The Ultimate Sustainable Dividend Portfolio

avatar By: IS
Date posted: 09.14.2011 (4:34 am) | Write a Comment  (11 Comments)

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We write a lot about dividend investing both on here, on TheDividendGuyBlog (general discussions and our award nominated free dividend ebook) and WhatIsDividend (dividend basics). On this blog, two of our most popular posts have been our explanation of how we select dividend stocks. Our main methods are looking at 20 different factors for dividend stocks but also finding stocks that will be part of a sustainable dividend portfolio. What does that mean? We are looking for stocks/companies that will be able to increase sales, profits, and thus dividends for the medium and long term. These stocks should also react reasonably well no matter how the economy reacts.

The End Result?

A sustainable dividend portfolio should thus be a portfolio that can perform very well over time, provide good returns and obviously solid payouts that increase over time. I have discussed the fact that a dividend portfolio can be started with as little as $5000 and that is certainly true of sustainable dividend portfolios as well. Thus, in past months, we have taken deeper looks of several high potential dividend stocks both on the blog and on our free newsletter. Today, we decided to go bigger. We are taking the universe of top dividend stocks and looking to form a sustainable dividend stock portfolio. The number of stocks to be included depends on the  amount being invested of course but in our case, we are looking at a typical portfolio worth $100,000 that would include 20 dividend stocks. Most of these stocks were looked into in more detail, mostly on our newsletter. First, let’s take a look at what such a portfolio would give you:

IntelligentSpeculator Sustainable Dividend Portfolio

Stocks Owned: 20 (all owned equally)
Largest Market Cap Owned: Exxon Mobil Corp (XOM)
Smaller Market Cap Owned: Hasbro (HAS)

Portfolio Dividend Yield: 2.86%
Portfolio 1 year dividend growth: 20.86%
Portfolio 5 year dividend growth: 15.24%

As you can see, the current yield is reasonable but the growth is very impressive, especially when you consider the diversification involved!!

Portfolio Sales Growth 1 year: 23.82%
Portfolio Sales Growth 5 years: 13.96%
Average Portfolio P/E ratio: 12.07
Average Payout Ratio: 33.45%
Debt to Capital Ratio: 0.167%

It is truly impressive. To give you an idea. $100,000 invested in this porrtfolio would currently yield $2862 in annual income. If those companies can maintain their 5 year increase pace, that payout would be up to $5816, with much more upside to go. Of course, a lot can change over time which is the exact reason why we focused on healthy companies that are leaders and have displayed the ability to do well in all circumstances. Some names such as Exxon (XOM) were on the fence because other names in the industry have displayed better growth recently, but because of the sustainability issue, being a market leader that is able to do well, to secure important deals that assures its long term future did end up being a big factor.

Diversification Achieved

It’s always possible to do better but holding 20 companies that are involved in technology, advertising, oil and natural resources, food, toys, etc makes it possible to expect that such a portfolio will do very well over time. Also, in this very difficult economic context, holding stocks that have little to no debt means a great deal. Not only will they have limited issues if credit continues to be difficult but they will end up getting great opportunities buying competitors that were not as wise.

You might judge that some industries are not represented well enough or others are too present. I would argue that the main reason is that some industries are not as good about paying dividends which certainly excludes them. As well, while many dividend portfolios/funds hold a lot of financials, I mostly decided to stay away. Why? I was mostly going for simple businesses that do not hold hard to value assets such as is the case for most banks these days. Companies such as BlackRock (BLK) and T Rowe (TROW) are portfolio managers that mostly collect fees on money managed. That business is less volatile and less subject to impetration.

Strong Growth Potential

Companies such as Intel (INTC), Microsoft (MSFT) and Pepsi (PEP) all have shown the ability to increase their business, mainly thanks to emerging markets which should translate into continued dividend growth as well. That is what I was gunning for in this portfolio. Stable companies that can increase their business over the coming years. Many would have picked Coca-Cola (KO) over Pepsi (PEP) as holding both would not have made much sense. However, I considered Pepsi to have much more long term potential, mainly thanks to its strong position in emerging markets where the growth is mostly coming from.

More Info And Tracking Our Portfolio

We would like to invite you to join our free newsletter that is sent weekly and includes information about these and other dividend picks. We will of course be tracking this portfolio over time to see how it performs, which stocks should be replaced (no pick is permanent!).



Is There Such A Thing As A Perfect Portfolio?

For many reasons, it’s impossible to achieve a perfect portfolio, no matter what the type. So I certainly expect and hope to be challenged on some of my choices, on names that were left out but could or should have been included. Please note that for this exercise, I only used stocks from the S&P500 which did exclude other strong dividend names such as Canadian banks for example. I will certainly get the opportunity build more such portfolios in the future.

Without further wait, here is our Ultimate Sustainable Dividend Portfolio

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More on this topic (What's this?)
Dividend Discount Model Overview
Read more on Dividends at Wikinvest
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11 Comments

  1. Comment by HighonDividends — December 5, 2011 @ 1:50 am
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    MAT dividend is wrong? Unless they jacked it up but not yet announced that?

  2. Comment by IS — December 5, 2011 @ 5:35 am
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    @HignOnDividends – That was published some time ago before stocks rebounded so that might explain a big part of it, it is under 4% now yes.

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  6. Comment by SUSAN — March 6, 2012 @ 8:00 am
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    Great article!

  7. Comment by Dividend seeker — March 20, 2012 @ 9:54 am
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    When are you going to update your portfolio. I thought you were selling MUR and getting AFL.

  8. Comment by IS — March 20, 2012 @ 10:02 am
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    @Dividend seeker – I usually update it around mid-month, yes the trade was done, it will be reflected in the next update, mid-April:)

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