Perfect Portfolio (Back-Bone) To Navigate Turbulent Times And Sleep Well At Night

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The Dutch Investor
516 Followers

Summary

  • Many people find investing risky and complex, although they know that it is the best way to invest their spare savings or retirement funds.
  • This article presents an internationally well-diversified model portfolio with shares in high-quality companies.
  • The portfolio yields three times the overall market yield, but with lower volatility and risks. Perfect for people wanting to invest and get reliable dividend income, but with limited stress.
  • All of these companies are also a fundamental backbone in my personal investment portfolio.
  • Other experienced and active investors that would like to reduce volatility and increase steady dividend income in their portfolio could also consider including these companies in their portfolio.

Green arrow upward on stack of coins and growth graph on bokeh background

smshoot/iStock via Getty Images

In this article, I present a model portfolio for investors with money to invest right now, but that look for low maintenance, low stress and still achieve attractive dividend income and total returns. The reason for writing an article on this topic is that I have (close) relatives and friends that would like to invest some 'spare' cash. They understand the power of investing in the financial markets but have little experience, knowledge and interest to be an active investor or financial analyst. Therefore, they asked me for help and I assume there are more readers out here on Seeking Alpha with a similar interest (either for themselves or maybe for people around them).

The individual companies I present could also be of interest to other already active investors to reduce volatility and increase dividend income in their portfolios. I personally own shares in all of the companies included in the model portfolio and they form a solid backbone in my personal portfolio. I like to sleep well at night, despite turbulence in the real world and financial markets and

If you have read previous articles from me, you know that I am a value dividend growth investor. I look for company shares in high-quality companies with attractive dividends (growth) and are offering an attractive entry point from a valuation perspective. Since I own all of them in my personal portfolio, they have all passed my own quality checks.

The target group

The typical target group for this portfolio are people who understand the power of investing in shares, but with little expertise or interest to do it themselves. They have money to invest right now, either in their retirement account or via direct investments of 'spare' cash lying around and only generating a very low yield. Their financial position is solid and they have a long time horizon with the 'spare' money to justify taking the risks of investing. This means they expect not to need the money (and be forced to sell any of these shares) in at least the next 10 years.

Of course, someone in this target group could easily invest in an ETF like the S&P 500 (SPY) or even the MSCI World Index (URTH). I however think that with this portfolio you can achieve better results with lower volatility.

Another target group are investors that already have an investment portfolio, but want to reduce volatility and increase the dividend income. They could also consider adding several or all of these companies to their portfolio to help them sleep better at night. Together these 10 companies provide a great solid portfolio, but in a wider portfolio, they will very likely reduce volatility and increase dividend income.

The selection process

The portfolio I composed is well diversified across various metrics and consists of common shares in 10 different companies. They offer an attractive dividend plus due to an attractive valuation the potential for capital appreciation on top of the dividend. To select the 10 companies for the model portfolio I looked at several dimensions and factors.

The individual 10 companies:

  • High-quality company with a proven track record of solid financial performance and that I expect to be still around and performing well in the next decades.
  • Attractive dividend yield and/or dividend growth
  • A valuation that is around fair value or even undervalued
  • Beta ideally lower than the overall market, to reduce volatility
  • I am sufficiently convinced of the company to own it my own investment portfolio. (eat your own dog food :-) )

Combining the companies into the portfolio:

  • Diversification across currency (max 50% in one currency)
  • Diversification across industries (max two companies from the same industry)
  • Aggregated Beta of the portfolio <1, so less volatile than the overall market.
  • Overall portfolio dividend yield should be substantially higher than the overall markets, at least 3-4%
  • Equally weighted positions

Presenting the portfolio

Following the selection criteria, I arrived at the portfolio:

Company Ticker Sector Currency
Algonquin (AQN) Multiline Utilities CAD
BASF SE (OTCQX:BFFAF) (OTCQX:BASFY) Chemicals EUR
Bristol-Myers Squibb (BMY) Pharmaceuticals USD
Broadcom Inc. (AVGO) Semiconductors & Software USD
Enbridge (ENB) Energy & Pipelines CAD
Essity (OTCPK:ESSYY)(OTCPK:ETTYF) Personal & Household Products SEK
Lockheed Martin (LMT) Aerospace & Defense USD
Realty Income (O) Residential & Commercial REIT USD
Unilever (UL)(OTCPK:UNLYF)(OTCPK:UNLVF) Personal & Household Products EUR
W.P. Carey (WPC) Residential & Commercial REIT USD

Source: author table

As you can see the list is composed of a mix of very different companies from different industries and regions.

Why the portfolio should perform well

Let me share with you the reasons why I think the portfolio will perform well and in line with the needs of the target group mentioned before.

Attractive dividend income

First of all, all companies currently offer between 2.5% and 6.5% dividend yield. The overall (equally weighted) portfolio is therefore expected to produce 4.2% dividend yield in the next 12 months. Not something investors from Europe (and I assume also the US) could easily get with saving accounts or low risk bonds. I also suspect many existing personal investment portfolios have a lower yield.

Dividend (forward)
Algonquin 4.9%
BASF SE 5.2%
Bristol-Myers Squibb 3.2%
Broadcom 3.5%
Enbridge 6.5%
Essity 2.5%
Lockheed Martin 2.9%
Realty Income 4.4%
Unilever 3.9%
WP Carey 5.6%
Average 4.2%

Source: author table, based on Seeking Alpha dividend data

The S&P 500 index currently only offers a 1.3% dividend yield and the MSCI World index only 1.6%. This means the portfolio offers approx. three times the dividend yield compared to often used benchmark markets!

