High Dividend Portfolio vs Portfolio Diversified Across Asset Classes

[cute fuzzy bunny]

This is where my "simplify!" approach brought me.

After running with a slice and dice portfolio with 15 funds in it, I sold each one as they became "fully valued". Except for REITS, which seem to defy gravity well, seems I sold each in a timely manner.

I waited for sectors to become more reasonably valued but found that large caps, particularly value stocks, seemed to persist in being the most reasonably priced.

Deciding that spending hours a week playing this game was no longer a lot of fun, I shifted about 2/3 of my taxable money into a vanguard target retirement fund and the rest into a large cap value dividend paying fund, In the IRA, same target retirement fund for 2/3 and small cap value for the remainder.

Ballast of self-regulating low cost index with a heavy twist of dividend payers; large on one side and small on the other. No rebalancing between. See where it is in 20 years.

Expense ratio is under .20. Kicks off about 2.6-2.7% in dividends and gains that go into the spending pot along with the few bucks my wife is still earning working a couple of days a week. Projected growth of capital is somewhere in the 5-7% range. Wont sell any shares unless we need to make a large purchase, like another frickin lexus or a college education.

Only thing that screws us is a very long downturn in the equities market. But as I tell my wife, that will screw everyone equally. With our no-debt situation and the probability of some sort of regular income, we'll probably feel a little less screwed.

You dont have to outrun the bear...just the other guy!

 

[FIRE'd@51]

GE pays a 3% dividend even in the current low return environment. GE is an AAA credit, and IMO a very well run company.

GE is a textbook example of the type of "high" yield stock one should hold if tilting his/her portiolio toward dividend-paying stocks. It's current yield of 3% is 70% higher than that of the S&P 500. Additionally, GE has raised the dividend every year for the past 30 years. Over that time period the dividend has grown more than 12% per year versus an average annual inflation rate over the same period of 4%.

 

[wildcat]

I suppose I would differ in terms of what I would evaluate in this situation in response to the OP's original post. Should you want high yield or high dividend growth? I mean high yield means nothing if the business is going down the crapper.

Without any additional information with regard to which securities you are looking at, my preference would be growth, especially if you intend to hold these securities for an extended amount of time. Of course, a security offering both would be ideal - Altria (MO) 8 years or so ago.

 

[ForeignExchange]

I just checked "The Dividend Rich Investor" by Joseph Tigue & Joseph Lasanti, published in 1999. In it they have a list of long term dividend payers. At that time there were well over 200 companies that had paid dividends since at least 1929 or before. Quite a few of these (over 50) have been paying out dividends since the 17 to late 1800's.

In the equity section of the portfolio, this is the only way I invest.

 

[renferme]

I'm in Ben Stein's camp. My Ameritrade account has 3 banks, GE, Altria, XOM,
and several REITs - all paying nice dividends.
And I'm not worried about diversification as I have mutual funds in my Vanguard IRA account and a bunch of CDs all paying greater than 5%.
.

 

[Running_Man]

For dividend stocks I reccommend the following, you will get above inflation dividend raises and should avoid all cuts. It is the rules I have used in my stock purchases.

Stock Universe - Value Line 1700
Requirements for purchase:

1) Financial Strength B+ or greater
2) Earnings Predictibility 75+ or greater
3) Price Growth 75+ or greater
4) Stock Price Stability 75+ or greater
5) Timeliness Rating 2 or greater
6) Must pay a dividend for the last 10 years with an increase in dividends paid each year.

Sell when:
1) Any cut in Financial Strength Rating results in a below A rating
2) Dividend payment for a year not greater than prior year
3) EP, PG or SP ratings drops to 60 or below for one or total of 3 to 210 or below.
4) Timeliness drops to 4 or below.

I have found this to be a very successful guide in picking dividend stocks. Here is a sample page of Walmart from value line. Do for all stocks and take the 5 highest yielders.

http://www.valueline.com/dow30/f9638.pdf

 

[trixs]

I think that you can get a very well diversified portfolio from dividend paying stocks. However, you are not going to have 100s of stocks as you would in an index/mutual fund. The question becomes at what point do you have to much diversification.

Lets do a little test:

Health care: JNJ, PFE, MRK, LLY. ect..

Banks: BAC, WFC, WM, Citi Group, ect..

Retail: MO, KMB, WMT, GE, PEPSI, COKE ect

Energy: CVX XOM ect

All high yield dividend paying stocks that have raised dividends every year for decades.

Add to this list utilities, telephone companies ( AT&T/SBC), reits and you have a very well diversified portfolio. So let’s purchase equal amounts of all the above stocks and make it 50% of our portfolio. We are then going to add 25% Vanguard Complete Bond Index and 25% International Dividend Payers (which seem to always have higher yields that US)

The point being you can easily get a portfolio to give off upwards of 4% yield that is diversified. Simply rebalance each and you end up with a nice portfolio with extremely low Expense Ratio. How do you know when to completely sell any of your individual stock holdings? Well, did they forget to raise dividends this year?



- Trixs

 

[Gone4Good]

Keep in mind that "yield" is a component of, not an addition to, "total return". Generally speaking, higher yielding stocks (of healthy companies) will likely have lower capital appreciation then lower yielding stocks - total return should average about the same, all else being equal. Whether you sell principal for income or have income distributed to you via a dividend shouldn't have too great an impact on portfolio survivability. The asset concentration in single name equities and high yielding sectors could, however, increase overall risk and reduce survivability.

 

[Hydroman]

Deciding that spending hours a week playing this game was no longer a lot of fun, I shifted about 2/3 of my taxable money into a vanguard target retirement fund and the rest into a large cap value dividend paying fund, In the IRA, same target retirement fund for 2/3 and small cap value for the remainder.

Which VG Target Retirement Fund are you in and how many years to retirement? Are the large value dividend and small cap value fund with VG too? I guess I am interested in if/how you rebalance your large and small value funds. Your equity allocation will increasingly be concentrated in the large value dividend and small cap as your target fund increases its FI allocation over time.

Thanks

 

[cute fuzzy bunny]

I had been in the target retirement 2045 funds until they redid how they work internally. Changed those to target retirement 2025. We'll be in our 60's by the time those funds 'mature' to operate like target retirement income.

Heres the whole ball of wax:

IRA: About 2/3 in target retirement 2025, 1/3 in vanguard small cap value index. All dividends/gains from the TR2025 reinvested in MORE small cap value index. We wont be touching that money for 20-30 years.

Taxable: 2/3 in target retirement 2025, 1/3 in vanguards windsor II. All dividends/gains paid out to money market, no reinvestment. I collect the dividends/gains, other interest and dividends, and anything residual we've got left and when I see something I think is undervalued I employ Unclemicks testosterone based ploy to buy it and make a little money. Havent seen anything in a while though. At some point when eating the capital gains is acceptable, I may convert the windsor II over to the "large cap value index" to get improved tax efficiency.

Roth: all of it in VG total international stock

Around 2-5% of the total port in cash and cd's.

Wife is still contributing most of her income into a 403b (s&p500 index) that we'll roll over into a vanguard ira in 3 years when we're eligible to do that. We're also still contributing the max to our Roth accts.

 

[Hydroman]

Thanks El Guapo for opening your kimono a bit. Sure sounds like you are going to be extra concentrated in small value over time, but I guess if it is 20-30 year money, you will be ok.

 

[cute fuzzy bunny]

Sure will, and if the future is like the past that'll give me some nice returns. When they've had a good runup i'll probably drain some of it out back into the TR2025 fund and when we reach our 60's or early 70's I'll drain it all back into the TR fund. Maybe.