Today I’m re-launching my Dividend Stocks for Income Investors portfolio.
By the end of this post, you’ll know
- why I think a dividend income stock portfolio is something all income investors need to consider as part of their total income portfolio
- how the portfolio I launched in the winter of 2005 has performed
- and what 10 dividend stocks I’m recommending now.
This is an even tougher environment for income investors than in December 2005 when I began this portfolio of ten high-dividend stocks.
Interest rates in general are lower. The 3-month Treasury bill yields just 0.07% currently. The yield on a two-year Treasury note is less than 1% at 0.9%. And if you’re willing to lock up your money in a 10-year Treasury you get paid just 3.26%.
Risk is higher. Thanks to the big rally in junk and other distressed bonds in the corporate market are trading at higher prices, which means you get less yield and more risk. For example, when I bought the senior notes of home builder D.R. Horton (DHI) back in late 2008, I paid $9,035 for a bond with a $10,000 par value and got, instead of the 7.875% interest rate coupon, a yield of 8.69%. On October 6, that bond has rallied and now it would cost me $10,425 to buy that $10,000 par value note and, because of the rally, I’d collect a yield of just 7.68%. And if I bought today and held to maturity in 2011 I’d be looking at a $425 loss on each bond with that $10,000 par value.
And we’re a lot closer to the turn in the interest cycle. I don’t expect the Federal Reserve to start raising rates in 2009 and 2010 is, in my opinion, an outside chance. But 2011? For sure, unless the economy slips back into a double-dip recession. Remember that rising interest rates drive down the prices of any existing fixed income vehicles such as a bond.
Investing in dividend paying stocks is one way to either get completely around these problems or to at least reduce them.
First, while stocks have rallied 60% or so from the March 9, 2009 bottom, many are still trading substantially below their 2007 highs. That’s not surprising since even after this huge rally as of October 6 the Standard & Poor’s 500 Stock Index was still 33% below its October 9, 2007 high of 1565. That means a stock such as Chevron (CVX), which on October 6 traded 18% below its October 9, 2007 price, pays a dividend yield of 3.9%. That substantially higher than the yield on a 10-year Treasury at 3.26%
Second, risk in the stock market isn’t by any means absent but I’d argue that an investor in dividend stocks is getting paid more for that risk than an investor in high-yield bonds is right now. PepsiCo (PEP), for example, is still 11% below its October 9 price. It has raised its quarterly dividend to 45 cents a share from 37.5 cents during that roughly two-year period. And if you’re willing to hold for something like the three years that will expire before the D.R. Horton note matures, I think you stand a very good chance of seeing you capital appreciate. At least the investor who holds to maturity isn’t locked in to the 4.25% haircut that holding D.R. Horton to maturity guarantees.
And third, dividend stocks offer you some protection—in many economies and markets a great deal—against rising interest rates. If interest rates are going up because the economy is in full recovery and is growing strongly enough for the Federal Reserve to try to claw back some of its interest rate cuts, companies are likely to be showing climbing earnings. So they’ll have the money to raise dividend payouts. Rising earnings should also be pushing up stock prices. The combination gives you a good chance to stay ahead of rising interest rates.
Now that all that’s said and done, how did the portfolio do?
I made the first investment in this portfolio on December 6, 2005. I didn’t get up to a full 10 stocks until April 8, 2008. I built the portfolio starting with a hypothetical $100,000 and put $10,000 into each of the 10 stocks I picked.
As of October 6, 2009 that $100,000 in capital was worth $98,891 for a loss of capital of 1.1%.
During that same period the 10 stocks in this portfolio produced $18,166 in dividends. (No dividends were reinvested but instead accumulated as cash.) That’s an 18% return on that initial $100,000 invested.
The total, looking at both the capital loss and the dividends, is a total portfolio of $117.007. That’s roughly a 17% total return over what is a period of 46 months.
For a little context, the return on the Standard & Poor’s 500 stock index during this period from December 6, 2005 to October 6, 2009 was a loss of 17%.
