Thursday, December 30, 2010

The T20YM Dividend Value Portfolio for 2011 and beyond

I am a firm believer in Buffett’s old adage that ‘there are no called strikes in investing’. If an investor is patient the market will eventually err and they will be in a position to capitalize on the mistake. There is no need to chase stocks for the sole reason of owning them. For instance, I love Chevron (CVX) as a company. I feel it is the best integrated oil play on the market- but not at its current $90 cost basis. I will wait for Chevron’s price to come down, or allocate my capital elsewhere.

As a long term dividend investor, I have been twiddling my thumbs since July. Good entry points have been few and far between, with the market slowly, but steadily, grinding upwards. The economies seemingly renewed strength, pro-business Obama, QE2 and a Republican congress has changed my outlook for 2011. Barring any unforeseen macro events, the market wants to go higher and thus it will go higher. I have learned the hard way not to fight the fed.

Taking this all into account, how can we construct a long term dividend portfolio for 2011 and beyond? What companies will benefit from QE2 and an international economic recovery? What companies have lagged the market and offer capital appreciation as well as a stable yield?

Before we get to these questions, let’s take a look at some basics rules I use when constructing a long term dividend portfolio:

1.    Diversification: In any portfolio diversification is essential. Spreading your money across sectors ensures you are not putting all your eggs in one basket. Diversifying a dividend portfolio can be exceptionally difficult as the majority of qualified companies are consumer staples, energy and utilities. Nonetheless, I cannot stress the idea of diversification enough. Look at the dividend investors that were overweight financials in 2009. Furthermore, we want to diversify internationally. Opening our portfolio to different markets hedges our investments against sudden downturns in certain economies and currencies.

2.    Dividend Yield and Growth: When analyzing a Dividend Growth companies I am looking for a yield greater than 3%, with a payout ratio lower than 50%. A company with consistent dividend growth as well as a low payout ratio is often financially secure and well managed. Good places to start looking for these companies are The Drip Investing Resource Center’s Dividend Champion list (here) or the S&P Dividend Aristocrat list. For the sake of this article I am not limiting myself to these lists as I am building a dynamic portfolio of dividend paying stocks.

3.    Value: I am always looking for value. I am looking for stocks that are selling for a discount to their peers or previous multiples. We are looking for beaten down stocks not beaten down companies. The dividend yield from these companies allows us to sit on the stock as the market eventually realizes the company’s true value.

I want to start the portfolio by focusing on 6 separate sectors: Basic Materials, Finance, Consumer Staples, Energy, Healthcare and Utilities. This should give me broad exposure to the market while focusing my attention on the traditionally best yielding sectors.

Without further ado, I present The T20YM Dividend Value Portfolio:

Monday, December 27, 2010

T20YM End of Year Update

It’s been an interesting month for the T20YM Portfolio. I successfully cycled into the Financial and Banking rotation before the explosion upward. This has made up for some of my losses in GLD and GOOG. I have been going for singles and doubles via Option Trading rather than home runs. This isn’t exciting, but it has been working. I will take making money, over losing money any day of the week.

Portfolio wise, I have a broad based BRIC ETF portfolio in place. I would like to add EZA and TUR on pullbacks. I am also adding to FXI on current weakness. This ‘surprise’ China tightening isn’t very surprising. They have been telling us this was going to happen for weeks.

The fixed income/preferred portion of the portfolio continue to lag. If I wasn’t overweight in PGF I would add another 100 shares. I’m not concerned about foreign bank preferred. The monthly yield is there and the ETF should be trading around $20.

I have started building my individual dividend portion of the portfolio. I plan on doubling the CIM position by the ex div date. This REIT is more attractive than NLY for multiple reasons. I think there is less risk here and it might be a position I hold long term. DEO is a small position that I will continue to build on weakness. I believe it is one of the better foreign Dividend Growth stocks and a free cash flow machine. I will look to add to the position under 72.00. WY is trading below tangible liquidation value and is looking to TRIPLE its dividend in 2011 as its transitioning to a REIT. It’s a very cheap play on housing. The dividend will allow me to hold the shares until the inevitable recovery. Other names I plan on adding to by year end are ABT and TOT.