Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (25) | Ignore Thread Prev | Next
Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214551  
Subject: OT: So you want a dividend, V2 Date: 7/8/2009 7:12 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 74
In this post...
http://boards.fool.com/Message.asp?mid=27763831
...I did a quick-and-dirty portfolio taken from Berkshire's list of
holdings to come up with a dividend-paying alternative for those who liek
Berkshire's thinking but for whatever reason really do want a dividend.
It's not designed to be the best portfolio in the world, but a demonstration
of the idea that *if* you want dividend income, a list stolen from somebody
good is probably better than a random selection.

However, I decided to put a little more thought into it, based more
on the stocks that I really liked at today's prices, and I added a
few of my own picks notably for international diversification.

So, here it is. Taken from a free newsletter I write from time to time.

======================================================
The Informed Hunch, your free investment rag
"Getting stuff for free is good, but an income is even better"

Let's say for the sake of argument that you don't really think the stock
market prices are going to go up a whole lot in the next decade.
That's what I think. Up and down a lot, sure, but not up and up. I don't
think prices are likely to be a whole lot higher in 5 or 10 years than they are now.

So, if stock prices are going net nowhere, a nice steady income gives
you something to pass the time. Good old dividends. No, they're not as
exciting as a stock that doubles in a month, but they do add up over time.

So, herewith, Uncle Jim's Dividend Portfolio.

Note, I expect that the world economy is going to stay pretty sick for a
large number of years. I expect a lot more cuts in dividends, and I
expect the dividends of the broad US market to be lower than their peak
for a long time, maybe 6-8 years at a guess.

So this set of stocks, like any other, is pretty likely to experience
some dividend cuts. However, it will probably have some increases too,
and I think the stocks in the list are much better than average quality,
so that should help a little too.

How are they picked? Well, I cheated. One of the better ways to get
above-average stocks is to steal the list from somebody smarter than you
are, so that's what I've done. The bulk of this list is made up of
those stocks held by Berkshire Hathaway which also pay reasonable
dividends. So sue me! From that list I picked my favourites for being
both safe long run investments and very undervalued right now.

The stocks are not equally weighted in this portfolio---I have suggested
buying more of those stocks with higher dividends, and there are also
bonus weightings on stocks which are expected by some analysts to have
above-average returns in the next several years. Then I added a few
fudge factors of my own to boost a couple of favourites.

Well, here's the list.
The suggested share counts add up to a portfolio of $200,000. But of
course you can increase or decrease the number of shares proportionally.

Ticker         Company              Industry       Country      FX    Price   Shares  Dollars  Fraction of Portfolio  Dividend Yield
GE General Electric Big machines USA 1 10.71 1290 13816 6.94% 3.73%
STD Santander Spanish/LatAm bank Spain 1 11.34 1140 12928 6.50% 7.86%
WFC Wells Fargo Bank USA 1 22.91 560 12830 6.45% 0.87%
COP Conoco Philips Integrated oil USA 1 39.44 290 11438 5.75% 4.77%
SNY Sanofi-Aventis Europe drugs USA 1 29.44 380 11187 5.62% 4.89%
KFT Kraft Foods Branded food USA 1 25.70 370 9509 4.78% 4.51%
GSK GlaxoSmithKline UK drugs USA 1 34.85 270 9410 4.73% 4.70%
4502:JP Takeda Japan drugs Japan 92.810 3740.00 230 9268 4.66% 4.81%
ETN Eaton Elec & hydraulics USA 1 40.98 220 9016 4.53% 4.88%
IR Ingersoll Rand Industrial machines USA 1 19.85 450 8933 4.49% 3.63%
NSC Norfolk Southern Railway USA 1 36.10 240 8664 4.35% 3.77%
JNJ Johnson & Johnson Health products USA 1 57.08 140 7991 4.02% 3.43%
AXP American Express Charge cards USA 1 22.72 350 7952 4.00% 3.17%
PG Procter & Gamble Household products USA 1 52.64 150 7896 3.97% 3.34%
RY.TO Royal Bank Canada Canadian bank Canada 1.1668 44.99 200 7712 3.88% 4.45%
KO Coca Cola Soft drinks USA 1 48.51 155 7519 3.78% 3.38%
NESN.VX Nestle Candy and foods Swiss 1.0898 41.14 180 6795 3.41% 3.40%
TSCO.L Tesco UK supermarket UK 62.2278 349.20 1210 6790 3.41% 3.23%
CL Colgate Palmolive Toothpaste etc USA 1 73.34 90 6601 3.32% 2.40%
PKX Posco Korean steel USA 1 80.73 80 6458 3.25% 3.12%
DEO Diageo Liquor and beer USA 1 56.56 110 6222 3.13% 2.79%
BNI Burlington Northern Railway USA 1 68.09 80 5447 2.74% 2.35%
TI Toyota Industries Machines & parts Japan 92.810 2260.00 190 4627 2.32% 0.88%

Now, this portfolio as suggested has a current dividend yield of 4.00%.
However, in these trying times, various firms have been cutting their
dividends, and some might be expected to restore them again at
some point, so there are changes which should be noted.

