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High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:07 PM   #1
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High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

What do you guys think about a "Ben Stein" style income investor portfolio in lieu of a well diversified "Merriman" style portfolio. My thinking is that if you have a large percentage of high dividend payers (like Citicorp) that pay close to 4% and couple that with some 6% bonds, you would easily achieve your income goals and maybe even be able to take out more than 4% per year. In his book, "Yes You Can Be an Income Investor", Stein identifies how you can narrow down your investments to companies that (1) have a record of paying high dividends and (2) have a record of routinely increasing the payout.

If all of your equities pay high dividends and consistently increase their payout rate, your retirement income would presumably keep up with inflation perhaps even beat it. With a portfolio like this, market dips would probably be much less scary because companies like this are much less likely to lower their dividends and so long as you keep receiving the dividends you've got enough income to make it.

What's wrong with this scenario? What am I missing? Why don't more people pursue a plan like this?









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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:10 PM   #2
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Unfortunately, the high dividend paying stocks will not give you a very good industry diversification. You will either load up on financial or energy trusts. I'm a big fan of wide diversification between industries and asset classes.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:14 PM   #3
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

But if you keep getting a high dividend and don't care about fluctuations in your asset base, who cares if you aren't diversified. And what's wrong with having all financial stocks? It's not like the banking industry is going to go out of business.

By the way, I am asking these questions at least partially as a devil's advocate. Everything I've ever read suggests diversification is sacred. But shouldn't we keep asking questions?



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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:19 PM   #4
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

If the business gets bad, the dividend will be reduced.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:23 PM   #5
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Yes, but I'm not suggesting you have a single stock here. I'm talking about something that's at least somewhat diversified and perhaps includes one of those dividend rich mutual funds - like IShares Select Dividend Index Fund.


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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:25 PM   #6
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by 2B
If the business gets bad, the dividend will be reduced.
...and, since you were not acquiring more shares through rebalancing or dividend reinvestment (assuming you were using the dividends to live off), you have no hedge against inflation or capital appreciation.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:33 PM   #7
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

But according to Stein, there is a group of companies - the dividend paying All-Stars - whose dividends increase every single year. And these increases handily beat inflation.


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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:43 PM   #8
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Sure, there are several here that invest for dividends....I do it for my taxable portfolio....
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:46 PM   #9
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by ScaredtoQuit
But according to Stein, there is a group of companies - the dividend paying All-Stars - whose dividends increase every single year. And these increases handily beat inflation.


I see nothing wrong with having a good chunk of dividend stocks. I plan to have a healthy allocation of them in retirement but I want some growth stocks too. A combo of the two stands a better chance of standing up to inflation.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:49 PM   #10
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by ScaredtoQuit
But if you keep getting a high dividend and don't care about fluctuations in your asset base,
I think it may be tough to ride out a big dip in your asset base.........especially if you are not diversified.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:50 PM   #11
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Ah hem

That's way they did it before all this modern portfolio theory, index fund, enhanced computing power to crunch numbers/make studies claptrap.

Some people think the digital age is here to stay - ok so I'll throw in the towel on electricity and the automobile.

The Norwegian widow now uses auto deposit.

My version thru the late 80's and early 90's - peaked at 40% of income at about 6 yrs into ER.

electric utilities, telephone, big oil, gas utilities, food, drug, REITs - used Mergent's Handbook of Dividend Achievers and Moneypaper(DRIPs).

Given that Wall Street has been feeding the ducks the last few years - dividends having been discovered 'one more time' juiced by a tax cut - someone persuing this strategy should proceed with caution.

A valid strategy - but with a lot of nuances depending on where you are in the accumulation/distribution phase and other - like pensions, SS, rental RE.

At 63 - I'm old enough to remember when that was 'the way' - aka the Norwegian widow, 1948, RR 9 when I got off the Kindergarten bus.

heh heh heh heh heh heh - and I have a Curmudgeon certificate and 33 dividend payers(15% of portfolio) - barnburners like Con Ed, Exxon, Bank of America, National Fuel Gas, Glaxo, United Dominion Reality, etc, etc.

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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 07:55 PM   #12
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by DOG52
I see nothing wrong with having a good chunk of dividend stocks. I plan to have a healthy allocation of them in retirement but I want some growth stocks too. A combo of the two stands a better chance of standing up to inflation.
That's my take, too.

Plus, I like the idea of rebalancing into cheap shares and watching that float up when that allocation type finally does recover. I think mixing dividend equities with growth is just another example of asset allocation.

My "bucket 2" will be Wellesley or something like it - bonds and dividend stocks, but not for all my holdings.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 08:08 PM   #13
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by ScaredtoQuit
But according to Stein, there is a group of companies - the dividend paying All-Stars - whose dividends increase every single year. And these increases handily beat inflation.
That reminds me of the perpetual question: "If [insert name here] is so smart then why does he need us to buy his book?"

Your devil's advocate comments aside, you're giving the impression that your mind is already made up and that you're nearly impervious to logic or other "what if" arguments. But I'll give it a try.

You're right-- a portfolio of stocks whose dividend payouts rise faster than inflation will keep you ahead of the market and solve all your problems for the rest of your life.

I sure hope that works for iShares' Select Dividend ETF because DVY is a portion of our ER portfolio. But I can't help having this nagging feeling that the tax legislation has caused a lot of hot money to chase performance over the last couple years.

Your comments about asset fluctuation are also correct, as long as you don't need to sell any during a down market. And while the financial industry isn't going out of business anytime soon, it's thought that some institutions are so highly valued that reversion to the mean is inevitable.

