Building on a core of 12 ETFs, described in this article, six dividend stocks were added to a globally diversified portfolio to increase projected return while keeping the projected volatility under control.
How were the dividend stocks selected? From a database of over 9,000 stocks, screens were set to extract stocks that showed increasing dividends over the last seven years. Only stocks with positive free-cash flow were accepted. Three special valuation models were use to find stocks that were priced lower than the Price/Earnings, Price/Free-Cash Flow and Price/Sales when compared to other companies in the same industry. A required yield greater than the average yield over the last seven years was another screen. In all, 27 screens were used to come up with eight companies.
The last screen was one of correlation where each of the eight stocks were compared with VTI and the six with the lowest correlation to VTI made the final cut. Below are the six stocks.
- American States Water Company (NYSE:AWR) provides water, electric, and related contracted services.
- Expeditors International of Washington, Inc. (NASDAQ:EXPD) provides global logistics services in the movement and positioning of goods.
- Hormel Foods Corporation (NYSE:HRL) is engaged in the production of a variety of meat and food products.
- National HealthCare Corporation (NYSEMKT:NHC) operates and manages long-term health care, retirement, and assisted living centers.
- Prosperity Bancshares, Inc. (NYSE:PB) operates as the holding company for Prosperity Bank that provides a range of financial products and services to small and medium-sized businesses, and consumers in Texas.
- Telephone and Data Systems, Inc. (NYSE:TDS), a diversified telecommunications service company, provides wireless and wireline telecommunications services in the United States.
The following screen shot shows the securities and percentages allocated to each in this dividend oriented portfolio. With a projected annual return of 8.1% and a standard deviation of 13.2%, both metrics exceed our goals for a potential portfolio. The starting time frame is a little unusual due to at least one holding not having a three-year record.
Over the time frame examined, the portfolio nearly matched the performance of the S&P 500 (11.4%) and did it with lower risk (12.1% to 15.8%).
Individuals constructing their own portfolios can use the 12 ETFs as core holdings and then "supercharge" the core by adding stocks that qualify based on independent analysis. The six dividend stocks included in this portfolio are only possible examples one can use to fill out a global set of ETFs.