++Be aware of potential dividend withholding taxes when investing outside of a tax shielded account and abroad from your perspective.++

Lower volatility

Besides the interesting dividend income, many of the included companies have lower volatility than the overall markets. This means the Beta is below 1.0.

Beta
Algonquin 0.22
BASF SE 1.25
Bristol-Myers Squibb 0.58
Broadcom 1.06
Enbridge 0.91
Essity 0.47
Lockheed Martin 0.78
Realty Income 0.78
Unilever 0.46
WP Carey 0.78
Average 0.73

Source: author table, based on MS Office Excel stock data

As you can see the model portfolio has an average Beta of only 0.73, which means that the portfolio is expected to be 27% less volatile than the overall markets.

Another potential driver for volatility is exposure to other currencies (FX risks). The US has the best market for investing in terms of a great variety of companies that are stock-listed and has very high liquidity. So, at least in my opinion, any good stock portfolio cannot avoid significant exposure to the US and USD. Nevertheless, for non-US investors there should also be a cap to that, which I put at 50% of the portfolio. It could also be interesting for US investors to have certain FX exposure beyond the USD to mitigate potential inflation/currency measured against the rest of the world.

Currency diversification graph

Currency diversification graph

Author Excel table

Currency diversification graph

Currency diversification graph

Author Excel table

You can see the portfolio has 50% USD exposure and next to that three other currencies. This will also help to reduce volatility. Typically FX movements tend to dampen each other if you have multiple currencies in your portfolio as I have seen in my own portfolio over the years.

The portfolio companies are also coming from a variety of industries.

ndustry diversification pie chart

Industry diversification pie chart

Author Excel graph

No sector represents more than 20% of the total portfolio. Even if something very bad happens to one or even two of the industries, it will only affect a limited part of the portfolio. This helps to reduce volatility in the portfolio, whatever is happening in the real world and financial markets.

Long-term market beating returns when backtesting

Despite lower volatility, the portfolio also has outperformed the overall markets over the last 10 years. This includes as well the recent period of turbulence in the markets around inflation, potential rising interest rates, geo-political tensions around Ukraine and high energy prices.

Author table, based on SA data

Performance shares and benchmarks during different time frames

Author table, based on SA data

During last month the S&P dropped almost 10% and the MSCI World 9%. The portfolio averaged not even minus 1%! This is exactly what I mean with reducing stress and sleeping well at night with your investments. Over the mid-term (1yr / 5yrs) the portfolio lags a bit behind the overall markets, but still offers decent returns when considering the lower risks/volatility. Looking over the very long term (e.g. 10 -year), the portfolio outperforms the overall markets. The total return is more than double that of the MSCI World and 404% versus only 296% of the S&P 500.

High-quality companies at a fair or better price

The 10 included companies also get good ratings right now, based on both the company quality and also the investment potential right now.

Copy of SA company ratings

Company ratings

Seeking Alpha

As you can see all companies either get neutral (yellow) or positive ratings from Seeking Alpha authors or Wall Street analysts. This shows that most analysts are expecting at worst nothing exciting but also no drama from investing in these companies. At best these companies seem to be attractively valued right now and offer potential share price appreciation. This would also be in line with their historical performance as shown in the previous section.

Risks with the portfolio

Of course, the model portfolio is and will always be an investment in the financial markets and in common shares of companies. That in itself comes with certain risks that someone should carefully assess before doing so.

There is also the risk of market volatility (despite the lower Beta), which could mean that the share prices nose-dive in the short term. New investors could be scared by that and do panic-selling, which should be avoided at all costs. This is why I always recommend investing in several steps, spread out over time. The least someone should consider is investing their capital in two or three different steps with a minimum of several months between them. This will help to reduce the chances of buying the shares at a (short/mid-term) high of the stock markets.

Although capped, the portfolio still has 50% USD exposure. This means that for non-US investors a significant weakening of the USD could still put downward pressure on the portfolio. The other way around, for US investors a strengthening of the USD could also put downward pressure to the portfolio due to the 50% non-USD currencies.

Conclusion

As I have demonstrated, with this 10 company portfolio you should be able to get great investment returns, attractive regular dividend income while experiencing lower volatility and stress.

I hope this could be of interest for you or people around with money to invest but certain caution to do so themselves directly. Further I hope the portfolio also provides some interesting leads for already active investors to add some anchors to their portfolio for turbulent times, without giving up on total returns (rather the opposite).

From my side I feel fully confident to recommend this portfolio to several people around me as a way to invest their spare cash in a relatively low risk way, while still expecting very attractive investment returns.

Would you (dis)agree? Any companies you would add or exclude from the portfolio? Please let me know in the comments!

This article was written by

The Dutch Investor profile picture
516 Followers
I am very passionate about investing, specifically value investing for (growing) dividends. My main investments are individual stocks with global scope (European, US, Canada listed). I am privately investing since 2006 and have therefore experienced and "survived" several big crises. My educational background is Business Economics, I have also read numerous books around investing and work in the financial sector since 2007. My investment style is a mix of traditional value investing (like Benjamin Graham, Warren Buffet), but enhanced with also more (dividend) growth-oriented stocks (like Peter Lynch, Charlie Munger). My main investment portfolio is focused on (growing) dividend income in combination with capital appreciation from always buying with a Margin of Safety. My goal as a writer is to share with you my investment approach and skills, including also my investment judgement on specific companies. I am also happy to share with you interesting European companies that US-based investors might not be aware of.

Disclosure: I/we have a beneficial long position in the shares of ABBV, BASFY, BMY, AVGO, ENB, ESSYY, LMT, O, UL, WPC either through stock ownership, options, or other derivatives. 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.

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