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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
13 Dividend Stocks and 3 ETFs To Balance Your Asset Allocation
Posted by: Dividends4Life (IP Logged)
Date: February 26, 2014 04:30PM
If you want to lower the risk of your income portfolio and position yourself to increase returns, you can not ignore asset allocation. Many dividend investors loaded up on banks and other high-yield financials, only to see their portfolios collapse along with the financial markets in 2008 and 2009. So what can you do to protect your portfolio from stock and sector-specific declines? Here are some of the steps I take to help protect my portfolio.
The Allocation Dilemma
If your entire portfolio consists of income-based dividend stocks it would be very easy to end up over allocated in certain sectors. Of the 230 companies that I track, 22% of them are in the Consumer Goods sector. Furthermore, some of most well-known and very best dividend growth stocks are in this sector, including: Colgate-Palmolive (CL), Coca-Cola Company (KO), Pepsico Inc. (PEP), Procter & Gamble (PG) and Kimberly-Clark Co. (KMB).
Judge Allocation Based on Your Total Portfolio
Instead of trying to preserve my allocation at the individual portfolio level (Income, 401(k), IRA, Dividend Growth Stocks, etc.), I measuring asset allocation across my entire portfolio. You can't truly determine your overall risk, unless you consider your entire portfolio. The first time I calculated my allocation across all my holdings, I was surprised at the outcome. Some of the areas I thought would be over-allocated were not, while other areas came up short.
Set Limits On Individual Holdings
In addition to my overall asset allocation, I have set limits on individual stocks, Exchange-Traded Funds (ETFs) and Closed-End Funds (CEFs). In setting these limits, you have to ask yourself, "What is the most I would be willing to lose, if a company went belly-up over night?" For me and my risk tolerance, 5% was the amount I was comfortable with. I doubled the amount to 10% for funds (ETFs and CEFs) since they are invested in many different stocks. I did limit exchange traded notes (ETNs) to 5%, since your risk is effectively in the company issuing the security.
As a result of being over-allocated in some sectors and close on others, I began to investigate how I could target specific sectors where I was significantly under-allocated. I looked at two fund companies that offered sector-based ETFs, iShares and Vanguard. Their offerings were similar, and included: Consumer, Energy, Financial, Healthcare, Industrials, Materials, Real Estate, Technology, Telecomm and Utilities. In many instances the funds tracked the same indexes. As you might suspect, the Vanguard fund expenses are less than the iShares funds. Most of the Vanguard sector ETFs charge less than 0.25% for the management fee.
Vanguard Utilities ETF (VPU) | Expenses: 0.14% | Yield: 3.66% : The fund employs a passive management investment approach designed to track the performance of the MSCI U.S. Investable Market Utilities 25/50 index. This index consists of all capitalization companies within the utilities sector. The sector includes electric, gas, and water utility companies, as well as companies that operate as independent producers and/or distributors of power. The sector includes both nuclear and nonnuclear facilities.
In the past I owned VNQ and VPU in my income portfolio. After a period of time, I determined their erratic dividends were not appropriate for my income portfolio. After a quick look at VOX, I found that their dividends were not consistent and thus also not appropriate for my income portfolio. However, I will continue to give consideration to holding these ETFs outside my income portfolio — not as income investments but for allocation purposes.
Full Disclosure: Long KO, PEP, PG, KMB, CINF, ABBV, JNJ in my Dividend Growth Portfolio, long MCY in my High-Yield portfolio. See a list of all my dividend growth holdings here.
Stocks Discussed: CL, KO, PEP, PG, KMB, ERIE, CINF, MCY, ABT, ABBV, CAH, JNJ, MD,