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12May/130

S&P Dividend Aristocrats Portfolio Part Two: Existing Components

In my last article I briefly discussed my strategy of building a dividend portfolio paying a monthly stream of income based on the S&P dividend aristocrats index. I haven't determined how many stocks are going to make up this portfolio, but the idea is to buy stocks on a set schedule that eventually leads to extremely regular dividend payments. I don't have a DRIP in this brokerage account (the tradeoffs are well worth it), so every dividend will just build up my cash balance, and slowly reduce the amount of my earned income I need in order buy more securities.

Further to that point, DRIP plans are great for tax-advantaged accounts, because you don't have to worry about tracking all the tax lots, it's like getting free shares rather than cash. In a taxable account, it's kind of frustrating because you still have to count the dividends as taxable income, but there's no withholding of taxes before the reinvestment occurs. This doesn't really cause that much of a problem if you're just holding the shares and you have a W-2 job basically over-withholding all year for you (i.e. you regularly get a tax refund, so dividend and cap gains taxes have a negligible impact). If you need to turn around and sell some securities then you have to keep track of all the lots...your brokerage will help you with this but it's still a lengthy amount of paperwork if you do it a lot. It's also a form of double-taxation: you paid taxes on the dividends, then you'll pay taxes again on the capital gains, and because you didn't DRIP the after-tax amount it creates an overall loss of value. Perhaps I'll write something in more detail, the point of this article is to show the stocks...sorry I get carried away on tangents.

Here they are, the core components and my first choices in putting this portfolio together:

AT&T (T)
A typical dividend bellwether stock that's been paying dividends since 1881, that's 131 years! While it's under a bit of pressure from its competition in the wireless arena, AT&T will continue to be a cash machine in its other lines of business. They will find a way to remain competitive, and I'm confident in their ability to grow the dividend. However, the payout ratio is quite high, so I'm going to limit my exposure here just in case things don't pan out in a few years. Currently yielding about 4.8%

Altria (MO) - was removed from the index in 2008, but I consider it a major contender with the rest of the index components, so I still want to talk about it. Altria has some of the strongest brands in the US tobacco industry. They also have exposure to the alcoholic beverage and smokeless tobacco space. All around a great dividend paying stock to own. There is some concern over their payout ratio, currently on the high side at 84%, but I still feel that MO will continue churning out cash to shareholders; however, their dividend growth rate will likely start to slow down unless they can significantly increase free cash flow to avoid the payout ratio getting out of hand. Currently yielding about 4.7%

Abbott Laboratories (ABT) - A massive health care stock dealing in mostly pharmaceutical products. They have been paying dividends since 1926 and have 40 years of consecutive dividend increases. With a healthy payout ratio of 35% and a never ending stream of sick Americans to care for, they will be able to continue increasing this payout for many years to come. Currently yielding about 3.6%

AbbVie Inc (ABBV) - the bio-pharmaceutical spin-off of ABT, this isn't really part of the aristocrats index but I felt it was worthy by association. It has the same basic management team and investor relations spirit, so I feel they're worthy to talk about. If you received ABBV as a result of the spin-off then you're in a better position than I am, I just got into both of these stocks so I figure I may as well get into both. I will evaluate my exposure to each as I progress. It has a 1.8% yield that I'm confident will improve over time and I expect them to raise their dividend on the same schedule as ABT, in the December announcement.

Speaking of health care companies, HCP Inc (HCP) invests in health care properties acrss the country. I think this stock will do well due to the aging baby boomer generation and increasing rates of diet and lifestyle related illness. I invest in things that make you sick (MO) and the hospitals that make gobs of money treating these illnesses. It sounds depraved, and truly it is, but it's a legitimate investment nonetheless. Currently yielding 3.9%.

Consolidated Edison (ED) for exposure to the stable and boring utility sector. ED supplies power to residents in the New York and tri-state area. The sheer number of residents and growth rates of that part of America pretty much guarantees a steady stream of income for any established utility. It's not going to be a rally story, but it can provide income that allows me to pursue sexier endeavors. Currently yielding 3.9%

Sysco Corp (SYY) is a major food industry supplier with a deep reach into many markets. It's paying approximately 3.2% yield right now and poised to grow. Yielding 3.2%

McCormick & Co (MKC) is another food service company but more direct to consumer. Check the spice packs in your pantry right now you'll probably find at least one of their products. Yielding 1.8%, on the low side, but hoping for growth over time and better yield-on-cost.

Wal-Mart (WMT) - who doesn't know this company! Arguably the biggest retailer in the world, expanding internationally at a break-neck pace. Great yield, and great recent price appreciation! This was one of my first choices when developing this portfolio, and I was lucky enough to buy it before the March/April bull run and secure two dividend payments in the process. I'm very pleased with this. Yielding 2.2%, again sort of low but I think the stock is a bit overvalued right now anyways. My YOC is 2.6%.

Automatic Data Processing (ADP) - the company that probably does your companies payroll, maybe. Seems to do well in boom or bust situation while paying out a steady dividend, I look forward to increasing my exposure to this security. Yielding 2.4%.

V.F. Corp (VFC) - many have never heard of this company, but they probably wear their clothing brands. VFC owns The North Face, Timberland and Vans to name a few. They engage in apparel and footwear in the US and Europe. This can be kind of a tough industry if you really feel that consumer spending is going to scale back, but VFC has a pretty wide reach to a lot of brand ranges. They do high end and low end, and everything in between. There's a lot of diversification here. The yield is 1.7%, mainly due to the massive $183 stock price, luckily my YOC is a bit better at 2.16%

There you have it, a short list of stocks all generating very good yields. My average YOC across this particular brokerage account is 2.84%, much better than the 0.75% I'm yielding in my savings account. That percentage is taken across the entire portfolio, which includes some non-dividend paying speculative growth stocks, so the yield across the dividend stocks are much better on average.

That's all for now, I intend to do some quick updates as I add positions, or at least weekly updates on my performance. I meant to post this immediately after the introduction post but other parts of my life get in the way I suppose. I'm making a resolution to sit down and write more in the coming weeks.

Also on the radar: a quick and dirty data tool that automatically creates daily updates! I've got the framework in my head and I can definitely program it, but it's not really the most important thing for me to be doing at the moment. Check back later for more updates.

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