7 ETFs To Complete My Monthly Core Dividend Portfolio

by: ETF Monkey


In a recent article, I laid out 20 top stocks with which to build a dividend-focused portfolio, and also included 2 "bonus" stocks to consider.

However, 22 stocks do not a truly diversified portfolio make.

In this article, I attempt to combine these 22 stocks with the power of ETFs to do exactly that.

I will round out the portfolio by including 6 asset classes, represented by 7 ETFs.

Finally, I will offer some suggested guidelines as to overall weightings of each asset classes for investors in the age groups of 30, 45 and 60.

In a recent Seeking Alpha article I laid out 20 top stocks, derived from a review of the top holdings of some world-class dividend ETFs, with which to build a dividend-focused portfolio. An additional core tenet of the design and selection criteria was that the portfolio should yield dividends every month. In addition to the 20 "base" stocks I suggested, I offered two bonus stocks for investors to consider, and wrapped it all up by revealing that I had incorporated all 22 suggested stocks into a significant revamp of my personal portfolio. In other words, that I had "put my money where my mouth is."

In true ETF Monkey fashion, however, I concluded that article with a reminder that these 22 stocks, though comprised of some of the finest companies in America, did not by themselves constitute a truly diversified portfolio. I suggested that investors would do well to consider adding some ETFs to bring that needed diversification. And that, dear readers, brings us to this article, designed to be a complementary piece to that original article.

Building A Truly Diversified Portfolio

In this section, let's begin with a brief discussion of the asset classes we will add to the portfolio, in each case including some comments on the strategy and thought process.

Domestic Stocks - Here is where we will start. The 22 stocks I selected in the original article come from 8 different sectors. That was done very deliberately to introduce a measure of diversity and stability within that core component. However, all of the stocks selected are large-caps. While these quality, mature companies offer stability along with a nice income stream, in most cases their days of robust growth are behind them. To round out this asset class, therefore, we would like to include both midsize and small companies, to bring an element of growth to the portfolio.

Foreign Stocks - As I feature in this educational article from my personal blog, there are good reasons to include exposure to foreign, or international, markets in your portfolio. Two key reasons are potential for growth and diversification. Many countries are not as developed as the U.S. and, as more and more people rise to the middle class, offer greater potential for growth. Additionally, for a variety of reasons, their returns can often move in different directions than the U.S. The fancy phrase for this is that they often lack correlation. So, a portfolio with exposure to foreign stocks may provide a measure of stability at times that the U.S. market is declining.

REITS - As one might quickly, and rightly, conclude from the name; a REIT is a corporate entity that invests in real estate. What makes REITs somewhat unique is their tax status. To qualify as a REIT, a company must agree to distribute at least 90% of its earnings to its investors in the form of dividends. As a practical matter, many REITs distribute 100% of their income to investors such that they owe no corporate tax. You might be surprised to discover that much of the real estate you see as you move about your daily life is owned by REITs. This can include everything from downtown Manhattan office buildings to suburban outlet malls to high-quality apartment complexes to mobile home parks.

Utilities - This sector is comprised of companies that provide the basic services that each of us literally need to get through each day, such as electricity, gas, and water. These companies are often regulated, and must therefore meet regulatory standards. In addition, they are extremely capital-intensive, as the facilities and infrastructure needed to run their businesses involve are expensive to purchase, maintain, and upgrade. As a result, they often carry large amounts of debt and are thus sensitive to interest rate changes. In general, they do not offer exciting growth prospects. What they do offer is a relatively high, safe, and secure stream of dividend income. Because of this combination of factors, some investors view this sector as, in a sense, somewhat of a middle ground between bonds and stocks.

Bonds - Rather than get into a lengthy explanation here, once again I will offer an educational article on my personal blog. In brief, bonds contribute consistent income, a measure of stability, as well as downside protection in the event of severe market reversals.

TIPS - The acronym TIPS stands for Treasury Inflation-Protected Securities. TIPS are designed to offer a measure of protection against inflation. The principal value of TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. If you are interested in further information, have a look at the Treasury Direct website.

The ETFs

Here are the 7 ETFs I have selected to complement our 22 individual stocks, and leave us with a truly diversified portfolio.

