A Buy & Hold Forever Dividend Stock Portfolio

by: Devin Hobbes November 03, 2008 | about stocks: AFL / AHBIF.PK / AXP / BA / BNI / CHD / CPB / CVX / DD / DEO / DOW / DUK / ED / ENB / FRO / GE / INTC / JNJ / KFT / KO / LFC / MCD / MMM / MO / MSFT / OKS / OSG / PEP / PFE / PG / PM / SI / SNY / T / TGT / UNP / USB / UTX / VNQ / VZ / WFC / WMT / XOM / YUM    

Devin Hobbes

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This year's market turbulence has many investors calling the buy and hold strategy dead. Let's prove them wrong. My musings (here and here) on holding dividend paying stocks forever have inspired me to make a new, all dividend paying stock model portfolio.

It's composed of 43 stocks and one ETF, and is based on minimal research (more research is always better, but the goal here is to show how it doesn't take an investing maven to succeed with a relatively diversified dividend stock portfolio). Almost all the stocks were selected because they're household names that pay dividends.

The other criterion was to take a couple of companies from every industry that came to mind, so that they wouldn't be clustered in one area, as most dividend ETFs are. As far as energy pipeline companies go, I took the two that I've been hearing the most about. As REITs are not really household names, the portfolio will have a REIT ETF instead of separate stocks.

Here's a list of companies by type (note that some companies may be classified in a number of ways that aren't shown here, and I might be leaving out a few--they're all in the spreadsheet though):

Aerospace/Defense

Boeing (BA)
United Technologies (UTX)

Alcohol

Anheuser Busch (BUD)
Diageo (DEO)

Banks/Credit Cards
American Express (AXP)
General Electric (GE)
US Bancorp (USB)
Wells Fargo (WFC)

Beverage/Snacks
Coca Cola (KO)
Pepsi (PEP)

Chemicals
Du Pont (DD)
Dow Chemical (DOW)

Communications
AT&T (T)
Verizon (VZ)

Diversified
3M (MMM)
General Electric (GE)
Siemens (SI)

Food
Campbell Soup (CPB)
Kraft (KFT)
McDonald's (MCD)
Yum! Brands (YUM)

Healthcare
Johnson & Johnson (JNJ)
Pfizer (PFE)
Sanofi-Aventis (SNY)

Household Goods
Church & Dwight (CHD)
Johnson & Johnson (JNJ)
Procter & Gamble (PG)

Insurance
AFLAC (AFL)
China Life Insurance (LFC)

Oil
Chevron (CVX)
Exxon Mobile (XOM)

Pipelines/Energy Transport
Enbridge (ENB)
Frontline (FRO)
Oneok Partners (OKS)
Overseas Shipholding (OSG)

Railroads
Burlington Northern (BNI)
Union Pacific (UNP)

Real Estate
Vanguard REIT Index (VNQ)

Retail/Consumer
3M (MMM)
Target (TGT)
Walmart (WMT)

Technology
Intel (INTC)
Microsoft (MSFT)

Tobacco
Altria (MO)
Philip Morris International (PM)

Utility
Con Ed (ED)
Duke Energy (DUK)

The portfolio will work as follows. Three hundred fifty dollars worth of each stock was purchased at the close on Friday 10/31/08. Fractional shares were purchased, as can be done with discount brokers like SogoTrade (for $3.00 a trade), with the commission of $3.50 a trade. So, this portfolio starts out with around $15,400 worth of stock, and a loss of $154 for the 44 trades.

As this is a buy and hold forever portfolio, no position will be sold, even if it stops paying dividends. If there is a spinoff (e.g., Target spins off a REIT or Procter & Gamble gives some shares of Smuckers as a dividend) any new stock will be added to the portfolio's holdings and the cost basis of the original stock will be reduced by the amount of the dividend (for example, when Altria spun off Philip Morris International, the spin off was worth $51.06 a share. Had this portfolio existed then, Philip Morris International would be added, and the cost basis of Altria would be reduced by $51.06 a share).

