Sector Allocations

|
Includes: AAPL, ABBV, ADP, ADX, APD, APLE, AWR, BCE, BEP, BIP, BLK, BNS, CDUAF, CL, CLX, CMI, CSCO, CVX, DOV, DUK, ECF, EMR, EPD, ETN, EVA, FTS, GE, GPC, GSK, IBM, IFN, IMO, INTC, ITW, JNJ, KMB, LEG, LLY, MAIN, MFC, MMM, MMP, MRK, MSFT, NNN, NWN, O, ORCL, OXY, PEGI, PEP, PFE, PG, PPL, QCOM, RDS.B, RMT, RVT, RY, SKT, SO, SPG, T, TD, TGT, TM, TXN, VBR, VEA, VOE, VT, VTI, VTR, VWO, VYM, VYMI, WEC, WMT, WPC, XOM
by: Dividend Sleuth

Summary

The delicate balance between growth and yield.

How to simplify portfolio diversification.

A helpful sector resource from Fidelity.

44 portfolio equities are spread over 10 sectors.

This is a follow-up to my August 20, 2018 article, which included a portfolio review, but not sector information. (Note to non-PRO subscribers: I've avoided writing single ticker articles to prevent them from being paywalled, but SA made the dual-ticker August 20 article an Editor's Pick and paywalled it. C'est la vie.)

The delicate balance between growth and yield

One of my heroes is a 93-year-old retired businessman who each week convenes a group of friends to discuss ideas for stocks to study. I met with the group last week. In our round-table discussion, I mentioned that my portfolio yield is just under 4%. My friend said he couldn't live on a yield that low. He reads Seeking Alpha and I named several contributors with a high-yield focus. He was familiar with all of them, including Steven Bavaria, whose approach is to "Get it Now."

I told my friend that if I'm privileged to live to be 93 and still be reading Barron's and Seeking Alpha as he does, it's likely that I, too, will be more fully in his and Steven's camp.

On the other hand, our 37-year-old son has begun a deep dive into a study of the stock market, and he is fully cognizant of the importance of growth in his portfolio, which he is building for the long term.

At age 67, I value both growth and income. I hold some growth stocks with relatively low yields for a dividend portfolio, such as Apple (AAPL), Microsoft (MSFT) and Texas Instruments (TXN). I don't aim for as much growth as my son desires but I seek more growth than my 93-year-old friend.

Our son appreciates dividends, but he does not need current income. So, he is happy with a lower dividend yield if it is a growth company. I like higher dividends but I also like growth because I may need more income 25 years from now than at present. The portfolio has some high-yield components, but that's not the primary goal. For the past 3 years, the focus of this dividend portfolio has been relative safety and quality.

The balance between growth and yield is one aspect of the art of portfolio design, which is a dynamic process that may shift during one's lifetime with changes in one's personal situation.

How to simplify portfolio diversification

The simplest way to approach diversification is to buy an index fund such as the Vanguard Total World Stock ETF (VT). Dave Dierking's August 30 article addresses this simple approach to diversification. Several SA contributors, such as ETF Monkey, offer suggestions for a basket of exchange traded funds as a way to build a portfolio.

I've chosen to design and maintain a portfolio that has a primary focus on 44 individual equities (83.84%), with 5 closed-end funds (4.78%) and 7 ETFs (3.71%). So, for others who manage a portfolio of individual securities, I'll share some simple ways I've found to monitoring sector diversification. This article focuses on the 44 individual equities in the portfolio.

A helpful sector resource from Fidelity

For quick access, I have bookmarked a very handy page on the Fidelity website that provides the updated sector weightings of the U.S. equity market, along with recommendations for whether to underweight or overweight the sectors:

(Webpage from Fidelity.com)

I transfer these U.S. market weightings to a column on my portfolio spreadsheet so that at a glance I can compare the portfolio's weightings with the current broad market weightings. I don't try to mimic the total market, and don't update these percentages very often--perhaps quarterly. This helps me observe which sectors are gaining or losing favor with investors.

When I updated the spreadsheet for this article, I noticed that Information Technology's share of the broad market had risen from 23.92% to 26.18%, while Consumer Staples had dropped from 8.17% to 6.79%. I tend to view these shifts as "contrary indicators," which encourage me to look more closely at less popular sectors. Notice the difference in the 5-year dividend growth rates for the Tech sector and the Consumer Staples sectors.

44 portfolio equities are spread over 10 sectors

Ten of the eleven sectors are represented in the portfolio. For each sector, I list the sector's percentage weighting of the economy, the sector's weighting of the portfolio, and the percentage of the portfolio's income that is contributed by the sector.

