What Europe Might Do To Solid Dow Dividends

by: MyPlanIQ

Europe is a flashing red blip on everybody's RADAR screens. Brian Stoffel of the Motley Fool highlights European exposure of major companies who are likely to be responsible for a great deal of the dividends on which many will rely over the next few quarters. Brian started by selecting the Dow dividend stocks that could weather a eurozone meltdown. He wanted to throw out those with yields that were puny. He did this by eliminating from consideration any company that didn't at least offer its shareholders a 2.5% yield. In addition, he checked out the company's dividend payout ratio and eliminated all companies with payout ratios above 80%.


Dividend Yield

Payout Ratio

3M (NYSE:MMM) 2.9% 37%
Boeing (NYSE:BA) 2.7% 33%
Chevron (NYSE:CVX) 3.5% 22%
Coca-Cola (NYSE:KO) 2.9% 34%
DuPont (DD) 3.7% 45%
ExxonMobil (NYSE:XOM) 2.5% 22%
General Electric (NYSE:GE) 4.1% 48%
Home Depot (NYSE:HD) 3.2% 43%
Intel (Nasdaq: INTC) 3.7% 32%
Johnson & Johnson (NYSE:JNJ) 3.7% 54%
JPMorgan Chase (NYSE:JPM) 3.5% 13%
Kraft (KFT) 3.4% 64%
McDonald's (NYSE:MCD) 3% 48%
Microsoft (NASDAQ:MSFT) 3.3% 23%
Pfizer (NYSE:PFE) 4.3% 54%
Procter & Gamble (NYSE:PG) 3.4% 51%
Travelers (NYSE:TRV) 3.1% 41%
United Technologies (NYSE:UTX) 2.7% 34%
Wal-Mart (NYSE:WMT) 2.6% 30%

Source: Yahoo! Finance.

To further refine the list, he looks are European exposure. Wal-Mart, Travelers, and Microsoft didn't offer detailed enough information on European exposure in their reports, so they were thrown out of the equation for this exercise. Of the remaining 16 companies, here is how they stacked up, listed from least to most European exposure.

Company Payout Ratio Dividend Yield % of European Revenue 2010
Home Depot (HD) 3.20% 43% 0%
Chevron (CVX) 3.50% 22% 7%
Boeing (BA) 2.70% 33% 12%
Intel (INTC) 3.70% 32% 13%
Coca-Cola (KO) 2.90% 34% 15%
ExxonMobil (XOM) 2.50% 22% 21%
General Electric (GE) 4.10% 48% 21%
3M (MMM) 2.90% 37% 23%
Kraft (KFT) 3.40% 64% 24%
United Technologies (UTX) 2.70% 34% 25%
DuPont (DD) 3.70% 45% 26%
Johnson & Johnson (JNJ) 3.70% 54% 26%
JPMorgan Chase (JPM) 3.50% 13% 28%
Pfizer (PFE) 4.30% 54% 28%
Procter & Gamble (PG) 3.40% 51% 34%
McDonald's (MCD) 3% 48% 40%
Microsoft (MSFT) 3.30% 23% Unknown
Wal-Mart (WMT) 2.60% 30% Unknown
Travelers (TRV) 3.10% 41% Unknown

This is an interesting filter but there is a caveat -- does the European meltdown apply to these companies? Alternatively, will management in these companies be able to shift emphasis and reduce cost in the Eurozone, should that be necessary and offset this with increased focus in emerging markets. In all likelihood, they have done this already.

So, I am going to first of all compare the whole set of 19 stocks with our reference benchmark before we look at where to draw the line with European exposure. We will compare this with our dividend ETF benchmark.

Asset Fund in this 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 2% 9% 10% 78% 8% 54%
Solid Dow Dividends 8% 40% 11% 53% 4% 13%
Retirement Income ETFs Strategic Asset Allocation Moderate -1% -25% 13% 75% 2% 1%

As I look at the long term returns and Sharpe ratios, I see that the solid Dow dividends portfolio sits right in the middle of the returns bracket. The TAA returns are the best because they moved into cash in the darkest days of the crash. If we look over a three year window, we see that SAA and TAA swap places but the equities stay in the middle. Given that the equities is fire and forget and the TAA and SAA have some selling involved, this is not a bad result.

Three Month Chart
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One Year Chart
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Three Year Chart
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Five Year Chart
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This establishes our baseline which is fair. In the next article, we will drill down on European exposure and see if it might be sensible to prune the list. This isn't a bad starting point given the turbulence and desire for less risky portfolios.

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