If I turn that $18,166 in dividends into a simple annual rate of return (as opposed to a compounded rate of return since I didn’t reinvest my dividends) that comes to a yield of roughly 4.53%.
Better than a poke in the eye with a sharp stick, but I think I can do better. In fact, you don’t have to take the portfolio too far apart to see some of the problems.
Here’s a list of the 10 stocks in the final portfolio with gains and losses with and without dividends.
Â
| Stock | Symbol | Buy | Gain/ | Â Â Â Â Â Â Â Â Â Total |
|
 |
 |
date | Loss % | Â Â Â Â Â Â Â return |
|
 |
 |
  |
w/o dividend |
 |
| Suburban Propane | SPH | 12/9/2008 |
48% |
57% |
| Oneok Partners | OKS | 12/6/2005 |
16% |
54% |
| Magellan Midstream | MMP | 12/6/2005 |
17% |
53% |
| E.I. du Pont | DD | 12/9/2008 |
21% |
26% |
| Rayonier | RYN | 12/6/2005 |
-0.4% |
21% |
| Natural Resource | NRP | 12/6/2005 |
-64% |
-49% |
| Penn Virginia Resource | PVR | 12/6/2005 |
-35% |
-6% |
| Potlatch | PCH | 12/9/2008 |
26% |
35% |
| US Bancorp | USB | 4/8/2008 |
-33% |
-27% |
| Enbridge Energy | EEP | 12/18/2007 |
-8% |
7% |
Â
You can see that part of the problem is that I took a beating in three stocks: Natural Resource Partners (NRP) down 64% before dividends, Penn Virginia Resource Partners (PVR) down 35% before dividends, and US Bancorp (USB) down 33% before dividends.
In one of these cases, that of Penn Virginia Resource Partners, the dividend was ample enough to make up for much of the loss. But the capital loss in the other two overwhelmed any dividends collected. And in the case of US Bancorp, the company cut its dividend to just 5 cents a share as a result of the financial crisis.
The lesson I take away from this is that sector selection matters, especially when some sectors such as banking (US Bancorp) and coal mining (Natural Resource Partners and Penn Virginia) are collapsing. A hefty dividend isn’t enough to prevent major capital damage when a sector takes that kind of punishment.
The other lesson that I take away from this is that a dividend income portfolio needs more frequent care and feeding that I gave this one. I should have replaced these three positions far earlier in the crisis. Going forward I’m going to tend this garden more carefully.
What else am I going to do going forward?
First, replace US Bancorp. I think this is a bank stock that will recover and I’m keeping an eye on its potential for capital gains. But it clearly no longer makes the cut as an income stock. Not with a quarterly dividend of 5 cents a share.
Second, I’m going to better diversify this portfolio. It’s very heavy on energy and on master limited partnerships. The combination has done rather well by this portfolio, but I think I can add some safety here by moving a bit of money outside the energy sector.
In addition, the tax treatment of master limited portfolios doesn’t make loading up on that vehicle ideal for tax-deferred portfolios such as an IRA. If you wind up with more than $1,000 in annual income from a master limited partnership if triggers a different kind of tax treatment. In most cases that treatment isn’t either onerous or costly but I’d like to give you more alternatives.
So today I’m selling US Bancorp out of this portfolio and replacing it with Verizon (VZ), which currently pays a yield of 6.34%. (I’ll give you the complete logic on that buy in a blog post later today.)
I’m going to take the proceeds from selling US Bancorp plus sufficient cash from the portfolio’s dividends to put $10,000, an equal position, into Verizon.
Right now it doesn’t make any sense to sell either of the coal master limited partnerships in the portfolio since the coal sector is one of the hottest in recent market sessions.
 In the future I’m going to deal with the cash from dividends that builds up in this portfolio by rebalancing all the positions at the end of each year so that I will have 10 equal positions of a larger size.
I’m going to track with portfolio in the same way that I do my other two portfolios, the Jubak’s Picks and the Jubak Picks 50. Beginning next week—as soon as we can get it up–at the top of the home page of my JubakPicks.com blog https://jubakpicks.com/ you’ll find a link to a portfolio page that gives current gains and loss percentages plus a short-description of why I originally bought the stock and any recent updates.
