Construct your own high-dividend fund?

[soupcxan]

There is just something about dividend paying securities that I like...I feel the return is more tangible than stocks that depend on capital gains since the latter:

a) requires you to sell to realize the gain
b) may rely on a "greater fool" effect sometimes

Vanguard's Equity-Income (VEIPX) is only yielding 2.4% which is not a whole lot more than the 1.8% offered by the S&P500 itself (VFINX). Not to compare apples to oranges, but even my ING account is paying 2.6%. DVY is paying 3.1% but 40% of its holdings are in financial services...seems like a lot of industry-specific risk (if it comes out that a lot of banks have been playing accounting games with their bad debt reserves, for example).

So instead, why not just create your own portfolio of blue-chip, high-dividend stocks in a few different industries (all with a history of increasing dividends over time) and get almost double the dividend? For example:

Altria - MO - Consumer products - 4.4%
Bank of America - BAC - Finance - 3.9%
Con Ed - ED - Utilities - 5.3%
Donnelley - RRD - Industrials - 3.3%
Pfizer - PFE - Health Care - 2.9%

If you held equal amounts of each, that's a total yield of 4.1%. If you buy & hold, you can achieve an effective expense ratio less than the mutual funds above.

Obviously you lose some of the diversification benefit of a fund that holds 100 different stocks (systematic risk blah blah) and you're going to have more volatility than a mutual fund, but it seems like it could be worth it - as part of a balanced portfolio.

What do others think about this approach? Could it apply to someone who's early in the accumulation phase?

 

[unclemick]

Sure

15% of total portfolio - Con Ed, Excelon, Dominion, Verizon, SBC, Exxon, Chevron, JP Morgan, Bank of America, Smucker, National Fuel Gas, Eli Lilly, Glaxo, New Plan Realty, Washington RE, and more.

I'm in the distribution phase. In the accumulation phase - I would invest in Mergent's Handbook of Dividend Achievers or other source to track down dividend growth numbers to try to find the right balance between current div vs div growth.

More work - much more - so most go the mutual fund route and pay the fees.

Lot's of ins and outs - pros and cons. Go to Bernstein's Efficient Frontier website and google The 15 Stock Diversification Myth - for the distaff view.

 

[smooch]

I am also interested in dividend stocks. I own Pfizer, Verizon, GE, HD, Tyco, VOD. I am selling some Oracle and Comcast to purchase additional dividend paying stocks. Right now I feel paralyzed, because I keep hearing that the market is over-valued. How does one know when it is the "right" time to buy? I would like to purchase Chevron, but this doesn't seem like a good time with the oil prices so high.

 

[unclemick]

I stay with the horse I rode in on - buy a company I like and DCA for 7-10 years via the evil DRIP plan.

Check out your local library - see if they have any books by Geraldine Weiss or David Dreman to skim for ideas.
Similar in value orientation they persue different strategies.

 

[ak4195]

Soupx,
Google up dividend discount model,its important to refrain from drooling.Think about risk,diversify,and utilize what ever bag of tools you understand to quantify a stock purchase.Keep in mind the divvy yield isnt everything,but certainly can be an important aspect of buying.Altria is a perfect example,you would have had to wait years before breaking even (assuming buy n hold).Getting paid to wait for recovery sounds good,but in general human psychology doesnt accept a sinking asset very well for most people.You could also use other stock screeners for ex., MSN to broaden the list of divvy yielders.Good luck,hope this helps some.-ak

 

[Berkshire_Bull]

My DRIP/Dividend stocks are about 8% of my portfolio and growing as it splits most of my new money with my 401K. I own Johnson and Johnson, Lowes, Pfizer, IndyMac Bancorp, Limited, Wal-Mart, H&R Block, and Energen. My portfolio currently yields 2% which isn't bad. I like the idea a lot, and it's fun. The good thing about dividend stocks is, unlike some other investments, if you need the cash flow it can be easily released by stopping the DRIP option. Unclemick is my hero with his 40 Dividend Reinvestment Plans! just for the record.

 

[brewer12345]

The good thing about dividend payors is that the total return tends to be less volatile due to the regular payouts of cash. The bad thing is that it is easy to be seduced by a high yield paid by a failing business. Personally, I am more interested in the total return that an investment will generate. Dividends are definately a part of that, so if I find an attractive asset paying a solid div, it is a plus. But be careful not to end up in a bunch of lousy businesses just because they pay a high div.

 

[wildcat]

I tend to agree with Brewer. I believe one should focus on the fundamentals of the business and not so much the dividend yield. Taxes hurt returns and I would rather buy a company for capital appreciation at a good price (seems to be a rare find today). A return is a return and if I can get the same return by delaying taxes I am game. However, dividends are not a bad way to play defense during uncertain times. What is going on with this market anyway....up up and away?

