This High-Yield Dividend Portfolio Will Beat the Market

Three weeks ago, I invested my cold, hard cash into 10 high-yield dividend stocks I believe will beat the market. Let's see the results so far:

Company

Average Cost

Shares

Recent Price

Total Value

Return

Altria (NYSE: MO  ) $24.86 40 $24.29 $971.60 (2.29%)
Philip Morris (NYSE: PM  ) $61.83 16 $61.87 $989.92 0.06%
National Grid $45.63 22 $43.75 $962.50 (4.12%)
Annaly Capital Management (NYSE: NLY  ) $17.55 57 $17.77 $1,012.89 1.25%
Frontier Communications (NYSE: FTR  ) $9.36 106 $7.95 $842.70 (15.06%)
Southern Co $37.87 26 $36.80 $956.80 (2.83%)
France Telecom (NYSE: FTE  ) $22.23 45 $20.31 $913.95 (8.64%)
Vodafone Group (NYSE: VOD  ) $28.88 34 $26.78 $910.52 (7.27%)
Eli Lilly (NYSE: LLY  ) $34.48 29 $33.63 $975.27 (2.47%)
Bristol-Myers Squibb $25.37 39 $24.97 $973.83 (1.58%)
Cash   53.71   $53.71 0%
Dividends Receivable   35.07   $35.07 0%
Total Portfolio       $9,598.76 (4.01%)
Investment In SPY         (4.29%)
Return vs SPY         0.28%

Source: Capital IQ, a division of Standard and Poor's. Data as of March 16.

The past two weeks, the disaster in Japan has taken a toll on the market with the S&P falling 3.8%. When people panic, all assets get sold off. Our portfolio proved more stable than the markets and moved from underperforming the market by 0.3% two weeks ago to beating it by 0.3% now. While outperformance is always good, it should be taken with a grain of salt. We're investing for the long term, and it's only been 3 weeks. I firmly believe the results will bear us out.

Movers & shakers
Of our stocks, the biggest movers in the portfolio the past two weeks were France Telecom (-7.7%) and Vodafone (-6.9%), which dropped more than the S&P 500's -3.8%. However, these losses were both less than the European market's large drop of 8.8% as measured by the euro Stoxx 50.

Money!
There are 4 upcoming dividends for the portfolio.

  1. Philip Morris International will pay a dividend of $0.64 per share on April 11. The ex-dividend date is March 22.
  2. Bristol-Myers Squibb will pay a dividend of $0.33 per share on May 2. The ex-dividend date is March 30.
  3. Altria will pay a dividend of $0.38 per share on April 11. The ex-dividend date was March 11.
  4. Frontier Communications will pay a dividend of $0.1875 per share on March 31. The ex-dividend date was March 7.

News
Not much company-specific news over the past two weeks. Eli Lilly is purchasing Johnson & Johnson's animal-health business, which has roughly 50 animal-health products. This deal gives Eli Lilly's existing sales force more products to offer clients and strengthens the unit against Merck and sanofi-aventis' animal health joint venture.

Buffett on dividends
Superinvestor Warren Buffett recently released his annual letter to shareholders. In it, he talked about his investment in Coca-Cola and the power of dividends:

Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

So how does Buffett define a wonderful business?

Some businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to more than 100%. Others produce good returns in the area of 12%-20%.

Here are our businesses' earnings on unleveraged net tangible assets

Company

Earnings on Unleveraged Net Tangible Assets

Altria 2836.04%
Philip Morris 88.25%
National Grid 3.54%
Annaly Capital Management 1.61%
Frontier Communications 1.88%
Southern Co 3.52%
France Telecom 13.52%
Vodafone Group 19.37%
Eli Lilly 26.04%
Bristol-Myers Squibb 15.94%

By Buffett's measure, 30% of our companies are great businesses, another 30% are good businesses, and the rest are mediocre. That's OK, though; each of our mediocre businesses smartly uses debt to increase their returns, putting them on par with good businesses.

My Foolish bottom line
I'm highly confident in this portfolio's ability to crush the market over the next decade, and that's why I put $10,000 of my personal cash into these stocks. My strategy is simple. I'm buying strong companies with outsized dividends, reinvesting those dividends, and holding them for the long run. Over the coming year, I'll track my performance, update you on when I'm going to reinvest all my dividends, and keep you abreast of news affecting these companies.

