Eventually, someone else will have to manage your portfolio. Will this hand-tuned marvel you've spent a lifetime constructing collapse under a spouse or child's oversight? Now might be a good time design a plan for your portfolio for the day when you are no longer available to call the shots.
Earlier this month I celebrated my 50th birthday. My kid's think I am "really old." Then again, they say that about people in their 30s. Being closer to the grave than the cradle, I sometimes think about how my wife and/or children will manage their portfolios after I am gone, and it isn't a pleasant thought.
In an effort to build interest in stocks and portfolio management, I gave each of my kids a small weekly job to expose them to investments. My daughter, pulls the financial information for the stock analysis I publish on Thursday's, while my son creates the PDFs for my premium subscribers that are uploaded each Saturday.
Has it helped? Not really. To each of them, it is just a job they do to pay for their cell phones. Periodically, they will make a comment like, "Whoa Dad, Nike rules, why is it only a 2-Star stock." Unfortunately, they run out of interest before I run out of explanation. My wife has even less interest in portfolio management than my kids.
Assuming I choose not to go the Trust route, how can these people possibly manage my well-tuned dividend machine after I'm gone? Simply put, they can't. At least not the same way I do. So here's my plan for them when I can no longer manage the portfolio...
Currently, I hold 40 stocks in my Dividend Growth Portfolio, 18 securities in my High-Yield Portfolio, 9 securities in my IRA and 10 or so other miscellaneous holdings. This doesn't include my 401(k) or employee stock options.
I spend a lot of time managing my portfolio and researching investments. It is my hobby and I enjoy doing it. My wife and kids likely will never share my passion in this area, so I must design a portfolio that is simple to manage and will take little time to do so.
The goal of the portfolio is to provide a relatively stable/growing income with minimal complexity.
Simple Income Portfolio
For my wife and kids (and others not able or willing to manage a large portfolio), the Simple Income Portfolio (SIP), just might fit the bill. Before discussing the specific holdings, let's look at some of the considerations I had when constructing it:
1. Minimal Holdings
Too many holdings are difficult to manage. With my 70+ holdings I spend a great deal of time tracking dividends, following news on the securities, etc. For the SIP portfolio I wanted less than 10 holdings. I ultimately settled on 7 securities.
2. Diverse Holdings
I did not want the portfolio to be solely focused on U.S. blue-chip dividend stocks. As we learned in 2008 sometimes bad things happen in the U.S. equity markets. I want exposure to foreign stocks and emerging markets.
3. No Individual Stocks Or Other Securities
Holding individual stocks increases risk. Higher risk requires higher attention and understanding, both of which my target audience will likely not provide. For the SIP portfolio, I will focus on CEFs, ETFs and ETNs.
4. Specific Allocation Percentages
What to buy and when is always a paramount question in a portfolio of individual stocks. These decisions are what can potentially increase your return well above the market, but it comes with a cost - time and effort analyzing the individual stocks to determine when to buy and when to sell.
4. Other Items of Note
Most investors will immediately notice there are no bonds in the portfolio. I considered bonds, but they would be contrary to my goal of stable/growing income. Yields on bond ETFs are inversely related to the underlying value of the bonds. When bond prices rise, yields decline and when prices decline yield rise. This creates too much income volatility when the bonds are held in an ETF.
Below are my initial thoughts on holdings. Were appropriate, I listed some alternate holdings that I considered.
SPDR S&P Dividend (SDY)
Allocation: 55% | Expenses: 0.35% | Yield: 3.2%
This ETF holds the 60 highest-yielding stocks of the S&P 1500 that have raised their dividends every year for the past 25 years. With a 55% allocation, this is the SIP's core holding that I will build the rest of the portfolio around. With 25 years of dividend increases, the hope is the ETF will generate increasing income every year. As a substitute you might consider Vanguard High Dividend Yield Index ETF (VYM). It has lower expenses at 0.13%, but also has a lower yield at 2.9%.
Eaton Vance Tax Adv Global Dividend Inc (ETG)
Allocation: 10% | Expenses: 0.87% | Yield: 9.2%
Eaton Vance Tax Advantaged Global Dividend Income Fund is a closed ended equity mutual fund launched and managed by Eaton Vance Management. The Fund seeks high total return with current income and capital appreciation through investment in dividend paying common and preferred stock. This fund pays a stable distribution with no recent distributions characterized as Return Of Capital (ROC). I selected ETG over ETO based on yield and over PID based on yield and stable distributions.
WisdomTree Emerging Markets Equity Inc. (DEM)
Allocation: 5% | Expenses: 0.63% | Yield: 4.1%
The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets Equity Income Index. The fund normally invests at least 95% of total assets in the component securities of the index. This fund does not pay a stable dividend, but provides needed exposure to emerging markets.
The Gabelli Global Gold, Natural Resources & Income Trust (GGN)
Allocation: 5% | Expenses: 1.27% | Yield: 12.7%
The GAMCO Global Gold, Natural Resources & Income Trust by Gabelli is a non-diversified, closed-end management investment company that seeks to provide a high level of current income. The Fund's secondary investment objective is to seek capital appreciation consistent with the Fund's strategy and its primary objective. Under normal market conditions, the Fund will attempt to achieve its objectives by investing at least 80% of its assets in equity securities of companies principally engaged in the gold industry and the natural resources industries.
UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)
Allocation: 5% | Expenses: 0.85% | Yield: 5.1%
The investment seeks to replicate, net of expenses, the Alerian MLP Infrastructure Index. The index provides exposure to the infrastructure component of the Master Limited Partnership asset class. Its constituents each earn at least 50% of their EBITDA from assets that are not directly exposed to changes in commodity prices. This is an exchange traded note. You should understand the additional risks of ETNs before investing.
Vanguard Utilities ETF (VPU)
Allocation: 15% | Expenses: 0.19% | Yield: 3.6%
The investment seeks to track the performance of a benchmark index that measures the investment return of utilities stocks. This fund provides exposure to both regulated utilities (stable businesses/predictable returns) and merchant power generators (high volatility due to commodity price swings).
Vanguard REIT Index ETF (VNQ)
Allocation: 5% | Expenses: 0.1% | Yield: 3.3%
The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of a benchmark index that measures the performance of publicly traded equity REITs. This fund provides exposure to normally illiquid real estate and acts as an inflationary hedge via asset appreciation and increasing rents.
On July 17th, I set up a watch portfolio to track these investments. Since I am not dead yet, I reserve the right to tinker with the above holdings as I monitor the watch portfolio.
When weighted by allocation the SIP produces a yield of 4.6%. This is well above my Dividend Growth Portfolio's current yield of 3.8%, but this portfolio will likely only provide minimal dividend growth and it will likely exhibit much higher price volatility.
I doubt the performance of this portfolio will beat my Dividend Growth Portfolio over time, in either return or in income. As such, this is my Plan B. I still hope the light bulb turns on with my kids and they become interested in managing a portfolio of individual dividend growth stocks. We'll see...
Full Disclosure: Long GGN, ETG, ETO, DEM, VPU. See a list of all my dividend growth holdings here.