In the tables below, CR is the S&P credit rating, where available. Value is the percentage of the portfolio's market value represented by each holding. Income is the percentage of portfolio income contributed. Yield is the dividend yield as of August 31, 2018. CCC is the number of consecutive years of dividend increases, as maintained by Justin Law and the DRiP Investing Resource Center. DGR is the 5-year dividend growth rate, where available, provided by Justin Law and the DRiP Investing Resource Center. Canadian stock information comes from the Canadian Dividend All-Star List.

Sector is the percentage of each sector's market weighting in the economy.

Information Technology

Company CR Value Income Yield CCC DGR
Microsoft AAA 2.04% 0.80% 1.50% 16 14.5%
Apple AA+ 2.27% 0.76% 1.28% 7 26.6%
Automatic Data (ADP) AA 2.00% 0.98% 1.88% 43 10.6%
Cisco (CSCO) AA- 2.16% 1.56% 2.76% 8 25.7%
Int Bus Machines (IBM) A+ 0.93% 1.04% 4.29% 23 12.3%
Texas Instruments A+ 1.53% 0.88% 2.21% 14 24.5%
Qualcomm (QCOM) A 2.24% 2.12% 3.61% 16 18.3%
Sector 26.18% 13.16% 8.14% 2.37%

Seven portfolio companies operate in the Information Technology sector, which comprises over one-fourth of the market, but "just" 13% of the portfolio. The aggregate yield of the 7 tech stocks is 2.37%, which is the lowest of the sectors in the portfolio. However, they have contributed significant growth to the market value of the portfolio. I am watching two other Information Technology companies: Oracle (ORCL), which has an AA- credit rating from S&P, yields 1.6%, has raised the dividend 9 consecutive years and has a 24.6% 5-year dividend growth rate, and Intel (INTC), which has an A+ S&P credit rating and yields 2.6%.

Health Care

Company CR Value Income Yield CCC DGR
Johnson & Johnson (JNJ) AAA 2.44% 1.71% 2.67% 56 6.7%
Pfizer (PFE) AA- 2.26% 1.93% 3.28% 8 7.8%
Merck (MRK) AA- 2.11% 1.55% 2.80% 7 2.3%
AbbVie (ABBV) A- 2.09% 2.18% 4.00% 6 n/a
Sector 14.61% 8.90% 7.37% 3.17%

Health Care sector portfolio stocks JNJ, PFE and MRK have been steady, if not spectacular, performers. ABBV is a recent addition. The Health Care sector portfolio allocation is 39% lower than the sector's share of the economy. I'm watching Eli Lilly (LLY), which has a S&P credit rating of AA- and yields 2.1%; and GlaxoSmithKline (GSK), which has an A+ credit rating and yields 5.1%.

Financials

Company CR Value Income Yield CCC DGR
BlackRock (BLK) AA- 1.13% 0.77% 2.61% 9 10.8%
Royal Bank of Canada (RY) AA- 2.31% 2.28% 3.78% 7 8.8%
Toronto-Dominion (TD) AA- 2.19% 1.95% 3.41% 7 10.2%
Bank of Nova Scotia (BNS) A+ 2.10% 2.47% 4.50% 7 6.8%
Main Street Capital (MAIN) BBB 0.99% 1.50% 5.80% 8 5.5%
Sector 13.87% 8.71% 8.97% 3.94%

Like the previous two sectors, the portfolio allocation of the Financials sector is considerably smaller than the sector's share of the broad market. However, there are several recent additions: BLK, TD and BNS. I appreciate the strength of the Canadian banks and BlackRock's global market share in asset management. Earlier this year I decided to add one business development company, and MAIN was an easy choice. I'm watching Manulife Financial (MFC), which has a S&P credit rating of A, yields 3.7%, has raised the dividend 5 consecutive years and has a 5-year dividend growth rate of 9.5%.

Consumer Discretionary

Company CR Value Income Yield CCC DGR
Toyota Motor Corporation (TM) AA- 1.12% 0.94% 3.21% 1 n/a
Sector 12.81% 1.12% 0.94% 3.21%

For several months, there was no portfolio exposure to the Consumer Discretionary sector. The current lone portfolio representative of the sector is TM. Compared with the sector's share of the total market, it is very underweight in the portfolio. Three former Consumer Discretionary holdings on my watch list are dividend champions: Genuine Parts (GPC), which is not rated by S&P, yields 2.9%, has raised its dividend 62 consecutive years and has a 5-year DGR of 6.8%; Target (TGT), which has an A credit rating, yields 2.9%, has raised its dividend 51 consecutive years and has a 5-year DGR of 13.1%; and Leggett & Platt (LEG), which has a BBB+ credit rating, yields 3.3%, has raised its dividend 47 consecutive years and has a 5-year DGR of 4.4%.