It's easy to convince yourself of this unassailable logic given the market's performance over the last three years. You appear to have found the perfect portfolio... but are you sure that the stocks in that investment will perform as you think they will? Would you feel the same way in 1973-4, when most stocks lost 50% of their value? Forget about cutting dividends-- a lot of companies just stopped paying them or even went bankrupt. The same was true in the 1930s. The entire financial industry was hammered hard in 1990-92 and especially so in 2001-2.

Here's another devil's advocate thought experiment-- go pick the DOW's 10 highest-yielding stocks or the S&P500's 50 highest-yielding stocks... or for a real thrill, do it for the NASDAQ's 10 highest-yielding stocks. If you want, whittle down the candidates for those companies with a history of consistently raising their dividends faster than inflation. Then convince yourself that you'd be able to buy 30-50 of them and live off their dividends for the next 30-40 years. I wonder how many of those candidates have been in business for 30-40 years, let alone raising their dividends faster than inflation for that time.

If you're comfortable with that experiment then you probably have the temperament to research and stick with a concentrated portfolio like Buffett, Simpson, & Fisher. But if it makes you a bit concerned, then diversify!

I think our ER portfolio will always have a spot for dividend payers. But I think we'll keep buying other stocks for other reasons, too.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 08:10 PM   #14
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Hmmmm

I know I may have mentioned in a prior thread/post trying to kick the drug- er ah DRIP habit - but alas I renewed my one and only newsletter - Moneypaper.

January is installment 19(yrs) of their January once a year Dividend and Income portfolio.

I have/had 7 of their 19 stocks listed. I also peek a what pssst Wellesley owns in their top ten stocks from time to time.

heh heh heh heh
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 08:32 PM   #15
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Quote:
Originally Posted by unclemick2
Ah hem



Given that Wall Street has been feeding the ducks the last few years - dividends having been discovered 'one more time' juiced by a tax cut - someone persuing this strategy should proceed with caution.

A valid strategy - but with a lot of nuances depending on where you are in the accumulation/distribution phase and other - like pensions, SS, rental RE.



Ditto the cautions expressed by Nords - my brief 17 year exposure to DRIPs(1989 to now) encountered not a few dividend cuts, mergers and spin offs. Just two examples - my Bank of America stock started out as Fleet Boston and my water utilities suffered a wave of cash mergers. I don't even talk about dividend cuts - Union Pacific, Aetna, Luby's, Louisiana Pacific, etc.

There's a reason 85% of portfolio is Target Retirement - it's less work.

The other 15% I blame on hormones/the urge to putz.

heh heh heh
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 08:56 PM   #16
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

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Originally Posted by Rich_in_Tampa
...and, since you were not acquiring more shares through rebalancing or dividend reinvestment (assuming you were using the dividends to live off), you have no hedge against inflation or capital appreciation.
Sure he would- this is how rich people have lived for generations. GE pays a 3% dividend even in the current low return environment. GE is an AAA credit, and IMO a very well run company.

I have a number of issues that I have held long term, and are now paying me anywhere from 10% to >100% pa on my original investment. Their prices have increased along with the payouts, as might be expected.

It may be that this approach does not lend itself well to automatic or mindless investing; thus it cannot be modeled the way folks here like to do.

It is also true that for the most part, dividend yields are not high now, relative to past history. Who knows when that might change? For me, I plan to continue pursuing this strategy, but carefully and with time spent looking for special situations.

IMO, Brewers suggestion of ISM is one such special situation, pertaining to a bond rather than a stock. There are others.

Ha
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 09:37 PM   #17
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

I remember that I read Aswath Damodaran's book "Ten Investment Fables", and that the book rigorously tested ten common investment strategies, and that nine of them did not stand up to scrutiny, and that a high dividend portfolio strategy was one of the ten, but not the golden one.

What you are proposing is not exactly the investment strategy he tested, so I'm not saying this strategy is a bad idea (OK, maybe I'm hinting that it's not a great idea). I do think the book is worth a read before investing the life savings.

(If I recall correctly, the great risk is that these companies can't maintain their dividends and/or dividend growth; they have a "default" risk like a junk bond, and their current yield doesn't adequately compensate you for that risk. Can't remember what happens if you screen for dividend history or other indicators of quality).
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-09-2007, 10:05 PM   #18
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

It is all about balance.

Personally, dividends play an important part of my retirement income. Heck, in a few years they will be all of my income.
However, not all of my portfolio. As others have stated, it is not unheard of for dividends to go down (Cag did it last year, but still pays a decent return).

One very important thing to make sure of is that you have enough cash or other investments so if the dividends fall short you don't have to sell dividend paying stocks.

Both diversification and dividends are important in my portfolio. Treat it like a smorgasborg; a little of this, a helping of that, and some of those on the side
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-10-2007, 12:46 AM   #19
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

Haven't decided if I believe that favoring high dividend stocks could make retirement safer.

If S&P 500 yield was 3 or 4%, then I'd take a dividend strategy much more seriously. (Or if one could live off of 2-3% of portfolio today.) If average yields are under half of what you need to live off of, you may need to reach too far for yield, to be safe.


I would be careful about living off 6% bond or CD income, to supplement stock dividends. Inflation is eating away both principal and the value of your interest payments.
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes
Old 01-10-2007, 03:16 AM   #20
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Re: High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

forget about the 10 highest yielding dow stocks. i tried that 3 years ago and glad i abandoned that idea. with few exceptions all are still at a loss from where i bought in. even with the dividends i would have been down overall still
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