 

[grumpy]

soupcxan,

I agree. I have a portfolio of 23 dividend paying stocks that I built up over the last 10 years using DRIPS and Buy & Hold Securities ($15/mo. unlimited trades). The portfolio is worth more than $200k and generates $7300 per year in dividends for a current yield of 3.3%. The yield on my cost basis is 4.78%. I also have about a 7% average gain in addition to the yield. The companies in the portfolio are:

BankofAmerica
Washington Mutual
Regions Bank
Intel
Texas Instruments
Altria
Conagra
Sara Lee
RPM
Dow
Allstate
ExxonMobil
Pfizer
Donnelley
Avery Dennison
Washington REIT
Southern Co.
Aqua America
American States Water
Dominion Resources
Pepco

I expect to hold these for a very long time.

Grumpy

 

[charlie]

I like dividend paying stocks too and owned just about
as many DRPs as unclemick at one time. However,
over the last several years I have been selling them
off and sold the last just this January. It was a
good ride but at this point I would rather let the
experts at Vanguard handle my equity investments
via funds like Wellington and Wellesley in my wife's
IRA and our after tax accounts respectively. My
IRA is a slice n dice coffeehouse 60/40 mix which
is about all the excitement I care for at the present.

IMHO, if you go the individual stock route, you need
to own a bunch of them to achieve the safety of
diversification. 40 is not too many, I think.

I don't really have anything serious against the
individual stock route if done right. Your ER can
approach zero, you pay taxes at the cap gain/div
rates and you can choose when to harvest.

In my case, I just want to simplify things and not
give Lyn a big headache if/when I need a drool cup.

Cheers,

Charlie (aka Chuck-Lyn)

 

[yakers]

There must be a psychological preference that a bunch of us favor dividend paying stocks. I have 6 DRIPS (BWA, WEC, KEY, UST, MOD, and HNZ) which are all of 7.2% of my current assets. I add a small amount each month. These have treated me well and I expect to hold them a long while, possibly they will be left to the kids and just sit on the side for emergencies, maybe spend the dividends.

 

[renferme]

Here's a repeat of my earlier post regarding stocks that pay dividends :

" own stocks, in particular, stocks that pay dividends.
Own stocks in companies that are likely to increase their dividends yearly or almost every year.
For example : if I buy a stock for $100 that pays a 5% dividend, that's $5 / year return.
If the company raises it's dividend 50 cents per year for ten years, then the dividend increases to $10 total.
That's a 10% yield on my original investment. And if things go well for the company, the stock should be worth more than the $100 that I originally paid for it.
In any case, at least I'm getting 10% return on my original investment.
A nice deal if you ask me.
Of course, I don't have all my money in stocks as I believe in diversification. "

I own REITs such as ASN, FRT, HCP, NNN, EOP and also own stuff like MO, XOM, SLE, GE and USB.
A very nice total dividend yield to supplement my other retirement income.

 

[cute fuzzy bunny]

There must be a psychological preference that a bunch of us favor dividend paying stocks.

More than a psych preference...its a good idea.

Historically a lot of return from stocks has been in the dividends. High dividend stocks also tend to be Value stocks, and historically Value stocks have been better investments.

While owning the mentioned individual stocks, owning vivax or veirx gives you exposure to ~400 and ~180 stocks respectively, at ~.2% costs...in fact vivax's admiral shares run .11%. While you can show higher dividend rates with a smaller bucket of stocks, you are also taking on considerably more risk.

VEIRX is also managed by Wellington, the same guys that do a good job of stock and bond picking for the wellington and wellesley funds.

Hey unclemick...[whisper] Wellesleyyyyyy [/whisper]

 

[maddythebeagle]

There must be a psychological preference that a bunch of us favor dividend paying stocks.

- yes, also some of the "growth stocks" have simply destroyed capital that would have been better being returned to shareholders. Not every investment makes money.

 

[work4beer]

I have about 15% of my portfolio in higher dividend stocks, for about 6% overall yield:
(current yield)
CAG 4.5%
FGP 9.74%
MO 5.39%
MRK 4.73%
NLY 10.36% (well, not for long....)
SPI 4.78%
WM 4.45%

NLY and FGP are high risk, high return. They are also a REIT/MLP respectively so you need to look into the tax implications.

What you want to look for are steadily growing companies, that are paying out about 1/3 to 1/2 their free cash flow as dividends. Over 1/2 is too much.

Timing also helps; e.g. I bought MO 2 years ago in the low 40's and WM in the low 30's. But even with bad timing on some of these, I'm in the black overall on all except MRK.