  1. Vanguard Total Stock Market ETF (VTI)
  2. Vanguard FTSE Developed Markets ETF (VEA)
  3. Vanguard FTSE Emerging Markets ETF (VWO)
  4. Vanguard REIT Index ETF (VNQ)
  5. Vanguard Utilities ETF (VPU)
  6. iShares Core U.S. Aggregate Bond ETF (AGG)
  7. iShares TIPS Bond ETF (TIP)

One by one, let us now take a brief look at each of the ETFs. In most cases, in addition to the specific ETF I recommend, I will link you to additional articles that offer alternative ETFs, ones that you may be able to trade commission-free depending on which brokerage you use, as well as possible further reading.

So let's get started, shall we?

Vanguard Total Stock Market ETF

I thought long and hard about this choice. Since, as mentioned in the introduction, the 22 specific stocks in our portfolio are all large caps, we could round out the portfolio by selecting a couple of ETFs specifically devoted to mid-cap and small-cap stocks, such as the iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR). Certainly, if you wish to do so, I would have no objection to that.

For most investors, though, I believe you are likely as well off just keeping things simple and going with a top-notch U.S. Total Market ETF. It is true that you will have a small amount of overlap with the 22 individual stocks already in the portfolio. However, in total, the scale of this overlap is small enough that I consider it to be negligible. As it turns out, only 6 of VTI's Top 10 holdings are duplicated in our 22 individual stocks, as shown here.

With respect to the ETF, Vanguard announced some great news for shareholders back on April 28, 2017, namely that VTI was included in the list of 82 mutual funds and ETFs on which Vanguard was lowering the expense ratio. In the case of VTI, it dropped to .04%.

VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index. As of this writing, it holds 3,606 stocks. With AUM of $79.9 billion, VTI dwarfs the competition in terms of size and tradability.

If you are interested in possible alternatives, as well as more detailed commentary, please see this article.

Vanguard FTSE Developed Markets ETF

When it comes to the foreign component of the portfolio, I could have gone with an international total-market ETF, such as the Vanguard Total International Stock ETF (VXUS). I have no objection if you would like to keep things simple and go this route. You can examine 3 worthy competitors in this article.

However, countries outside the U.S. are actually broken down into two categories; developed markets and emerging markets.

In general, a country is considered developed if it has a highly-developed capital market, competent and serious regulatory agencies, and high levels of per-capita income. Countries such as Japan, France, Germany and Australia, to name just a few, are considered to be developed markets.

Emerging economies, on the other hand, tend to be characterized by higher levels of economic, political, or social instability, lower per-capita income, and still-developing infrastructure. Countries such as India, South Africa, Brazil and Mexico, to name just a few, are considered to be emerging markets.

Given each investor's personal tolerance for risk, I simply felt that some might wish to either stay away from emerging markets altogether, or at least be able to precisely determine their level of exposure. The way to do this is to use two ETFs for this asset class; one for developed markets and the other for emerging markets.

Again, I have some good news with respect to VEA. It was also included in that April 28, 2017 list referred to above, with Vanguard lowering its expense ratio to .07%.

With an inception date of 7/20/07 and AUM of $55.6 billion, it is both the oldest and largest ETF in this asset class. With 3,821 constituents, it is also the broadest and deepest ETF available in this segment.

If you are interested in possible alternatives, as well as more detailed commentary, please see this article.

Vanguard FTSE Emerging Markets ETF

We'll keep this section brief. The companion to VEA, to give you exposure to emerging markets, would be VWO.

Vanguard also lowered the expense ratio on this ETF back in February, to .14%. It contains some 4,619 holdings, with the Top 10 comprising 17.10% of its assets.

Here's a look at the Top 10 countries represented in VWO. If you do the math, you will notice that, in total, these 10 countries comprise 90.1% of the fund, with the Top 3 comprising exactly 57.0% of the total.

If you are interested in possible alternatives, as well as more detailed commentary, please see this article.

Vanguard REIT Index ETF

VNQ is often described as sort of the pre-eminent player in the field, the "big daddy" if you will. With an inception date of 9/23/04, 157 REITs in the portfolio, $34.0 billion in Assets Under Management (AUM), a low .12% expense ratio, and great daily trading volume leading to a wonderful average price spread of .01%, there are many reasons this ETF has been described using terms such as "the king" and "top of the charts."

Here are VNQ's Top 10 holdings.

If you are interested in possible alternatives, as well as more detailed commentary, please see this article.