I think those changes will assure that this portfolio gets the same attention as the other ones I run.
Full disclosure: Jim Jubak owns or controls shares in the following companies mentioned in this column: Enbridge Energy Partners, Natural Resource Partners, Oneok, and Rayonier.
How do I find the monthly and yearly performance of your this income portfolio.
You hinted in your article about changing some of your dividend investments. I’m looking to jump into this portfolio, but don’t want to jump into some of these positions as you are jumping out. Can you provide a little more clarity in an upcoming article about which positions in the current portfolio that you plan on replacing, or which you plan on keeping?
Jim – many thanks for the divie plays. And by all means, pls don’t wait for some arbitrary holding period. If something changes or runs up, sell winners and dump losers – anytime is good for me.
cheers, Foot
Jim, could we please have a PRINT function on this site? Thank you.
Bravo on starting this portfolio. There is a great need for rational, independent thought such as yours.
Hi Jim, Thank you so much for sharing your experience and the rationale behind your moves. What an education you are providing to all of us “Little Guys”. I bought Oneok Partners some time ago and it has done very well. I like the security of high paying dividend stocks. Thanks!
My question: Are there any major advantages between taking dividend as cash or reinvesting it in the stock?
Pat
Is this new dividend portfolio up on the site yet? I can not find it, if it is. Can someone help me?
Thanks,
Don
Jim,
What is your opinion on GMR ? They are still paying a $2.00 annual dividend. (22.75%)
Is this one a long term hold?
Thanks,
BuckeyeBill
Jim:
I appreciate your comments and dividend income suggested stocks & companies. However, given the tax hassle with MLP’s, is it possible to include a “second” choice selection/recommendation to your listing? Thanks
Companies return/create value in different ways; dividends, buybacks and reinvestment in growth. While yield is important, one must also keep in mind dividend growth, payout ratio’s and adjusted payouts (after considering dilutions & buybacks). I’ll give an example; in 1999 BP was yielding just over 3.5%. If you bought $100 worth of BP in 1999, it would have been worth $221.5 now; assuming you reinvested the dividend in stock and paid tax due on income out of your pocket; your income stream from BP would have been $13.67 today. Even if you had not reinvested dividends your income stream would have been $9.1 per year – that returns a yield of 9.1% on your original investment.
Have a look at http://maxkapital.blogspot.com/2009/10/how-shareholder-value-gets-returned.html. Also see The Quant Report for ideas on dividend payers – I like ABT, BA, BHP, BP, CAT, COP, CVX, DD, DE, HD, INTC, JNJ, KO, MT, PEP, PG, WMT, RDS, and VOD as companies which use dividend as part of the shareholder value return policy; they also sport decent long term dividend growth rates. The selection is not quite diversified accross sectors, but it does have a fair split between defensives and cyclicals – i.e. a diversified dividend portfolio can be constructed.
Thank you, thank you, thank you, Jim. Very few bloggers pay any attention to a diversified portfolio of income-producing investments at a time when investors are tilting their portfolios in that direction.
If you don’t mind using an etn, check out AMJ, new from JP Morgan. It eliminates the tax issues of holding MLPs in an IRA and pays a very handsome dividend. Instant diversification as well.
For those who prefer mutual funds over individual stocks, CAIBX (5.2%) and TIBIX (6.4%) pursue dividend growth in a global equity/income portfolio. Both include a slug of bonds, with lower credit quality driving the higher return for TIBIX.
You are meeting a real need. Thank you, Jim.
Jim, thanks for the update. I must say that MMP, NRP, and OKS are making me a bit nervous. I bought these postions in mid-April and have realized a sold return. However, each company appears to have issued debt and / or stock to cover the dividend payment in at least the past quarter. While I agree with your assessment that we should take advantage of the run up, I’m not sure how much longer these organizations can support the dividend payout given cash pressure and debt:equity ratios over 1. I’m interested in your thoughts on this.
