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As we explore the world of dividend bearing stocks, Austin Smith of the Motley Fool brings us back to the dividend aristocrats on which you can build a long term portfolio. These are normally drawn from a small list of blue chip companies. This list draws from this list.

Austin quotes Warren Buffett: "The goal is to find companies that will be around for 20 years and offer a margin of safety."

Austin picked three companies with a combined 151-year history of not only paying but also raising dividends.

  • 3M (MMM) is a $60 billion manufacturer of more than 50,000 products.
  • Johnson & Johnson (JNJ) the maker of all-things-health and payer of a 3.5% dividend that's been raised for 49 years.
  • Coca-Cola (KO) and its 3% dividend.
None of these companies need much introduction and I own 3M stock myself.

I have been looking at the DRiP website where they keep track of dividend champions for extra data and I extract a small piece of their data. Please note that I have not double checked their numbers which were updated as of the end of February 2012.

CompanySymbolIndustryYrsYieldGraham
3M Company Conglomerate542.6960.8
Johnson & Johnson Drugs/Consumer Prod.493.5060.5
Coca-Cola Company Beverages-Non-alcoholic502.92103.7

The takeaways are:
These are dividend aristocrats with over 150 years of dividends
There is a value premium (as defined by the Graham number) which says that the stocks are anywhere from 60% to 100% over the Graham standard of fair market value

Even with these aristocrats, three equities is too few for a complete portfolio but it might be the core of a larger portfolio. The companies are diversified and is worthy on being measured against our benchmark ETF portfolio.

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 NameYTD
Return
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate1%1%14%9%77%8%61%
3 Dividend Stocks Kid Gratitude1%6%32%24%153%8%37%
Retirement Income ETFs Strategic Asset Allocation Moderate5%2%18%21%133%3%12%

For a selection of only three stocks, the returns and Sharpe ratios are pretty good. These companies are aristocrats for good reason. Given that this is a simple set of stocks as a core of a portfolio, this is a very good start.

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

The charts tell the same story. These are strong businesses that justify their premium. There are other aristocrats but these are not a bad starting point.

More...

Source: 3 Dividend Stocks To Win Your Kid's Gratitude

Additional disclosure: 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.