Consider the 10 tickers above along with the 13 names from a free report from Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one named by a senior retail analyst as "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high-yielders, simply click here -- it's free.

Dan Dzombak can be found on his Twitter account: @DanDzombak. He owns shares of Altria, Philip Morris, National Grid, Annaly Capital Management, Frontier Communications, Southern Co, France Telecom, Vodafone, Eli Lilly, and Bristol-Myers Squibb.

Johnson & Johnson, Coca-Cola, and Vodafone are Motley Fool Inside Value selections. Philip Morris is a Motley Fool Global Gains pick. France Telecom, Johnson & Johnson, Coca-Cola, National Grid, and Southern are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Altria Group, Annaly, Coca-Cola, Johnson & Johnson, and Philip Morris. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2011, at 8:16 PM, mm5525 wrote:

    In PM's case, as a friendly reminder or anyone who does not know, they raise the dividend every September dec. date for the 3Q payout in October. Last year it went from $0.58 to the present $0.64. Altria (MO) does this too on a regular basis, usually in the same 3Q, but for some reason they raised their dividend earlier in 2010's 1Q instead. Point is these two raise every year like PG does and KO does, etc. In my humble opinion, PM is the best stock out there to possibly own. No U.S. exposure, dominant market share, pricing power, and a weak-USD hedge in addition to the forever-raising dividend, which is already a solid 4% at these levels. Plus, their management team is top notch.

  • Report this Comment On March 18, 2011, at 3:02 AM, trenton1ryan wrote:

    Right on the money mm5525. I recently bought some PM after the Japan crisis brought the price down (finally!). I will be reinvesting divs plus adding at certain times. With it in a Roth, I don't have to worry about the taxes either.

    Dan, I think you would do better to spend the whole 10k on PM and MO, possibly throwing in SO, VOD, and/or FTE. I know diversification is smart, but with an amount like 10k, I say it's better to do your homework and go with only a couple-namely PM and MO from this list.

  • Report this Comment On March 18, 2011, at 10:14 AM, mm5525 wrote:

    Nice to have you aboard PM, trenton. The best time to buy PM is, indeed, in a moment of global turmoil, but that's true with most stocks in general. PM is my #1 holding by far, and I tripled my position last July when the Greek debt issue was in full swing. PM has been battered this week due to the Japanese issues, but the big hedgies out there probably had to sell some of their winners to pay for some losers/margin calls. PM is up over 30% from July 2010, and that doesn't include what was, at the time, a 5% dividend. Plus, you don't have to worry about the FDA recommending banning menthol cigarettes with PM like you do with MO, LO, RAI, or VGR. PM can have some real volitility due to the currency issues, more so than any other of the tobacco stocks. However, the USD is not really the 'flight to safety' it has been, even with the Japanese Quake. That's good for PM. I basically view PM as a mutual fund spread out over 160 countries and dozens and dozens of different currencies, all of which are brought back to the US and converted into the USD. Nice hedge against inflation.

  • Report this Comment On March 19, 2011, at 8:15 PM, DividendDude wrote:

    Looks like a winning portfolio to this Fool. I can't tell from your article just what you are doing with your dividends - you say 'reinvesting', but hopefuly you take your dividends in CASH and invest them as you see fit, rather than just blindly reinvesting them back into the stock that paid them.

  • Report this Comment On March 20, 2011, at 11:57 AM, busterbuddy wrote:

    Very good idea and a good set of stocks pick. But you have some industry overlap and some missing industries. I'd recommend adding or changing to EEP or ETP. And I'd add the ETF PGF.

    In my humble opinion PGF should be the foundation of any portfolio.

    And you should have good dividend producing oil and natural gas and the pipeline companies make the most sense to me.

  • Report this Comment On March 22, 2011, at 2:06 PM, angellt wrote:

    Dear Sir:

    Why doesn't you reinvest all dividends in more shares at the time of payment?

    Thanks

    Angel

  • Report this Comment On March 23, 2011, at 5:51 AM, pryan37bb wrote:

    @angellt:

    To quote from the article,

    "My strategy is simple. I'm buying strong companies with outsized dividends, reinvesting those dividends, and holding them for the long run."

    @DividendDude:

    Reinvesting almost invariably means into the same stock which paid the dividend in the first place. As to why, not only do you save the commission fee, but you also harness the magic known as compounding, also called "earning interest on interest."

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