VZ ok, a lot of debt though, w int rates possibly going up and price pressure from Comcast and ATT, Sprint etc in their business areas, it could limit div growth. I think you could get it at 27 soon.
This portfolio is way too energy heavy, how about some LLY or BMY?
Depending on where you are in terms of needing the income it might well pay to consider good but slightly lower yields where dividend growth is likely to be strong. An example could be MCD. They have a fortress balance sheet, a economic crisis resistant business and a yield around 4% on 2010 estimates. The key for growth is the coverage ratio and earning growth potential. MCD’s coverage ratio is almost 2 with earnings growth likely to be 8-10%. If they just keep the payout ratio stable that means your income will probably double in less than 10 years. They also have room to raise the ratio if they so choose. Cyclical cash intensive businesses like Dupont are unlikely to be able to provide that kind of inflation beating income growth. As Jim pointed out however, you cannot just “put these away” and forget about them any more than you can with any investment. Things change and it seems they change faster than ever these days don’t they? BTW……If you are a tad adventurous take a look at Buckle. They yield almost 3% and are paying a $1.80 special dividend that give holders a total in excess of 11% in 2009. This from a TEEN CLOTHING STORE!
Jim and group: I am also a dividend stock (I think of them as “bond-stocks” in my portfolio) investor, for all the same reasons, and I am also very glad to see the return of this portfolio and the attendant analysis.
Two things Jim: dividend GROWTH possibilities, and even further diversification: my stat courses always said a population of about 15- 20 items (as I recall) was adequate to lower risk to [close to] the minimum.
But, perhaps you want to be more concentrated- at somewhat higher risk?
Dividend growth potential is a super attraction of this mode of investing- thus my preference for BASFY over DD (in chemicals). You may have a compelling argument against this choice, but I think BASF’s div growth will greatly outperform DD’s very high current yield in a period of just a few years…[actually, I think BASFs curent yield is just as high- or possibly higher?- at the moment?] At any rate, div growth is certainly not to be ignoreed in this sort of portfolio, IMHO.
cheers- welcome back- thanks for so much
sorry, Im not a tax expert, but I looked it up last week.
pasimmons2001, it is annually $1000.
Glad this dividend portfolio will be back as well.
My IRA doesn’t allow for MLP’s, so I look for decent yields on stocks like Rayonier and others. I definitely look for decent dividend’s that are safe so I can take risks in other places. I had no idea Verizon was yielding 6% plus right now and will start to do some research! Thanks for the heads up idea Jim.
I’m not a tax expert either, but I believe it is in total. The first $1,000 of MLP income per year per taxpayer ID is exempt from tax. The source of that income does not matter, whether it’s from 1 partnership or 10.
pasimmons,My understanding is that it’s $1,000 a year in income per partnership. But I’d be the first to tell you I’m not a tax expert.
sigli, thanks for the catch. It should be a 17% return over a period of 46 months. I’ve pretty much killed the keyboard a bought whenI started this blog and it’s dropping “4”s on a regular basis. Time to invest in a new one. I’ve corrected the error in the copy.
Andyvaj,
I had two income portfolios on MSN Money when I worked there. There was this one that included dividend stocks and another that included a wider range of investments including Genco Shipping and Macquarie. I got the resources to run one of these portfolios but not both so I’m going to stick with this one going forward. I haven’t even cranked the numbers on the other portfolio in a while. I’ll take a look and see what they are and see they tell me anything interesting.
I have been waiting anxiously for the return of this portfolio and am excited to see it next week!
Jim,
Is that $1,000 in annual income limit for master limited partnership on a per partnership basis or total?
“That’s roughly a 17% total return over what is a period of 6 months.”
I think you meant 34 months.
Hi Jim, I follow your dividend stocks closely as I bought all of them. I don’t know if the returns are accurate as not all of the stocks that were in that portfolio are mentioned. I can remember Macquarie and Genco Shipping off the top of my head.
Jim
Have you looked at BP?
Hi Jim, Are there any major advantages between taking dividend as cash or reinvesting it in the stock?