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Updating My Dividend Portfolio For 2011

One of my favorite monetary accomplishments this year is creating a dividend portfolio.  When I created that portfolio my first step was to use the dividend aristocrat index, which is a basket of stocks “within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.”  I updated the account earlier this year (around the 6 month mark), but  the aristocrat index is updated every December to drop or add those stocks which meet the criteria so I figured it would be a good time for Evan to update his perpetual income machine too!

Even though I have been investing in the following stocks for the past year, I have no loyalty to any of the companies so if they don’t meet my standards…I will allow dividends to continue to accumulate shares but I will stop actively investing in the company.  My current portfolio looks like (remaining % is in cash that I slowly move over during the month for the automatic purchase):

  • CB – CHUBB CORP 17.1 %
  • LLY – LILLY(ELI) & CO 16.1 %
  • PBI – PITNEY BOWES INC 9.3 % (Picked up in August Update)
  • SWK – STANLEY BLACK & DECKER, INC. 8.8 % (Dropped in August Update)
  • LEG – LEGGETT & PLATT INC 8.8 % (Picked up in August Update)

To implement this portfolio I use Sharebuilder.  While I don’t particularly understand Sharebuilder’s sale prices, I don’t plan on actively selling so I just rely on their fantastic automatic program:

Sharebuilder Advantage Rates

Since I am buying 6 automatic investments depending on blog income I will either use just 6 of the trades (averaging out to $2/trade) or I’ll use all 12 of the trades ($1/trade).

Updating my Dividend Portfolio Using 2011 Dividend Aristocrats

I am going to be using the following criteria to narrow down my individual choices (I will also have a portion of it in the Aristocrat Index ETF):

  1. They have to actually be on the Aristocrat List
  2. The stock has to have a Price to Earning that is lower than or equal to their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be between 2% and 5%
  5. Price to Book Value Should be Reasonable

Some quick definitions

  • Dividend Aristocrats are those dividend paying American companies that have increased their dividend for the past 25 years.
  • P/E is Price is “a valuation ratio of a company’s current share price compared to its per-share Earnings.”
  • Operating margin is “a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.”
  • Dividend Yield a “Financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated by dividing Annual Dividends per Share by Price Per Share”
  • Price to book is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

The Dividend Aristocrat Index

The list dropped the following stocks:

  • Lilly, Eli & Co – (LLY)
  • Supervalu Inc – (SVU)
  • Integrys Energy Group Inc – (TEG)

Since LLY is no longer in the list they can no longer be invested in.  I have decided to keep the shares that I do own, at least, until they significantly reduce the dividend yield (they just chose not to increase it which is necessary to be apart of the Aristocrat index).

Dividend Aristocrat Price to Earnings by Stock’s Industry

The first Stocks I their eliminated  were those whose Price to Earnings Ratios were out of line with their industry average:

Full Dividend Aristocrats with Price to Earnings

We were able to eliminate 10 of the 42 Stocks.

Dividend Aristocrat Operating Margin by Stock’s Industry

Next I eliminated those stocks whose operating margin was not better than its peers in the industry (or only marginally better).

I was able to eliminate another 7 Stocks.

Dividend Aristocrat Dividend Yield

While I am not ‘chasing yields’ I am attempting to create a dividend portfolio, so the next elimination step was to remove any stocks with a dividend yield of less than 2.2%

I was able to eliminate another 10 stocks.

Dividend Aristocrat Price to Book

Lastly, I was looking for those stocks whose price wasn’t through roof as compared to their book value.

This eliminate 7 more stocks.

Remaining Dividend Aristocrats to Build My Portfolio

I am left with 7 great stocks to choose from, however, I only can use 5 since I am trying to keep the basket at 5 plus the S&P Aristocrat EFT.  I have decided to continue my perpetual income machine with the following 5 stocks for the next 6 months:

While CTL, CB & LEG have been my portfolio in the beginning I am adding

  • MMM (3M) because its  P/E is lower than industry average, their operating margin is nearly triple of its industry and it has a yield of 2.4%
  • VFC (VF CORP) because its P/E is lower than industry average, their operating margin is a nearly one-third higher than industry average and it has a yield of 2.9%

Well there you have it a nearly 1,000 word post with spreadsheets! I’d love to hear some thoughts.



  1. Evan: I know you’ve written about this in the past, but I’m still going to ask…

    Why exactly are you focusing on this type of portfolio? Yes, the idea of generating passive income is attractive, but shouldn’t you really be after the highest total return? After all, you can always sell holdings to generate spendable income down the road.

    Sidebar… Vanguard had an interesting paper on this a few years ago:

    (apologies for the long, gnarly link)

    Assuming that you agree that highest total return is a good goal, then do you think high dividend stocks are the absolute best way to achieve this? If so, why? If not, then why are you pursuing this strategy?

    I should note that I, too, have a strange attraction to high dividend payers, though I’m still not convinced that it’s the best approach in the long run. And even if it is, why is your approach preferable to just piling your money into SDY? Is there a good empirical reason for this, or is it just (or at least partly) because it’s more interesting to hold individual stocks?

    Looking forward to your response.

    • I want to be challenged, so question away! I will start the convo with the basic question of why am I doing this?

      For me it is a mixture of building future passive income AND portfolio growth.

      I am not picking up Joe-Shmo company because it is paying out 6% dividends. Since I start with the members of the Dividend Aristocrat I am picking up blue chip stocks. Then using the criteria I use, I am looking for undervalued members of those companies.

      By doing this type of analysis (even though it took me a long time to do it AND create the post) I am getting the best of both worlds…dividends AND potential upside growth as the market figures out the company is undervalued.

      Does that sort of answer your question?

  2. Thanks for the reply. As for whether or not it answers my question, yes and no.

    (For what it’s worth, what you said is what attracts me to the idea, too.)

    Do you have any data to support the view that you are getting the “best of both worlds,” and that this is a better approach than an alternative (e.g., indexing the entire market and mixing in some bonds).

    Again, it seems to me that the goal should be able to turn a small pile of money into a huge pile of money. If that can be done with dividend stocks, great, but will that strategy give you the biggest possible pile at the end? Or would you be better off with another strategy, even if it doesn’t generate income per se. In other words, I’m cool with capital gains over dividends if that’s what it takes to grow my money faster. Or vice versa.

    Long story short… While dividend investing gives me warm fuzzy feelings, I’m just not sure if those feelings are well-founded. Know what I mean?

  3. This is a great post. One thing I want to do for 2011 is start building a solid portfolio of dividend companies. Right now, most offer some, but the dividends are almost negligible at best — I want some really solid long term dividends!

    • Twenty Something,

      Then do it! It is not something that is terribly difficult. Don’t let it be one of those things that you’ll start in 2012!

  4. This is a good strategy as part of an overall asset allocation. As I near retirement, I want a mixture of growth and fixed income. Everyone is different, therefore a personal strategy is important!

  5. I’m going to have to look into the Dividend Aristocrats companies. Currently the dividend companies that I do have in my portfolio are energy or REIT companies.

    I like the stability of Kimberly Clark, but like a moth, I’m drawn to the bright dividend yield lights of the REITS, even if it’s a temporary yield…

    • I can see the draw to high paying REITs…and the capital appreciation must be NUTTY if you purchased solely in the past 2 years.

      The problem has to do with whether you believe in the commercial real estate market, which I have mixed feelings about…although those feelings are based ONLY on a gut check and not checking out the financials.

  6. Okay, to clarify my “huge pile of money” comment…

    I don’t (necessarily) see that as being inconsistent with your income seeking strategy. For the sake of argument, let’s say that you can achieve higher total returns with a different strategy, but a higher proportion of it comes via capital gains instead of dividends. In that case, you would end up with more money at 39 (49, whatever) that could then be re-deployed to generate income, akin to your “flipping a switch.” In this case, you’d end up with a larger “perpetual income machine.”

    There are, of course, other differences that might come into play. For example, qualified dividends are currently taxed at a favorable rate, but you’re paying those taxes on an ongoing basis (in a taxable account). With a more growth-oriented strategy you’d end up with capital gains, but those taxes would be entirely deferred until you realize the gains.

    Another concern… What if dividends revert to being treated as ordinary income? While it’s possible that something similar could happen with capital gains, it seems much less likely that capital gains will ever be
    taxed as ordinary income (even though rates might rise). I know, never say never, but you’ve gotta play the odds.

    And yet another question… If you do want to follow a high dividend strategy, why not just use SDY instead of a basket of five stocks at a time? Sure, you could argue that your five are better than average, but your portfolio is way more concentrated, and thus carries significantly more risk. For what it’s worth, SDY is currently yielding around 3.3% with way more diversification.

    Anyway, these are the sorts of things that make me second guess the strategy. I’m not saying it’s wrong, just wondering if it’s the best approach.

    • Nickel, I think we have 2 conversations going and I think I can separate out the issues (for what it is worth I am LOVING the back and forth).

      For both issues I am going to ignore the tax issue only because it is not worth guessing what the government is going to do (who the HELL thought Congress was going to wait until 10 days before the estate tax reverted AND then who the hell thought they would raise the exemption rate lol)

      1) My Version Dividend Investing
      You seem to be equating dividend investing = No Capital movement. My contention is that I am participating in Dividend GROWTH Investing. I personally believe that the companies I chose will increase in value (your cap gains) WHILE providing me an income stream.

      My emperical data? I am not a heavy investment guy, I wish I was, and maybe someone out there can prove my theory (or disprove) a little bit better, but I’ll try.

      First, I believe in the idea of a dividend. A great quick post on the subject by a rather new blogger sums up 8 great reasons why (

      More importantly, dividends are important to the overall growth of the market (

      2) Buying Specific Stocks vs. Index
      I see your next issue as whether it is a good idea that I am picking out individual stocks vs going with the diversity that is provided by the ETF.