The notable ones are:
Wells Fargo cut their dividend a lot. I expect them to restore
it entirely within a couple of years. If they do so, so the dividend
yield will be 5.94% of today's price, not the 0.87% shown in the table.

General Electric has a small chance of blowing up because of stuff in
their financing arm that perhaps nobody understands. But if they don't,
their earnings will carry them away from their troubles, and the
dividend will be restored at some point. If it goes back to where it
is, the yield would be 11.58% rather than the 3.73% shown. If it's
half-restored, that would be 7.66%, a more reasonable medium term goal.

Toyota Industries is shown with a yield of 0.88%. This assumes that
their most recent reduced semiannual dividend becomes the new norm. If
it goes back where it was, this will rise to 2.65%.

If all three of those things happen (we'll assume GE is half-restored),
then the overall yield of the portfolio will be 4.53% rather than 4%.

However, there will probably also be some unforeseen bad news. I'm expecting
the average US company to cut its dividend about 30% in the next couple
of years, so the dividend yield on this portfolio might drop as low as
3% for a while. However, I have done whatever I can to pick extremely
good companies, so I think this set should have cuts which are smaller than typical.

A couple of notes on this portfolio:
Toyota Industries is NOT the well known car maker Toyota Motors. Toyota
Industries is a smaller, older, and more diversified parent company
which just happens to own a huge number of shares of Toyota Motors.
So, for every $100 worth of Toyota Industries shares you buy today, you
are getting $98.65 worth of Toyota Motors shares at today's market
value, but you also get a portion of Toyota Industries' own business
which is only costing you $1.35. Just that portion of the business
costing you only $1.35 earned $11.43 in 2008, made up of $3.98 worth of
dividends from Toyota Motors, and $7.45 in profits from Toyota Industries'
own operations. (they make a lot of weaving looms, car air conditioners,
and car parts). This "leftover" bit of their own business in the parent
company that the market is giving no value to had revenues of $16.5
billion last year, but a market capitalization of $99 million.
So even if they're having a bad year it's a great deal. In short, it's a
"buy one get one free". Plus, in case it's not obvious to everybody,
Toyota Motors is the best-run car company in the world. About the only
disadvantage is that Toyota Industries generally has to be bought on
the Tokyo stock exchange. It's not listed in the US, and the "pink
sheet" for it is almost impossible to trade.

You've probably never heard of Takeda. But it's the largest drug
company in Japan, which is the second largest drug market in the world.

Santanter is the most solid bank in Europe. It's true that they are
likely to have some tense moments because the Spanish economy is in free
fall, but they are actually pretty diversified geographically in Latin
America and have a very strong balance sheet (at least for a European bank!).
I think they will prosper. They will be the last ones standing, at least.

The Royal Bank of Canada might be the most solid bank in the world,
though it's hard to make a single pick. They are the very essence of
"boring". Who wants to be an excited bank shareholder? A big bonus is
that most of their revenue is in Canadian dollars, which will probably
do well in the years to come compared to the US dollar.

Sanofi-Aventis is the largest vaccine maker, the 6th largest over-the-counter
drug maker, a very large prescription drug company, and #1 or #2 in
quite a large number of developing countries. It's very cheap right
now, and they have a fortress of a balance sheet.

What do I recommend doing with these stocks? If you want dividends, I
think you could buy this slate and pretty much forget about them for a
decade. I would not rebalance the portfolio at all---some of these
firms will grow a lot more than others, so you might as well let those
winners grow to a larger fraction of the portfolio over time. Sure,
they will go though periods that they are overvalued or undervalued in
the short term, but it's best and easiest simply to ignore that.

Lastly, the hidden gem of good news: I would speculate that this slate
of stocks will increase in value and price a lot too. I am (foolishly)
forecasting an annual compound return including dividends of over
10%/year for this portfolio in the next decade or so. (in round
numbers, 3-4% dividends and at least 6-7%/year average price growth
rate). The dividends will be a lot steadier than the share prices,
which can be totally ignored. 10% a year might not sound like so much,
but let's look at the S&P index in ten years and see how high a hurdle it was!

As always, I might be wrong. There are sure to be a few duds in this
list, and maybe a couple of explosions. But, I have high hopes.

Happy investing!
Jim
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (25) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Macro Economics

Russia Collapsing Again?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement