here are my suggestions for our Core Portfolio;

Exxon Mobil (NYSE:XOM): Price: $85.83/share, Dividend Yield: 2.20%, ESS Rating: Bullish

(Click on any chart below to enlarge)

Exxon Mobil Corporation (<a href='' title='Exxon Mobil Corporation'>XOM</a>)

Recently Exxon has had a run up of nearly 8% in PPS and is not far from its 52 week highs. While this stock will be an outperformer for a very long time and a "forever" stock in my core, I would allocate about 10% initially and wait for some pullbacks to add up to 25% of my total funds available.

Exxon: 100 shares: $8,600 initial value

Johnson & Johnson (NYSE:JNJ): Price: $65.56/share, Dividend Yield: 3.50% ESS Rating: Bullish

Johnson & Johnson (<a href='' title='Johnson & Johnson'>JNJ</a>)

Johnson & Johnson has also had a fairly good run up in PPS recently but it has a higher dividend yield than Exxon, so we would allocate about 15% of our funds initially, and wait for those dips to add up to 25% of our total funds available.

Johnson & Johnson: 200 shares: $13,000 initial value

General Electric (NYSE:GE): Price: $19.03/share, Dividend Yield: 3.60%, ESS Rating: Bullish

General Electric Company (<a href='' title='General Electric Company'>GE</a>)

GE is in the same category as Johnson & Johnson, with a solid PPS performance and a higher yield than Exxon. It also has a lower price which will give us more shares initially, but we would stick to an initial 15% allocation and add more (up to 25%) on the price dips.

GE: 700 shares: $13,300 initial value

Annaly Capital (NYSE:NLY): Price: $16.81/share, Dividend Yield: 13.60%, ESS Rating: Neutral

Annaly Capital Management, Inc. (<a href='' title='Annaly Capital Management, Inc.'>NLY</a>)

Annaly is our dividend "thoroughbred" in our core holdings. A new investor might be tempted to put more funds at work here because of that amazing dividend. Along with high yields comes more risk, so although Annaly is a lower risk mREIT and a "best of breed" stock, there are always headwinds that differ from the "regular" equities available, and we will outline those as we go further into our series.

For now, we would deploy about 3-5% of our available funds in Annaly and after an anticipated secondary stock offering (which I believe will be within the next quarter), as well as after then next ex-dividend date i would slowly add no more than 10% at the very most, of our funds into this stock.

Annaly: 200 shares: $3,400 initial value

AT&T (NYSE:T): Price: $29.16/share, Dividend Yield: 6.00%, ESS Rating: Bullish

AT&T, Inc. (<a href='' title='AT&T Inc.'>T</a>)

AT&T has a lot going for it right now. It has come through a failed merger, an anticipated weak earnings report, and a dip in its share price, off of its recent highs. It is a dividend superstar, a superstar company, and has a wonderful future in my opinion. We have no problem allocating 20-25% of our available funds right now, into AT&T, and wait for what we believe to be a very strong year in 2012 for it.

AT&T: 700 shares: $21,000 initial value

So Here is Our Initial Core Portfolio

Stock Shares Value Yield %
XOM 100 8,600 2.20%
JNJ 200 13,000 3.50%
GE 700 13,300 3.60%
NLY 200 3,400 13.60%
T 700 21,000 6.00%
TOTALS 59,300 4.75%

As you can see we have a balanced portfolio to kick start our investment strategy. Roughly $59,000 of our initial $100,000 nest egg is invested, an approximate total dividend yield of 4.75% (which will earn us about $2,800 in dividends in our first year alone.

We also have about $60,000 in cash which will be used to add to our core when prices dip or pullbacks happen. Our idea of a dip or pullback is when a stock dips about 2% in a short period of time (1 or 2 days) and our strategy is to add about 10% more (in shares) to our holdings. If we hold 100 shares we add 10 shares, etc.

The ESS rating system was developed by Starmine, whose website is available for everyone to review. The ratings system is also used by Fidelity Investments, the brokerage firm we personally use.

Keep in mind that we are investing for the long term to have a more secure retirement. As you can see, by starting an investment strategy such as this, early in our lives, we should do very, very well when we decide the time is right. Just as important for those already retired or very close to it, this strategy offers a lower overall risk with a very well balanced reward while focusing on income now, and hopefully more later as we do our best to keep up with inflation.

Our Next Steps

In upcoming chapters we will delve into the world of options. Specifically selling calls on the core positions we now hold. It is the most basic option strategy with the least amount of risk, and will enhance the overall value of our portfolio as well as give us a nice income stream for those of us that need it. Stay tuned for Part 3 in this series.

Disclosure: I am long XOM, JNJ, GE, NLY, T.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks and is the opinion of the author.