Vanguard Utilities ETF

Similar to VNQ, VPU is also the pre-eminent player in its field. One site refers to it as "the poster child of US Utilities." VPU has an inception date of 1/26/04, 76 Utilities in the portfolio, and $2.5 billion in AUM. For a "specialty" ETF, it carries an amazingly low .10% expense ratio. That, combined with a daily trading volume that leads to an average price spread of only .04%--again, very impressive for a "specialty" ETF--this is a great vehicle with which to include diversified exposure to utilities in your portfolio.

Here are VPU's Top 10 holdings.

iShares Core U.S. Aggregate Bond ETF

My recommendation here is really a close call. You will notice that it is my first default recommendation outside the Vanguard family, barely edging out the Vanguard Total Bond Market ETF (BND).

Both are solid choices, in fact you can read more about both of them in this recent comparative evaluation I wrote. At the end of the day, your choice may come down to which one of the two, if either, you can trade commission-free.

iShares TIPS Bond ETF

With an inception date of 12/04/03, TIP is by far the oldest ETF in this specialty area. This headstart over the competition has translated into notable advantages in the quality of the portfolio, the daily trading volume in the fund, and thus overall costs.

From the ETF's information page, here are some of its key characteristics.

Building the Portfolio - Suggested Weightings

As mentioned at the outset, this article is intended to be complementary to the article in which I recommended 20 top stocks with which to build a dividend-focused portfolio, plus 2 "bonus" stocks.

Assuming that you were to invest 1% of your overall portfolio in each of the 22 stocks from the original article, how much should you invest in each of my 7 recommended ETFs to round out the portfolio?

That, of course, is a very difficult question to answer because it will ultimately come down to the circumstances and risk tolerance of each investor. You may even choose not to include all of the asset classes I have recommended. Still, are there perhaps some general guidelines that you can use to at least get started?

Happily, there are. Doing some work based on the allocations used in several of the Vanguard Target Retirement Funds (sample here), and making some adjustments for the extra asset classes I included, here are some proposed weightings that may prove useful to an average investor in each of the three age groups indicated in the table below. In each case, I leave the weighting in the 22 individual stocks the same and use the ETFs to achieve a reasonable overall weighting.

Age --> 30 45 60
"Base" 22 Stocks @ 1% Each 22.00% 22.00% 22.00%
Vanguard Total Stock Market ETF 28.00% 22.00% 12.00%
Vanguard FTSE Developed Markets ETF 30.00% 28.00% 22.00%
Vanguard FTSE Emerging Markets ETF 6.00% 4.00% 2.00%
Vanguard REIT Index ETF 2.00% 3.00% 5.00%
Vanguard Utilities ETF 2.00% 3.00% 5.00%
iShares Core U.S. Aggregate Bond ETF 7.50% 14.00% 27.00%
iShares TIPS Bond ETF 2.50% 4.00% 5.00%
TOTAL 100.00% 100.00% 100.00%

Summary and Conclusion

I'd like to leave you with one closing thought. In these two complementary articles, I have attempted to demonstrate that investing in individual stocks and ETFs does not have to be mutually exclusive. Sorry for using bold font in that last sentence, but I wanted to make that point very clear. One of the things I have discovered as I have read through the comments section of various articles I have written is that sometimes it almost seems that "never the twain shall meet;" that either you favor individual stocks or ETFs, but not both.

Here is the way I responded to one reader who made a similar observation in the comments section of the earlier article:

I tend to see a little more nuance in the real world. There are so many versions of personal circumstances and needs out there that the trick seems to be finding a solid plan that works for the specific investor.

In my work as ETF Monkey, I have proposed that, for an investor with a modest level of funds and trying to slowly build a portfolio, ETFs may be a great way to go. To oversimplify. If you are a Fidelity client, you can buy DGRO and HDV commission-free and, at some level, get an even more diversified version of what I have here. If you have $500 a month to invest, it's a little hard to buy $25 each of my 20 stocks. But you could drop $250 each into DGRO and HDV with no commissions. On the other hand, if you have a $500K portfolio, perhaps this (or similar) approach is ultimately superior.

And that is my hope. That somewhere in all of this, you will find a plan that works for you.

Disclosure: I am/we are long AGG, TIP, VNQ, VPU, VTI, VWO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.