Jim Royal's Huge Dividend Play

by: MyPlanIQ

Jim Royal from the Motley Fool recently announced five huge dividend plays.

We have to recognize that we are in a period of heightened sensitivity and therefore heightened volatility. We know that the US and Europe are caught between a rock and a hard place with the need to reduce deficits without causing the tender green shoots of recovery to wither. Therefore, we are going to see big swings as we go through this period. The question is whether this heightened sensitivity gives rise to modifying and investment strategy.

He selects one energy and five energy distribution companies:


TTM Yield

Distributions per share

Atlas Pipeline Partners LP (NYSE:APL) 5.4% $1.59
Linn Energy LP (LINE) 7.2% $2.67
Inergy LP (NRGY) 9.8% $2.82
El Paso Pipeline Partners LP (NYSE:EPB) 5.1% $1.79
Boardwalk Pipeline Partners LP (NYSE:BWP) 8.1% $2.08
Energy Transfer Partners LP (NYSE:ETP) 7.9% $3.58
Average 6.4%

Source: Capital IQ, a division of Standard & Poor's.

It is certainly worth considering high dividend stocks to provide stable income along with the recognition that, in the short term, energy and its distribution is likely to fare well as the summer wanes and we move towards the shorter days and longer nights in the northern hemisphere. So we are going to evaluate this portfolio for its returns to see whether it would be worth considering this portfolio as part of an investment strategy.

We will compare this with our ETF dividend portfolio benchmark:

Asset ETF in portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
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 Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 9% 84% 11% 81% 10% 71%
Jim Royal`s August 2011 Huge Dividend Play 2% 11% 18% 56%
Retirement Income ETFs Strategic Asset Allocation Moderate 10% 67% 4% 17% 4% 16%

Over one to three years, you can see how the energy sector has done well but in recent days, there are some very scary cliff edges.

Three Month Chart

One Year Chart Three Year Chart Five Year Chart

As appealing as the logic may seem to be for this portfolio, you can see that its recent performance is horrific. When it is compared with the ETF portfolio, the benefit of diversification is clear. While the market may be rational over the long haul, it reacts with excessive fear in the short term. One simple doesn't know what is going to happen and when you have all your eggs in one basket, you run the risk of losing it all in a fell swoop nobody could have anticipated.

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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