2009 wasn’t too bad a year for income investors. 2010 looks challenging. 2011 and beyond look terrible.
And that’s why I re-launched my Dividend Stocks for Income Investors portfolio with this October 9 post http://jubakpicks.com/2009/10/09/my-dividend-stock-portfolio-income-and-less-risk-too/ .
And why today I’m putting up the complete portfolio—all ten stocks—in the same format as I use to track and manage my other two portfolios. As of today, by clicking on the Dividend Income link at the top of the JubakPicks.com home page, you’ll be able to see why I originally bought each stock, the latest update on why I continue to hold it, the price gain or loss since purchase, and all new buys and sells.
In 2009 many income investments paid squat in interest but with interest rates still headed down for some of the year in many markets, income investors who picked the right vehicles saw the value of their income investments climb. The Vanguard Long-Term Investment-Grade mutual fund (VWESX), for example, was looking at a 10.3% total return for 2009 as of October 31, 2009.
But interest rates have started to rise around the world and the United States is expected to follow suit in later 2010 or early 2011. That will eventually be good news for income investors. When rates finally stabilize at higher levels than today, income investors won’t be stuck with yields of 2% to 3% on CDs and 10-year Treasury notes.
But the years it will take for interest rates to first increase and then stabilize are going to be tough on income investors—and their current investments. Every increase in current interest rates makes the price of existing income vehicles fall. Their prices go down until their older, lower coupon yields match the current higher market interest rates.
2010 when countries such as India, Brazil, and the United States are expected to raise interest rates will be hard on income investors.
2011 and beyond, when these countries and others are expected to keep pushing rates upward, are going to be even tougher.
Dividend paying stocks are one of the few income vehicles where payouts can rise over time. If central banks sense that growth is too fast and they need to raise rates to battle inflation—as the central bank of Australia decided in October 2009, for instance—dividend paying companies will be able to raise their payouts because the same higher growth that leads central banks to act is good for the company’s profits. And these companies will pass along some of that profit to investors.
The purpose of the Dividend Income portfolio is to find stocks paying yields above those of a 10-year Treasury note and that are likely to appreciate in price. I’m not looking to buy the highest yields I can find and take on a ton of risk. I want significantly higher yields with marginally higher risk.
I’ve limited this portfolio to ten dividend stocks. I think that’s a big enough universe to give an income investor who also holds bonds and other income vehicles good diversification. I initially invest an equal dollar amount in each position. I do not reinvest dividends until I rebalance the portfolio at the end of each year.
Every buy and sell is reported at the time I make it on the Jubak Picks blog. I’ll post a report on the portfolio’s performance a few days after the end of each quarter.
I appreciate the patience of all of you who has asked me when the portfolio will go up. It took me longer than I expected to carve out enough time to write all explanatory blurbs for each stock.
We’re finally ready to go.