Portfolio Breakdown

The portfolio has gone through a bit of a change lately, in terms of the template that is, and I wanted to take a few minutes to explain exactly what the new look means. This doesn't at all change the way that I invest or the way that I view the market, but more simply spells out how I diversify my portfolio.

If you haven't taken a look at the portfolio I urge you to click here and take a look before you read any further. After doing that come back and let's move on.

As you can see the portfolio has been broken into three categories:

  1. Dividend Growth Stocks
  2. Dividend "Bond" Stocks
  3. High Yield Dividend Stocks

Now you probably can make some assumptions about what all three of the categories entail, but I am going to go ahead and describe them for you.

First most of the stocks that I place in the "Dividend Fund" meet certain criteria that I believe will spell out value. These criterion, in no certain order, are:

  • P/E (or Forward P/E) of under 15
  • Dividend Yield of over 3%
  • Payout Ratio of under 60%

Now before you start picking at a few of my holdings (such as PFE or BP) I want to note that there is sometimes things that outweigh these criteria. In the case of PFE it is the almost 4% dividend yield that allows me to take on a bit of the risk. BP on the otherhand, is in an industry that is hurting and will have a dramatic decrease in those Gulf spill fines soon.

After I take a look at these values I research further (more to come on that soon) and make a pick. While I don't always look at the weight of my fund's "sectors" it does help me make a decision about where to add. 

What does this ideal weight look like?

Well the ideal weight of the portfolio would look something like this:

 

With my age currently sitting just under 30, I have more time to not only fill out my 401k (filled with safety) but also have time to take some risk with higher yielding stocks. Let's get going now on a description of each sector.

Dividend Growth Stocks

This sector is probably the most familiar for those of us that invest for the dividend. Dividend growth stocks do just that, they increase their dividend each year. How many years do I look for of consistent growth? 25. This places them in the league of Dividend Aristocrats. A good list and explanation of their history can be found here. These stocks tend to be slightly better than the indexes while also paying that ever growing dividend. 

Why, if I want 30% weight, is this sector only around 20% of my current holdings? This is purely because of the nature of the market. Most of these stocks are very highly valued, with P/E's at multiples that I am currently regarding as overpriced. Could I be wrong? Absolutely. Am I going to rush and buy Procter & Gamble at their 25.5 P/E (FP/E of 20) just because they have increased dividend for 60 years? The answer is no. I am watching them though because I believe they will dip into my zone.

Dividend "Bond" Stocks

This sector name is pretty much completely made up by myself. Go ahead and search that sector on Google and you won't find anything. That is because it doesn't exist. That being said let me describe to you all this fantasy sector.

This sector is where I place companies that I believe are undervalued because of a couple of factors. The first is that they have a pretty consistent history of paying a dividend. The second is that their current payout is low enough that they could potentially raise it for years to come. The third, and final factor, is that these companies are what I believe to be safe bets to continue their revenue streams for the foreseeable future. 

The main takeaway from these companies is this:
I know that they have the potential for growth but at least will always be paying me a dividend. (This is really where RGR and CHL come into play, companies that pay a certain percentage of their earnings)

High Yield Dividend Stocks

This is where things get tricky and also where I spend the majority of my research. While the first two sectors are relatively boring companies that I don't spend a lot of time watching, the opposite can be said about the third.

All the stocks that are in this sector are high risk/high reward in terms of safety. I really look to lock these positions in at times when I can get at least a 4.5% yield with the goal being over 5%. This allows me to have a sector that hopefully is in the green (as it is now) with a 5% return added to it. This easily can turn sour quickly, as happened with my BGFV purchase, or turn into a portfolio champ, something that Nokia has done. 

Now I know that some of you probably think that 5% yield isn't as high as you thought I was going to say, but before you go any further I want you to remember that although I want the yield to be high, I still look at a lot of other factors. Over a 4% yield the companies get scarce., especially if you want some sort safety.

Example:

Screen Criteria -
Yield >7%, P/E<15, Payout <60%, Current Ratio >2


Results:
Big Five Sporting Goods
Advanced Emissions Solutions, Inc.

That's right. Only two companies. Granted I absolutely set that up to make my point but most of the time the high yield players are that way for a reason. There isn't always safety in these so screens sometimes need to be skewed. 

Wait didn't you just say that they are scarce if you want some sort of safety? Yes I did. That is my point. This sector will always be the one that you are worried about. These are you hitters that will either hit a home-run or ground into a double play (in the short term, that is). If you are not prepared to lose 50% on a holding and still stick with your gut, then I would just go 50/50 on the first two sectors I mentioned. If you want to put in the research time and try to use a little bit of forward thinking then this may be right for you.

Ford for example would not come up in a "safe" screen because of their payout and ratio. That being said I feel fine with allocating a small portion of my portfolio there to lock in a 5% dividend. Also I believe in the company and their plans to push the industry forward.

Conclusion

I hope that this gives everyone a little bit better look at how exactly I allocate my funds. This is by no means the best or only way to diversify, but simply what makes sense to me and I have found works for MYSELF. Everyone's mind is a little different so feel free to leave me your thoughts and feedback below.