If one of the stocks is bought out for cash (e.g., BUD), that cash will count as a dividend (even though it's a capital gain). That's the only way a stock can be sold in this portfolio. If a company in the portfolio is bought with stock, or if there is a merger, the new entity will replace the old in the portfolio. The idea is, buy the stocks and leave them alone. Just get the dividend checks.

Although I think all the stocks in the portfolio are good for the long haul (or else I wouldn't pick them), no doubt some of them (hopefully only a few) will go out of business, decrease, or suspend their dividends in the next few decades (a decrease at GE and probably PFE will come soon, but I think both companies will do well over the long term). Others, I'm sure, will do very well.

Although I believe that reinvesting dividends regularly boosts returns (e.g., just have your broker buy you more shares for free when the dividend comes in), for sake of ease dividends here will be reinvested once a year--or when the portfolio accumulates $353.50, whichever is later. Dividends will be reinvested in the companies either with the lowest payout ratios or the lowest yields (depending on how lazy I am).

Since I'm taking the minimal research approach, such a simple rule would work better than trying to decide which stock to reinvest in by doing research. Lowest payout ratio seems to be the better approach, but it involves more mouse clicks. Lower yields are easier to find out, but reinvesting in these stocks might make me buy them when they're too expensive. Higher dividend yields mean lower investor confidence, so it's best (not necessarily for capital gains purposes) to add new money to the stocks that are in the best shape.

(This approach is the opposite of one I'd take with a diversified portfolio of index funds. It makes sense to add new money to the fund performing the worst, as this enables you to buy more shares when they're cheap and avoid buying shares of the funds that are doing better while they may be too expensive. As index funds are baskets of stocks and their composition changes over time, unless the financial system collapses these funds will not go to zero. Underperforming individual stocks can go to zero, however, so I'd like to avoid throwing new money at them.) Dividend reinvestment will not alter the cost basis.

Total return (capital gains + dividends) is always important. But because nothing will be sold in this portfolio, what I'm calling "Dividend Return" (dividends received divided by total invested and expressed as a percentage) will be the better measure. The portfolio will start out with a negative 1% return (that's the $154 spent on commissions).

The portfolio will be tracked in the spreadsheet here). The dividends received will be updated at the end of every month (probably over the weekend) here. For sake of ease, the ex-dividend dates will be used rather than the dates dividends are paid. Should a dividend not be paid after an ex-date, it will be subtracted from the portfolio.

Since all things are relative, the portfolio will be measured for total and dividend returns against the S&P 500, represented by the ETF SPY. Since buying SPY involves only $3.50 in commissions, it starts out with only a negative 0.02% return. Its dividends will be reinvested annually. When I get around to it, I might add the total bond ETF BND as a measure. Note that if the portfolio or SPY do reasonably well (at least 8% annualized total return) compared to CD rates, buy and hold is not dead. If the portfolio and SPY grow less than rates offered on CDs, (the highest 5 year CD rate I could find is 5.25%--I'll track these as time goes by), then I'll concede that buy and hold is dead.

Of course, this will take a few years.

Disclaimer: The above is for educational and entertainment purposes only. Do your homework before investing.

Disclosure: At the time of writing, I owned JNJ, PG, and PM. Some may ask, if all the above stocks are so great and you believe in buy and hold, why don't you own all of them? The bulk of my investments are in a target allocation mutual fund to which I contribute regularly without looking at the statement (that's so I don't stop contributing). Individual stocks are for play.

