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: