Dividend Portfolio Update

Nov 7, 2017 by

stock dividendsI’ve made some changes to our dividend-oriented equity portfolio. Here’s an update.

Why the Focus on Dividends?

I remember clearly my glee and astonishment at about age 7 that the local Savings & Loan would actually pay me money (interest) for doing nothing except letting it hold my cash in its vault. My passbook—literally a small pamphlet where deposits and withdrawals were manually recorded—became a prized possession. But enough ancient history. The point is: I always have, and still do, like passive income.

Moreover, barring an offer one of us can’t refuse, Ms. Money Counselor and I are past our peak earning years. Neither of us is retired fully from earning money—heck, the Money Counselor business alone earned for me about $0.03 per hour in 2016—but speaking for myself: mostly, I goof off, a privilege I treasure and am keen not to jeopardize.

Of course, we still spend money. We both like three squares a day, to run our 17-year old Camry to church on Sundays, and to keep our house temperature above freezing during winter. We’ve found that, almost regardless of the size of one’s nest egg, it’s a bit unsettling to reach a financial point that every dollar spent diminishes the nest egg by a dollar. Such a circumstance launches the contest we all fear. Which will expire first: our money or our heartbeats? None of us finds comfortable being in the position of rooting for the latter if we’re not ready “to go,” but there it is.

Our Dividend Stock Portfolio

Said simply, for me and especially as I get old(er), passive income feels good. Anticipating aging (aren’t I brilliantly prescient?), I’ve gradually been constructing over the past decade+ a portfolio of dividend-paying stocks. This is what it looked like as of October 31:

Money Counselor dividend portfolio

* as reported by Marketwatch.com

If you’re interested to know what changes I’ve made, check out this prior post.

One explanatory comment:

“My Dividend Yield” is based on our original investment in the stock, not the current value of the stock. To my way of thinking, this is what matters. One important factor I consider in choosing stocks for the portfolio is a history of raising dividends. That “my yield” on our BMY investment is 7.5% vs. the current dividend yield of 2.5% reflects 1) steady increases in the company’s dividend payout since 2004, and 2) the stock price is much higher today than when we bought it (a stock price rising at a faster rate than the dividend payment will reduce dividend yield).

The portfolio above comprises roughly 17% of our total financial assets. It will (barring a rash of dividend cuts, which is highly unlikely) generate enough cash over the next year to cover roughly one-third of our living expenses. This is pre-tax, but of course dividends so far retain favorable tax treatment. That cash flow gives me a nice, warm feeling.

Rationale Underlying Our Dividend Portfolio

In choosing stocks for our portfolio, I favor several factors but primarily these (in order of importance to me):

  • Relatively low likelihood of a large and lasting loss of principal (i.e., a sustained crash in the stock’s price). I emphasize “relative” because any stock investment is risky.
  • Long history of uninterrupted and gradually rising dividend payments
  • Magnitude of the dividend yield at the time I invest
  • Diversity: our eggs are in several baskets
  • Mix of dividends paid in Canadian and U.S. dollars (We live in Canada, but have interests in the U.S., and historically the U.S. dollar is worth more than the Canadian dollar. A 5% US$ dividend yield today is equivalent to a 6.25% CDN$ dividend yield.)

Critique of Our Dividend Portfolio Strategy

Let me take a stab at what some of you are thinking.

Criticism: Owning individual stocks is far riskier than owning diversified equity mutual funds.

My reply: I agree, in general. For me, given the totality of our circumstances, life aspirations, and risk tolerance—which will differ from every single reader of this article—I prefer the approach I’ve put in place. That said: If anyone would be good enough to point out to me a stock mutual fund with a dividend yield, risk, and expenses comparable to my mini-portfolio, I’ll sell my portfolio and invest in the fund.

Criticism: Prospective capital gains in my portfolio are too small to keep pace with inflation.

My reply: Inflation has been approximately zero for some time, and no one can reliably predict the inflation rate or anything else for that matter. Further, we maintain a significant investment in Treasury Inflation-Protected Securities (TIPS) as a hedge against inflation.

What’s your criticism?

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