Why diversify your portfolio? Why diversify into companies that show us the money by consistently increasing their dividends? Why reinvestment these ever growing dividends into the very same companies we’ve already diversified into?
All of these questions can be answered with another question: would you like to retire with a growing stream of income that will protect your purchasing power throughout your retirement years?
If you answered “yes” to the last question, I invite you to read on. In a previous article I touched upon the concept of monetizing your portfolio for monthly income. Here, I’ll delve further and illustrate how to answer the above questions.
Diversification
Diversification is a basic tenet of investing. In order to reduce risk to the overall portfolio, it is advisable to diversify holdings into many sectors of the market. My personal portfolio holds over 40 names in many different sectors. To illustrate today, I’ll propose 5 core holdings.
AT&T Inc. (NYSE:T) is the largest telecommunication holding company in America. AT&T and Verizon control 64% of the U.S. cellular market.
AT&T Inc. (NYSE:T)’s earnings growth rate over the next 5 years is projected to be 5.85%
| Dividend Growth Rate Calculator | |
|---|---|
| Stock | T |
| Number dividends | 113 |
| Current dividend date | 2013-01-08 |
| Current dividend amount | $0.4500 |
| First dividend date | 1984-09-24 |
| First dividend amount | $0.11667 |
| Growth rate – | 4.88% |
| Growth rate – total | 285.70% |
AT&T Inc. (NYSE:T) is a dividend aristocrat, meaning it has increased its annual dividends for 25 or more consecutive years. It sports a dividend growth rate of 4.88% and has a current yield of 4.9%. This company can be depended on to continue ringing up earnings and paying out a quarterly dividend check to you, regardless of the economic cycle. People will need and pay for their phone services no matter the economic climate.
Consolidated Edison, Inc. (NYSE:ED) is an electric utility company. Through its subsidiaries, it provides energy services to residential, commercial, industrial, and government customers in the United States. It too is a dividend aristocrat, paying out dividend checks, year in and year out, and is currently yielding 4.3%.
| Dividend Growth Rate Calculator | |
|---|---|
| Stock | ed |
| Number dividends | 171 |
| Current dividend date | 2013-02-11 |
| Current dividend amount | $0.6150 |
| First dividend date | 1970-02-02 |
| First dividend amount | $0.11300 |
| Growth rate – | 4.01% |
| Growth rate – total | 444.25% |
Its dividend has been growing at a rate of 4.01%, and will continue to keep investors well ahead of inflation.
In the services sector, kingpin McDonald’s is another dividend aristocrat that keeps us fed, paying out ever-rising dividends for over 25 years. It currently is yielding 3.2%, and its dividend growth rate is 21.34%. This outstanding growth rate will keep you satiated for years to come.
| Dividend Growth Rate Calculator | |
|---|---|
| Stock | MCD |
| Number dividends | 124 |
| Current dividend date | 2013-02-27 |
| Current dividend amount | $0.7700 |
| First dividend date | 1976-05-10 |
| First dividend amount | $0.00062 |
| Growth rate – | 21.34% |
| Growth rate – total | 124,093.55% |
Kinder Morgan Energy Partners LP (NYSE:KMP) operates as a pipeline transportation and energy storage company in North America. Its Products Pipelines segment delivers gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets through approximately 8,600 miles of refined petroleum products pipelines.
It has a current dividend yield of 6% and has been growing its dividend at a rate of 14.46% annualized.
| Dividend Growth Rate Calculator | |
|---|---|
| Stock | kmp |
| Number dividends | 82 |
| Current dividend date | 2013-01-29 |
| Current dividend amount | $1.2900 |
| First dividend date | 1992-10-27 |
| First dividend amount | $0.08350 |
| Growth rate – | 14.46% |
| Growth rate – total | 1,444.91% |
The next time you go to your gas station for a fill-up, if you own KMP, you won’t have to wince at the increased price of gas at the pump. You’ll be an owner in the transportation of this liquid gold. KMP is considered a toll road, charging for the transportation of these commodities through its pipes. It must pay out a minimum of 90% of its income to its unit holders as a distribution. As long as the world needs oil and its byproducts, KMP will be there with the transportation system, paying out a hefty flow of distributions in quarterly checks.
Apollo Investment Corp. (NASDAQ:AINV) is a business development company that operates as a closed-end management investment company. The company invests in middle market companies. Its current dividend yield is 9.2%, and its dividend growth rate is 19.86%.
| Dividend Growth Rate Calculator | |
|---|---|
| Stock | ainv |
| Number dividends | 34 |
| Current dividend date | 2012-12-14 |
| Current dividend amount | $0.2000 |
| First dividend date | 2004-09-21 |
| First dividend amount | $0.04500 |
| Growth rate – | 19.86% |
| Growth rate – total | 344.44% |
With the economy gaining momentum, revenues and earnings should continue to build and develop from here and result in higher dividends going forward.
Assumption: $20,000 invested in each of the 5 companies
| Name | Amount Invested | Dividend Yield | Annual Dividends |
|---|---|---|---|
| AT&T Inc. (NYSE:T) | $20,000.00 | 4.90% | $980.00 |
| Consolidated Edison, Inc. (NYSE:ED) | $20,000.00 | 4.30% | $860.00 |
| McDonald’s Corp (NYSE:MCD). | $20,000.00 | 3.20% | $640.00 |
| Kinder Morgan Energy | $20,000.00 | 6.00% | $1,200.00 |
| Apollo Investment Corp. | $20,000.00 | 9.20% | $1,840.00 |
| Totals | $100,000.00 | 5.52% | $5,520.00 |
Growing Income Stream
The conservative investor, approaching or in retirement, can become an owner in these mainstays of the domestic market and sleep peacefully at night, comfortable in the knowledge that her companies have been around the block, have all grown their revenues and earnings in a predictable, stable fashion, and have shared those growing earnings in steadily increased dividends for stockholders, most of them for over 25 years. The protection against inflation is priceless and allows an investor to deal effectively with the question that faces the baby boomer generation: “will I have enough money to retire, and last me through retirement.”
Dividend Reinvestment
Investors further away from retiring would best be served by reinvesting these regular dividends and distributions back into the names in the portfolio in an opportunistic fashion. When there is a sell-off of several percent in a particular holding, if the investor is confident it is only temporary and feels the original reason for buying is still intact, he or she should buy in.
This method allows the investor to always buy low, accumulating a greater number of shares at lower prices, and benefit from the higher yield attained. Consequently, it increases the income stream. That’s called killing two birds with one stone, as you fulfill two goals simultaneously.
Risks
Of course, there is always the risk that one or more of your portfolio names decides not to increase the dividend at some time, or even to reduce it due to company-specific or macro factors. The proper way to hedge this risk is to buy 30-40 different names, diversified into at least 7 to 8 different sectors, and diversified as to large-cap, mid-cap and small-cap.
Conclusion
This portfolio is only a sample, illustrating investments in 5 different sectors, including telecommunications, utilities, services, energy and business development. It is shared as a guide to developing and building a strong foundation for recurring, monthly retirement income.
With CD rates and bond rates at historic lows, it is essential to build such a portfolio to protect against the ever-present threat of inflation and the devastation it visits upon the buying power of fixed assets.
In an upcoming article, I will set up a sample portfolio that smoothes the monthly dividend payouts.
The article Retirement Mantra: Diversify with Dividend Growth and Reinvestment originally appeared on Fool.com and is written by George Schneider.
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