Industrials

Company CR Value Income Yield CCC DGR
3M (MMM) AA- 2.29% 1.55% 2.58% 60 14.8%
Illinois Tool Works (ITW) A+ 0.88% 0.66% 2.88% 44 13.3%
Cummins (CMI) A+ 0.90% 0.76% 3.22% 13 18.5%
Eaton (ETN) A- 1.21% 1.00% 3.18% 9 9.6%
Sector 9.65% 5.28% 3.97% 2.87%

Since selling General Electric (GE) a few months ago, MMM has been the only portfolio company in the Industrials sector. But the sector cooled off and in recent weeks I added ITW, CMI and ETN. I'm watching Emerson Electric (EMR), which has an A credit rating, yields 2.5%, has raised the dividend 61 consecutive years and has a 5-year DGR of 3.6%; and Dover (DOV), which has a BBB+ credit rating, yields 2.2%, has raised the dividend 62 consecutive years and has a 5-year DGR of 10.4%.

Consumer Staples

Company CR Value Income Yield CCC DGR
Walmart (WMT) AA 2.08% 1.18% 2.17% 45 5.4%
Procter & Gamble (PG) AA- 2.25% 2.04% 3.46% 62 4.4%
PepsiCo (PEP) A+ 2.03% 1.76% 3.31% 46 8.5%
Kimberly-Clark (KMB) A 2.09% 1.90% 3.46% 46 6.5%
Clorox (CLX) A- 2.10% 1.46% 2.65% 41 5.8%
Sector 6.79% 10.57% 8.33% 2.91%

The Consumer Staples sector is overweight relative to the overall market, populated by well-known companies. The average number of consecutive years of dividend increases is 48. The average S&P credit rating is A+. I'm watching Colgate-Palmolive (CL), which has a credit rating of AA-, yields 2.5%, has raised the dividend 55 consecutive years and has a 5-year DGR of 5.4%.

Energy

Company CR Value Income Yield CCC DGR
Exxon Mobil (XOM) AA+ 2.32% 2.49% 4.09% 36 7.0%
Enterprise Products (EPD) BBB+ 2.07% 3.24% 5.98% 21 5.7%
Sector 5.93% 4.40% 5.73% 4.98%

There are only two companies with higher credit ratings than XOM: JNJ and MSFT. I know of only two companies with an equal credit rating: AAPL and Canada's Imperial Oil (IMO). I would consider adding one or two more energy companies. I'm watching IMO, which yields 1.9%, has raised the dividend for 23 consecutive years and has a 5-year DGR of 5.6%; Chevron (CVX), which has an AA- credit rating, yields 3.8%, has raised the dividend 31 consecutive years and has a 5-year DGR of 4.2%; Occidental Petroleum (OXY), which has a credit rating of A, yields 3.9%, has raised the dividend 15 consecutive years and has a 5-year DGR of 8.7%; Royal Dutch Shell (RDS.B), which has an A+ credit rating and yields 5.6%; and Magellan Midstream (MMP), which has a BBB+ credit rating, yields 5.6%, has raised the distribution 18 consecutive years and has a 5-year DGR of 14.6%.

Utilities

Company CR Value Income Yield CCC DGR
NW Natural (NWN) A+ 1.18% 0.90% 2.91% 62 1.0%
Canadian Utilities (OTCPK:CDUAF) A- 1.86% 2.43% 5.00% 46 10.1%
Fortis (FTS) A- 0.95% 0.99% 3.99% 44 6.3%
PPL Corp. (PPL) A- 2.16% 3.11% 5.52% 17 3.1%
WEC Energy (WEC) A- 1.22% 1.05% 3.27% 15 11.6%
Brookfield Infrastr (BIP) BBB+ 2.12% 2.67% 4.82% 11 11.7%
Brookfield Renew (BEP) BBB+ 2.51% 4.18% 6.37% 9 6.4%
Sector 2.87% 11.99% 15.33% 4.89%

The Utilities sector comprises 12% of the portfolio's value and over 15% of the portfolio's income, compared with just 2.87% of the broad market. This sector is a long-time favorite for many dividend investors, and I'm always scanning the horizon for utility ideas. In the past I've held some traditional choices like Duke Energy (DUK) and Southern Company (SO), as well as some non-traditional holdings like Pattern Energy (PEGI) and Enviva (EVA). I would like to add a water utility, such as American States Water (AWR), which has an A+ credit rating, yields 1.8%, has raised the dividend 63 consecutive years and has a 5-year DGR of 9.4%.

Real Estate

Company CR Value Income Yield CCC DGR
Simon Property (SPG) A 2.49% 2.84% 4.37% 9 13.2%
Realty Income (O) A- 2.12% 2.50% 4.51% 25 7.4%
Tanger Factory Outlet (SKT) BBB+ 2.18% 3.32% 5.82% 25 10.3%
National Retail (NNN) BBB+ 2.09% 2.37% 4.34% 29 3.6%
Ventas (VTR) BBB+ 2.17% 3.00% 5.28% 8 7.6%
W.P. Carey (WPC) BBB 2.41% 3.87% 6.13% 21 11.4%
Apple Hospitality (APLE) NR 1.60% 2.84% 6.80% 0 n/a
Sector 2.79% 15.06% 20.74% 4.71%

The heaviest sector weighting in the portfolio is Real Estate, at just over 15% of market value, contributing 20.74% of the portfolio's income. This compares with just 2.79% of the total market. I've been a student of REITs and an investor in REITs for many years. This is one of my favorite sectors and I believe there are some attractive values in the Real Estate sector.

Materials

Currently, the portfolio has no exposure to the Materials sector. I'm watching Air Products and Chemicals (APD), which has a credit rating of A, yields 2.6%, has raised the dividend 36 consecutive years and has a 5-year DGR of 8.2%.

Telecommunication Services

Company CR Value Income Yield CCC DGR
BCE Inc. (BCE) BBB+ 2.44% 3.63% 5.68% 9 5.3%
AT&T (T) BBB 2.20% 3.60% 6.27% 34 2.2%
Sector 1.99% 4.64% 7.23% 5.96%

The portfolio allocation of 4.64% for the Telecommunications sector is more than twice the sector's share of the market. For quite a while, BCE was the only holding in the sector, but I added T a few months ago in spite of S&P's credit downgrade to BBB.

Closed-end Funds

Fund Value Income Yield
Adams Divers Equity Fund (ADX) 0.99% 2.16% 8.34%
Ellsworth Fund (ECF) 0.91% 1.42% 5.99%
India Fund (IFN) 0.92% 2.69% 11.14%
Royce Micro-Cap Trust (NYSE:RMT) 0.97% 1.73% 6.84%
Royce Value Trust (RVT) 0.99% 1.88% 7.28%
Total 4.78% 9.88% 7.91%

Exchange Traded Funds

Fund Value Income Yield
Vanguard Total Stock Mkt (VTI) 0.82% 0.34% 1.60%
Vanguard Developed Mkts (VEA) 0.59% 0.47% 3.04%
Vanguard Emerging Mkts (VWO) 0.23% 0.16% 2.61%
Vanguard High Div Yield (VYM) 0.79% 0.59% 2.84%
Vanguard Mid-Cap Value (VOE) 0.52% 0.26% 1.92%
Vanguard Internat'l Hi Div Yield (VYMI) 0.51% 0.49% 3.65%
Vanguard Small-Cap Value (VBR) 0.26% 0.12% 1.79%
Total 3.71% 2.42% 2.49%

Cash

Cash Value Income Yield
Total 7.68% 0.95% 0.50%

Portfolio Performance

Gain Portfolio S&P 500 Index
2016 20.73% 11.96%
2017 17.72% 21.83%
2018 YTD 4.90% 8.52%
Total 2016-2018 43.35% 42.31%

Portfolio Yield

As of August 31, 2018, the portfolio yield was 3.82%.

Conclusion

This is a brief overview of the 44 individual equities in my retirement income portfolio.

I don't advocate the purchase or sale of any security. I offer ideas for stocks to study. My articles form a journal of my effort to design and maintain a retirement income portfolio with a relatively safe stream of growing dividends. I seek companies with histories of rising dividends, strong financials, and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Now it's your turn. Your comments enrich our discussion. I always learn from our Seeking Alpha conversations. I'm particularly interested in your favorite sectors and your ideas for other stocks within the various sectors.

If you are not yet a follower, I invite you to click the "Follow" button at the top of the page. After you click "Follow," you can check "Get Email Alerts," and you will receive an email when an article is published.

Disclosure: I am/we are long JNJ, MSFT, XOM, AAPL, WMT, ADP, PFE, MRK, PG, MMM, BLK, CSCO, RY, TD, TM, NWN, PEP, ITW, IBM, TXN, CMI, BNS, KMB, QCOM, SPG, CDUAF, FTS, CLX, PPL, WEC, ETN, ABBV, NNN, O, SKT, EPD, BIP, BEP, VTR, BCE, T, WPC, MAIN, APLE, ADX, ECF, IFN, RMT, RVT, VTI, VEA, VWO, VYM, VYMI, VOE, VBR.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.