World’s Best Dividend Portfolio

In June 2011, I announced to Fool.com readers that I was putting $10,000 of my own money to work in 10 income-producing stocks. The stocks yielded 6% -- more than triple the average S&P 500 stock, gushing cash back to us shareholders. How did that turn out?  

To be blunt, it was a smashing success. The portfolio returned 10.5%, compared to just 5.5% for the S&P. In other words, we nearly doubled the S&P’s performance. Readers followed along all year with my weekly performance reports, and we collected dividends month after month, and then squirreled that money away in our dividend payers.

I’m looking to do it again this year, as I add new money and a few more stocks to what I call the World’s Best Dividend Portfolio.

Read on to find out where my money's going, because the time to act is now.

Why dividends?
Dividend stocks offer a solid payout and lower volatility than their non-paying cousins. In practice, that means dividend stocks outperform in bear markets and tend to underperform in raging bull markets but, all the while, they keep gushing those dividends.  This approach is backed by tons of studies.

Researchers at Tweedy, Browne surveyed the investment literature over decades, and determined that high-yield stocks do well. Or, as Tweedy dryly notes: "There is substantial empirical evidence to support a direct correlation between high dividend yields and attractive total returns." And dividend stocks did well relative to other strategies: "At least one study found that high dividend yield stocks outperformed other value strategies as well as the overall stock market return in declining markets."

They had me at “high dividend yields and attractive total returns.”

We’ve already seen a taste of those benefits in the World’s Best Dividend Portfolio, though it’s only been a year.  Now we’re forging ahead with a few new stocks, and more money.

Here are the stocks I selected last year, our performance through June 28, and those tasty yields. I put $1,000 in each to start.

Company

Yield

Total Value

Return

Southern 4.2% $1,170.32 17.5%
Exelon 5.6% $1,077.79 (9.6%)
National Grid 5.8% $1,070.20 7.4%
Philip Morris International 3.6% $1,245.16 25.0%
Annaly Capital 13.2% $1,089.92 (7.1%)
Frontier Communications 10.6% $479.15 (51.9%)
Plum Creek Timber 4.4% $1,010.88 1.2%
Brookfield Infrastructure Partners 4.5% $1,274.81 27.5%
Vodafone 5.0% $1,059.47 6.4%
Seaspan 5.7% $1,340.64 18.4%
Cash   $88.11  
Dividends Receivable   $90.40  
Original Investment   $9,986.58  
Total Portfolio   $11,032.88 10.5%

Investment in SPY

(including dividends)

    5.5%

Relative Performance

(percentage points)

    5


We had seven of 10 stocks with positive performance – and that’s before you count dividends that are now 5.9% on average!  And don’t let those negatives next to Annaly (NYSE: NLY  ) and Exelon get you worked up. With Annaly’s double-digit yield, it ended in positive territory for the year. Exelon provided a small loss after you factor in its 5%+ yield, but I’m willing to wait on it at this price.

I’m still confident in these stocks, with one exception. The only real loser was Frontier (NYSE: FTR  ) , which slashed its dividend and cut its estimate of free cash flow for 2012.  I’ll be selling Frontier when I think it reaches a reasonable price and reinvesting those proceeds.

But here’s the big news…

The new ground rules
This year, I’m adding $3,000 to the portfolio to help simulate an investor who socks away more money each year. I’m picking three new dividend stocks that each yield at least double the S&P, and putting $1,000 in each.  Here they are:
 

Stock Yield
AT&T (NYSE: T  ) 4.9%
Retail Opportunity Investments Corp (Nasdaq: ROIC  ) 4.2%
Annaly Series C Preferred Stock (NYSE: NLY-PC  ) 7.5%


AT&T provides a better positioned telecom to replace the outgoing Frontier. Its yield is sustainable, despite its high payout of free cash flow, at 71%. AT&T has a strong competitive position in mobile among what’s effectively a triopoly with Verizon and Sprint, and AT&T’s size ($211 billion market cap) means it has greater financial resources to continue its payout.

I’ve touted the virtues of Retail Opportunity Investments Corp (ROIC, for short) in this article, but they bear repeating. The company is a small-cap ($617 million), and with the acumen and business relationships of CEO Stuart Tanz, it is bound to grow. This REIT’s dividend has doubled since its initiation in early 2010, and that growing portfolio of properties will lead to a greater dividend over time. ROIC will diversify the portfolio with more direct exposure to real estate.

I’m picking up shares in the new Series C shares of Annaly for a couple reasons. First, they offer a high yield, $1.91 per year, or 7.5%.  Second, we still get access to the Annaly’s well-run business without the same risk of capital depreciation, should interest spreads decline. Sure, preferreds have interest rate risk, but we’ll be buying only slightly above the par value of $25, and we have nearly five years until they can be called.  We’ll still get paid a tasty dividend without the problem of having to guess when Annaly might start to get hurt by rates.

