Author: Bill Deshurko
Covestor model: Dividend and Income Plus
Disclosures: Long VZ, ALSK, WIN, GGN, NLY
2010 was an excellent year for our Dividend and Income Plus Portfolio. Covestor gives our portfolio a “2” risk score on a 1-5 scale with one being the lowest risk. We have also outperformed the S&P 500 since portfolio inception according to Covestor stats (as of December 30, 2010 – http://ibkram.com/401-advisor/dividend-and-income-plus). That is the Holy Grail of investing – low risk with market beating returns. (Of course past performance is not a guarantee of future results.)
As a result of our success in 2010, we will be revamping our holdings as we go into 2011. The strategy remains the same, just a change in holdings. For 2010 the portfolio was powered by strong performance in the telecom sector. As an example, top holding Verizon Communications (VZ) is holding onto an approximate 20% gain this year including reinvested dividends, (as of 12/28/2010 using data from www.bigcharts.com). We think it may be wiser to look for a new sector, with better future opportunities. While we will continue to hold VZ, we are replacing ALSK and WIN in the portfolio. We will also, at least start the year with a more diversified portfolio, holding 10 positions. We will also be nearly fully invested as we start the new year.
We anticipate a weighted yield of about 7.5% based on dividend data at www.finviz.com. This is slightly below our target of 8%, but expect dividend increases to raise that yield as the year develops.
Overall the strategy is to look for dividend payers in the commodity sector. While this will have a negative effect on yield, we have picked back up a little yield by switching from JNK as our high yield bond position to DHY, a closed end fund with a slightly better yield. In the commodity/precious metals/energy sectors we currently like: OKE, TNH, MVO, PWE, SCCO, and GGN. For enhancing our yield: DHY and NLY. And round out the portfolio with holdover VZ and newcomer VLCCF. All holdings are subject to change, and we do follow a trading model for our high yield position in DHY. Lately high yield bonds have been rallying, showing that the bond market has confidence that the economy will continue to grow and support lower credit quality offerings.
The final change will be a change to our portfolio title to more accurately reflect our objective. Our new name (same strategy) will be the Dividend and Income Plus portfolio. “Dividend and Income” reflect our primary focus and “Plus” refers to our strategy that currently provides 2 to 3 times the income as an investment in the S & P 500 and treasury bonds. “Plus” the expectation of capital gains over time, to meet changes in inflation and offset the management fee.