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This article has 39 comments:

  •  
    Nov 03 08:24 AM
    any back testing?
    Reply | Link to Comment
  •  
    Nov 03 08:34 AM
    Makes perfect sense to me. Let's see where you are a couple years from now.
    Reply | Link to Comment
  •  
    Nov 03 08:40 AM
    Why not buy a few of the dividend ETFs instead - there is no evidence that your ability to pick dividend payers is any better than the approach used by SDY and DVY
    Reply | Link to Comment
  •  
    Nov 03 11:12 AM
    You have an interesting portfolio. Here's another take on a set it and forget it dividend portfolio.

    www.dividendgrowthinve...
    Reply | Link to Comment
  •  
    Nov 03 06:30 PM
    Why not just reinvest in the stock with the lowest market value?

    D4L
    Reply | Link to Comment
  •  
    Nov 03 09:02 PM
    The only other stock I would suggest looking at (for Utilities) would be EXC. But a good diversified portfolio of high quality stocks otherwise!
    Reply | Link to Comment
  •  
    Nov 04 06:11 AM
    Took advice years ago and bought GM. Look what happened, worth less & less each day. Big industries nowadays are all facing union problems and one by one slowly moving overseas. There will be Strikes again at Boeing a few years from now. They seem to love that. GM's future is uncertain, and almost nothing is certain. Even what the new President is going to do is uncertain, whoever he is !!
    Reply | Link to Comment
  •  
    Nov 04 08:17 AM
    A buy and hold for DRIPs can be done cheaply thru their transfer agents. After initially established, some have no fees at all.
    Reply | Link to Comment
  •  
    Nov 04 08:31 AM
    " many investors calling the buy and hold strategy dead. Let's prove them wrong. "
    You won't prove them wrong. Buy and hold is deader than a door nail. Screen for stocks with a set criteria, buy at the proper entry point and monitor the portfolio regularly and SELL if it turns against you. That is the future for stocks.
    Reply | Link to Comment
  •  
    Nov 04 09:11 AM
    Interesting article and I like and own some of your picks but there is no such thing as a buy and hold portfolio and open those mutual fund statements that was my mistake in the tech bust. Knowledge is power.
    Reply | Link to Comment
  •  
    Nov 04 09:16 AM
    makes a lot of sense to me.I own both ,stocks to buy and hold for the long term ( dividends higher than the average) and trading stocks to take advantage of the highs and the lows offered to us occasionally. Nothing wrong with those 2 styles of investing. To avoid the stories like GM why don t you use stop losses on all your buy and hold stocks? Also always keep in touch with the performance and news of your buy and hold. Buy and hold doesn t mean to ignore it completely forever, stay alert and be ready to make some changes if necessary.
    Reply | Link to Comment
  •  
    Nov 04 09:23 AM
    It's better to buy the QQQQ's and DIA and S&P's. That way you have a little mutual fund and only own 3 stocks.
    Reply | Link to Comment
  •  
    Nov 04 11:25 AM
    use drips.some co's lt you buy from them directly.if the div is cut get out.wall st is more like vegas now.in the financial world today you cant believe anybody.there is no accountability for lying so its become the norm.
    Reply | Link to Comment
  •  
    Nov 04 12:23 PM
    Simply great! I wish everyone would use their heads and do this. There would be less moaning and groaning and blaming G. Bush for their portfolio.
    Reply | Link to Comment
  •  
    Nov 04 01:13 PM
    what is the expected annual return on this dividend portfolio?
    Reply | Link to Comment
  •  
    Nov 04 03:53 PM
    g.bush is one of the biggest liars of all.he made it trendy."mission accomplished".
    Reply | Link to Comment
  •  
    Nov 05 01:40 AM
    i like the list.

    keeping an eye on the biggest winners/losers on a regular basis might be prudent, although it looks like that might defeat the point of the buy and hope ideal... this market is getting more and more 'performance' driven rather than 'value' driven, so the buy and hold theme might be too spooky for a while.

    tnx for the ideas - well worth the read.

    --ikk
    Reply | Link to Comment
  •  
    Nov 05 10:30 AM
    My approach is very similar. I love dividend stocks and this market is the perfect time to start such a portfolio as stocks are so cheap. As you show, it's really not that difficult to find good stocks for this purpose.
    Reply | Link to Comment
  •  
    Nov 05 04:55 PM
    backtesting please.
    Reply | Link to Comment
  •  
    Nov 05 10:49 PM
    I actually wrote a 5 Best Dividend Stocks article on my site.