Like last year, I’ll keep these stocks in my portfolio for at least a year and will notify you of any changes (such as dividend reinvestments) before I make them.

Join me
I'm so confident that this portfolio will do well, that I'm adding my own money next week, as soon as the Fool's trading rules permit. I'll be reinvesting these fat dividends into more stocks in the portfolio, and you can follow along every week as I provide updates, news, and dividend announcements. I plan to turn this high-yield portfolio into a true dividend dynamo that gushes cash month after month. It's time to act.

Consider the names above along with more stocks from a free report from Motley Fool expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Hundreds 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 high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares of Annaly, ROIC, Brookfield Infrastructure, Seaspan, Exelon, Southern, National Grid, AT&T, Vodafone, Plum Creek, Frontier, Philip Morris, and Annaly Series C. The Motley Fool owns shares of Annaly, Brookfield Infrastructure, ROIC, and Seaspan. Motley Fool newsletter services have recommended buying shares of Vodafone, ROIC, Exelon, Brookfield Infrastructure, National Grid, Annaly, and Southern. Motley Fool newsletter services have recommended creating a covered straddle position in Seaspan. Motley Fool newsletter services have recommended creating a write covered straddle position in Exelon. 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 (9) | Recommend This Article (20)

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 July 07, 2012, at 3:40 PM, dbtheonly wrote:

    Okay Dr. Royal,

    I stopped out of both FTR & EXC last year. Cheating?

    I'm in for 90 shares of ROIC Monday morning. I'm in NLY already & T is one of my core holdings, so I'll be along for the ride this year too.

  • Report this Comment On July 07, 2012, at 4:29 PM, gcmagone wrote:

    You will be hard pressed replacing that Frontier yield. However, there is always CYS, PSEC and GGN that can fill the bill.

  • Report this Comment On July 07, 2012, at 5:31 PM, TMFRoyal wrote:

    Hi, dbtheonly,

    Thanks for reading. Make sure you read the link above for a more detailed look at ROIC.

    Jim

  • Report this Comment On July 07, 2012, at 5:34 PM, TMFRoyal wrote:

    Hi, gcmagone,

    Yeah, the lack of Frontier will ultimately bring the overall yield down (about 0.5 percentage points, all else equal), but Frontier's management has blown it, in my book.

    In AT&T, we'll still get a yield well above average and we're augmenting that with a preferred stock as well. Unlike FTR, I don't see AT&T costing us 50% in capital losses.

    Fool on and thanks for reading!

    Jim

  • Report this Comment On July 07, 2012, at 11:46 PM, CDNGuru wrote:

    I said it before, I'll say it again... Add "O". Realty Income Corp. 4.2%. Paid monthly, has never missed a payment. I've had it for years, its very stable, even in the past 4 years.

  • Report this Comment On July 11, 2012, at 2:01 PM, jimmybroderick wrote:

    Hi Jim,

    I am very interested in Dividend plays and loved reading this article. I noticed you began this portfolio last year with $10K. Would you have the same opinions of the portfolio if your entry price was $100K, $1MM, $10MM?

    Also, if someone (me) was to follow this portfolio, would you recommend using every ticker minus Frontier? Or would you also scrap Annaly (NLY) for NLY-PC? Basically, buy both or just the preferred?

    Thanks,

    Jimmy B

  • Report this Comment On July 11, 2012, at 2:16 PM, mikecart1 wrote:

    Ok Jim Where is Altria? Leaving Altria off the World's Best Dividend Portfolio is like leaving Michael Jordan off the Top 5 NBA Players All-time List.

  • Report this Comment On July 16, 2012, at 2:18 PM, TMFRoyal wrote:

    Hi, Jimmy,

    If I had substantially more money in the portfolio, I would be more diversified, perhaps 20-30 stocks. That might cause the yield to suffer some. On the other hand, I might diversify into more dividend-heavy stocks, such as REIT preferreds and MLPs to maintain the yield. Right now this portfolio is about 3 times the yield of the S&P. It's heavily weighted to a high current yield over a growing yield, though there are a few picks that have a strong possibility of high-growth dividends (PM, SSW, ROIC, BIP)

    I think everything here (minus FTR, as you note) is pretty solid for another year, and so that's why I continue to hold it. The mentality of a dividend-focused portfolio has to be different from a typical growth-oriented port. That is, I'm willing to hold a somewhat overvalued stock in a fundamentally strong business in order to realize the dividend over time, since I can't predict price moves.

    As for NLY vs NLY-PC, I suspect NLY is fine for another year, with funding costs remaining low. I do believe that it will continue to experience declining rate spreads, however, which should put pressure on its common stock dividend. The purchase of the preferred was to hedge my bets, while still gaining exposure to the company. It should also have less downside than the common.

    Foolish best,

    Jim

  • Report this Comment On August 30, 2012, at 8:33 PM, NickD wrote:

    WM JNJ CLX PG GIS MCD PEP CL WMT NKE YUM those r my picks for the rest of my life what u all think

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