We have all heard it... Stodgy, for old people, yawn, boring! These have all been used to describe investing in dividend growth stocks. Nevertheless, I am a firm believer in dividend growth stocks for building a bullet-proof retirement portfolio. Study after study has shown that most of the historical stock market returns have come from reinvested dividends.
My core portfolio contains traditional dividend growth stocks that are found in virtually every dividend growth portfolio. Why? Because not only do they provide a growing income but their total return over time usually beats the market. Consider these:
ConocoPhillips Co. (NYSE:COP)
Current Yield: 3.4% | Yield On Cost: 5.1%
First Purchased: 3/2011 | Average Annual Return: 21.0%
Genuine Parts Co. (NYSE:GPC)
Current Yield: 2.7% | Yield On Cost: 4.6%
First Purchased: 5/2009 | Average Annual Return: 22.5%
Illinois Tool Works Inc. (NYSE:ITW)
Current Yield: 1.9% | Yield On Cost: 4.0%
First Purchased: 10/2008 | Average Annual Return: 25.0%
Johnson & Johnson (NYSE:JNJ)
Current Yield: 2.8% | Yield On Cost: 4.2%
First Purchased: 2/2008 | Average Annual Return: 16.1%
The Coca-Cola Company (NYSE:KO)
Current Yield: 3.0% | Yield On Cost: 3.9%
First Purchased: 7/2007 | Average Annual Return: 15.4%
I could go on, but you get the idea. This works incredibly well if you have some time to wait, but what can investors do if they need a higher income today?
Over the years I've toyed with adding income focused CEFs/ETFs. For the most part this failed miserably (you can read about it here). However, the last several years I have enjoyed some success with high-yield income funds. I attribute much of this to the low interest rate environment we are in. These funds were originally purchased to pump up the yield of my overall portfolio, while I waited for income from traditional dividend stocks to grow over time.
Let's look at a few of the successful funds:
Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO)
The fund seeks high total return through investment in global common and preferred securities. I originally purchased this fund in July 2008. It cut its distribution in January 2009, then raised it in August 2013. In spite of the distribution cut, I continued to hold the ETF because of the attractive yield. I also own ETO's cousin ETG, which has produced slightly better results over a shorter holding period.
Distribution Yield: 7.2% | Yield On Cost: 9.1%
Current Discount: 5.6% | Total Return: 14.2%
ALPS Alerian MLP ETF (AMLP)
The investment seeks to replicate, before fees and expenses, the Alerian MLP Infrastructure Index which provides exposure to the infrastructure component of the Master Limited Partnership asset class. I originally purchased AMLP in July 2012. AMLP is a corporation, not a fund. As such, it is liable for taxes at the corporate level, which has caused AMLP to lag its underlying index. Unlike ETO above, MLPI has increased its distribution each year that I've held it.
Distribution Yield: 6.0% | Yield On Cost: 6.9%
Current Premium: 0.04% | Total Return: 14.5%
Clough Global Equity Common (GLQ)
The fund seeks a high total return through investment in equity, corporate and sovereign global investment grade securities and through utilizing an options strategy. The Fund has applied to the Securities and Exchange Commission for an exemption from Section 19(bb) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make periodic distributions of long-term capital gains. I originally purchased GLQ in June 2012.
Distribution Yield: 8.5% | Yield On Cost: 9.6%
Current Discount: 11.65% | Total Return: 19.8%
My portfolio philosophy is that the core portfolio should follow a time-tested path that will provide the best opportunity for a successful retirement. For me, this is a conservative dividend growth stocks approach. However, I am always looking to improve my situation. For this reason I have allocated a small portion of my portfolio to experiment with. Understanding that a significant number of experiments will fail this portion of my portfolio is limited to a defined percentage, and I don't increase it no matter how well the investments perform.
Full Disclosure: Long COP, GPC, ITW, JNJ, KO, ETO, AMLP in my Dividend Growth Portfolio and long GLQ in my High-Yield Portfolio. See a list of all my dividend growth holdings here.
- 8 Dividend Stocks With A 15% Yield In 15 Years
- First Quarter 2014: Top And Bottom Performing Dividend Stocks
- Don't Touch These 5 Dividend Stocks!
- 7 Dividend Stocks Headed In The Right Direction
- Who Owns The Top Dividend Stocks?
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros
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