The Perfect Investment Portfolio: It's All About The Income, Right?

Includes: INTC, MSFT, RAI, VZ, XOM
by: David Crosetti


In my last article, The "Perfect Investment Portfolio", I told you about having to find an income-producing investment that could replace my mother's CD investments, because of the declining interest rates that were available in 2009. Here's a link to that article.

Now, I have to admit, I was pretty surprised by the response I got to the article. The commentary thread was excellent, and for the most part, very constructive. I mentioned that the intent of the first article was to show you what we invested in and how those stock purchases have done, year to date. In this article, I want to share the results of the income stream that the stock investments created for my mom.

Well, How Did We Do?

I am calling each of the investments a "basket." The reason is that these were 100k CD deposits, and each matured at a different time, due to the CD laddering approach that my mother took to these investments.

The first CD matured in March of 2009. Once I had conducted some research and investigation of potential stocks to purchase, I came up with 10 companies that met my own DG investor metric of being Dividend Champions. These are companies that have paid dividends for a long period of time (over 25 years), have increased those dividends annually over that time period, and have the earnings power to continue raising dividends in the future.

Here is a look at each of the baskets and the dividends that were paid by each basket.

Basket Number One:

The first CD was invested in 10 stocks, with an equal weighting of 10k per position. Here is a look at the dividend income for each of the years this basket has been in play.

The 100k investment returned 4.3% in the first year. We had met our target yield of 4% or better. As you can see, each year, these companies increased their dividends. As a basket of stocks, the dividend growth rate has been in the 8% range. So, we are beating inflation with the dividend increases.

Basket Number Two:

The second CD matured in April of 2010. Again, I spent some time looking at my existing holdings as well as other potential candidates, but elected to just purchase 10k lots of the same companies.

Since this basket was created in 2010, there are no dividends for 2009. The interesting thing here is that the growth of these dividends is holding like the first basket, around 8% dividend growth for the portfolio.

Basket Number Three:

This CD matured in April of 2011 and was invested into the market with a bit of a twist. I decided that I wanted to add some new holdings to the portfolio, so Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Reynolds (NYSE:RAI), Exxon (NYSE:XOM) and Verizon (NYSE:VZ) were added in 10k increments. We purchased an additional 5k of each of the original holdings. Here is the dividend income for this basket.

Growth Into The Future:

When we look at all three baskets of stocks, the dividend income numbers become very impressive. The portfolio is now projected to return $14,565.68 in dividends in 2012. At the end of the year, I will have a better handle on that, as some of the companies in the portfolio have recently announced dividend increases, or will be increasing dividends before the end of the year.

Why I Call This The Perfect Investment Portfolio:

Every investor should have a reason to be investing in the stock market. Why are you putting your money at risk in the market and what do you hope to accomplish by doing so?

For this portfolio of stocks, it was about replacing an income stream from CD deposits that were earning 4% yields, because the CD rates that were available in 2009 were no where close to that. There were many investments we could have made. We chose stocks. Nothing fancy, nothing brilliant. We chose what we knew.

There were 4 objectives to creating this portfolio:

1. Provide an income stream that would return a rate of 4% or more.

2. Create an income stream that would increase on an annual basis.

3. Create an income stream that would grow faster than inflation.

4. Minimize risk to capital invested.

Those goals have been met and exceeded and that is why I call it a "Perfect Investment".

What You Need To Know:

Just because this is my perfect investment portfolio, doesn't mean that it has to be yours. You may have a whole different set of objectives in managing your investments that have nothing to do with mine. Everyone can have their own Perfect Investment Portfolio and it may be filled up with growth stocks, or small cap stocks, or foreign stocks, or MLPs and REITs. That is because your goals and objectives are as unique and as individual as you are. My goals and objectives are not your goals and objectives. Sometimes they may line up together and sometimes they may not. It all depends on where you are in you financial life and where you want to go.

Based on my own particular wants and needs, I came up with a portfolio that fulfilled my own particular wants and needs. Could I have accomplished the same in some other manner? Sure. But this was my choice and it worked. It worked "perfectly" for me.

Summary and Conclusion:

Even if I were to never add any additional money to this portfolio, even if I never reinvested a single dollar of dividends, with a projected 7% dividend growth rate, the income stream from this portfolio will basically double every 10 years. That $14,465 that is projected for 2012 will grow to $28652 by 2022.

Some 40 years from now, when my oldest daughter turns 65 years old, this portfolio, with a 7% dividend growth rate, will be paying her $218,111 dollars a year. Now I don't know what the purchasing power of $218k will be in 40 years, but I know she will be able to buy a lot more than the person who does not have 218k coming in.

Just because this portfolio is made up of 15 specific stocks today, does not mean that it will remain unchanged "forever." As needs and wants change, so can the methodology for achieving those needs and wants can also change.

This portfolio may grow to 30 stocks in the next few years. It may not. It all depends on circumstances and goals. The primary goal, for me, will always be "growing the income stream." That can be done with these companies or many others.

Some of the current companies in this portfolio may not be in the portfolio in a year, 5 years or 10 years. They may very well be replaced by companies that represent a better value, a better dividend growth rate, or better prospects for capital appreciation. Again, it all depends on the goals and objectives that are put into place for the next challenge.

I liken it to the notion of remembering "why I came to this party and who did I come here with?"

Disclosure: I am long (NYSE:ABT), (NYSE:KO), (NYSE:CL), (NYSE:KMB), (NYSE:PG), (INTC), (MSFT), (VZ), (XOM), (NYSE:MCD), (NYSE:JNJ), (NYSE:T), (NYSE:MO), (NYSE:CVX).