    4 of my 5 best are included in your list. Good picks, I just don't personally like holding such a large amount of stagnant stocks.

    Also, for readers, notice that dividends reported on stock quotes are not always what they will pay in the future (i.e. banks in this credit crisis may lower dividends).
    Reply | Link to Comment
  •  
    Nov 06 04:51 AM
    23 of these stocks are on the DOW. what's the point? just buy the DIA or do dogs of dow..not a real helpful list.
    Reply | Link to Comment
  •  
    Nov 06 10:50 AM
    Good luck with a strategy that I don't think will work well at all in this environment. As for my own portfolio, I use market timing and it saved me from huge losses this year.
    FJP
    Reply | Link to Comment
  •  
    Nov 06 01:18 PM
    Honestly, I think buying into an index fund forever would be wiser, but it would be interesting to see your returns on this in 5 and 10 years.
    Reply | Link to Comment
  •  
    Nov 06 04:48 PM
    Ok, so why dont you just buy a "dividend stock" ETF?
    Reply | Link to Comment
  •  
    Nov 07 09:51 AM
    agree with MCD not just for its dividend but the trading down to cheaper alternatives by the consumer. here's my case for long "cheap" retail: www.marketfolly.com/20...

    and short discretionary/specialt... www.marketfolly.com/20...
    Reply | Link to Comment
  •  
    Nov 08 01:41 PM
    Looks like a Warren Buffett`s portfolio. Visit a Buffett`s Blog at:

    warrenbuffettstocks.bl.../
    Reply | Link to Comment
  •  
    Nov 08 09:23 PM
    Yes let's talk about buy and hold going into a greater depression. Let's buy MMM which hasn't crashed YET but which will certainly crash soon because that's what happens when a credit bubble bursts.

    Forget dividends until we hit bottom and then start picking through the survivors for a buy and hold portfolio.
    Reply | Link to Comment
  •  
    Nov 09 02:23 AM
    Good article. I would replace 3M and GE with United Technologies [UTX] though...
    Reply | Link to Comment
  •  
    Nov 10 01:57 AM
    I like dividend paying stocks. I think that any portfolio needs to have the flexibility to drop and to pick up stocks within the portfolio however and even the dow and S and P replaces stocks that fail in market cap so I would have a bit more flexibility in that regard unless I used ETF or index fund.

    Next I would put in asset allocations that actually reflect your expected expenditures to retain purchasing power. The dividends would be reinvested untill the portfolio actually needed to be tapped. This would place a higher allocation into REITS due to the fact that you'll spend more on real estate than say technology in your "real life". If REITs were to fall in price or yield, the price of real estate presumably would follow, same thing with the other allocations.

    Using this methodology your allocations might look something like this.
    20% REITS
    10-15% energy/transports
    10% healthcare/drugs
    10% food
    10% tech/telecom
    10% retail
    15% cash
    15% hard assets
    Once again dividends should be reinvested (preferably in a tax defered account). And idexing is recommended for both diversification and low management fees.
    Reply | Link to Comment
  •  
    Nov 10 03:22 AM
    It's a good point you've set out, I in fact have one stock that I only seek
    dividends from the stock.
    I "SHOULD" be happy with it, but I'm not entirly, because I've seen 0%
    growth from the stock in a year, true there was a stage I was up 20%, but
    it's pulled back since then and I sticked to my original reason to hold it
    for the dividend. I've heard of another story where someone bought a
    dividend ETF on listing and it has not grown in the last 1-1,5 years or so.
    Hope that helps you.


    On Nov 06 04:48 PM DVW wrote:

    > Ok, so why dont you just buy a "dividend stock" ETF?
    Reply | Link to Comment