      I have a lot of diversity in my life! Since my 401(k) is made up of only mutual funds I must own way north of 50+ Companies lol. My Wife’s Roth IRA (however small as it might be right now) only owns an S&P Index ETF. My whole life cash surrender value is basically a make up of the bond fund owned by the mutual company, so there is some more diversity. I see this account as my chance to hit one out of the park, BUT, I balance that with my risk adverse nature by investing in companies that are stable and I believe to be undervalued (vs. someone’s neighbor who heard a tip about some hot new penny stock).

      You can check out my gains and losses:

      • Why a whole life policy? You should drop it and go for a 20-year term. Much cheaper, and by then you’ll have a lot more banked away, so you’ll be self-insured.

  7. For starters… Taxes. I agree that we can’t worry too much about what the future holds because nobody really knows. That being said, I don’t think it’s fair to ignore the HUGE difference between paying taxes on an ongoing basis (as with regular dividend payments) vs. deferring them until you sell (as with piling up long term capital gains). The difference is almost like investing in a taxable account vs. a traditional IRA, and I don’t think you can completely ignore it.

    Now… On to your main points.

    Sure, dividend stocks can go up, I never said they couldn’t. At the same time, things like total market, index 500, etc. funds pay dividends, just at a lower rate. What I’m wondering is which strategy will give the best combination of appreciation + dividend over the long run.

    As for the argument about how important dividends are to market performance… That’s not relevant to our discussion. Yes, given that dividends are being paid, then it only stands to reason that reinvesting them will significantly improve your portfolio performance, BUT… We’re not asking if reinvesting dividends vs. not is a good idea. We’re asking if focusing on high yielding stocks is better than other possible approaches. I would assume that you would reinvest your dividends no matter what strategy you follow, at least during the accumulation phase.

    Remember, if a company doesn’t pay a dividend, then they are presumably reinvesting that money in the company themselves, so it only stands to reason that you should be reinvesting yourself if you want to maximize your returns.

    Look at it this way… If some crappy, non-dividend paying company suddenly started paying a dividend, would it’s stock performance suddenly improve? No. The dividend itself isn’t a magic wand.

    Here’s the thing… If you receive a dividend and don’t reinvest it, then you’re essentially taking money out of your portfolio. In other words, we could just as well rephrase that original argument to be that “resisting the temptation to take money out of your portfolio is an important determinant

    Failing to reinvest your dividends is the rough equivalent of selling shares of a non-dividend-paying growth stock. OF COURSE this will have a negative impact on your portfolio – you’re taking money out of the market!

    The more important question is whether or not those high dividend stocks will outperform more “growth-oriented” investments after considering both capital appreciation and dividend reinvestment.

    As for the individual stock vs. SDY question, that was mostly intended to get a peek into your mind – I’m not trying to convince you that you’re wrong. I’ve also done a bit more reading, and have learned that SDY weights holdings based on dividend yield, which could be a bad thing because some of the highest yielding companies are also the least healthy companies.

    • “Sure, dividend stocks can go up, I never said they couldn’t. At the same time, things like total market, index 500, etc. funds pay dividends, just at a lower rate. What I’m wondering is which strategy will give the best combination of appreciation + dividend over the long run.”

      The SDY has only been around since the end of 2005 so to compare it to the S&P seems unfair considering the market we’ve seen. I am SURE there are more advanced investors out there that could back test the portfolio.

      I disagree with:
      “We’re asking if focusing on high yielding stocks is better than other possible approaches.”
      – I am not focusing on high yield stocks. I don’t think a yield between 2 and 5% is a high yield stock.

      My focus is on a blue chip stock that has 25 years of increased dividend history that is undervalued according to the metrics I put out there.

      “The more important question is whether or not those high dividend stocks will outperform more “growth-oriented” investments after considering both capital appreciation and dividend reinvestment.”
      – There HAS to be studies out there. HAS TO BE. I’ll see what I can find tonight. The problem would be figuring out an author’s definition of both investing strategies and how/when they are back tested. A fair comparison would maybe two indexes?

      “As for the individual stock vs. SDY question, that was mostly intended to get a peek into your mind”
      – It is a scary place LOL! A place where I get yelled at for thinking that EVERYONE wants to be wealthy ( lol.

      • I agree that 2-5% isn’t a super high yield, though in this day and age it’s still pretty high.

        Do you see my point with arguing in favor of dividend investing simply b/c reinvestment (vs. not reinvesting) accounts for a large % of S&P performance over the years?

        And again… I’m not trying to convince you that you’re wrong. It’s more like I want you to convince me that you’re right. 🙂

        • @Nickel: 2-5% yield with increases every year adds up very quickly. Companies that are in the dividend aristocrats are in my opinion a great investment. This means that while initially their yield is low it does increase, sometimes dramatically, over time.

          Take Warren Buffet and the purchase of Cola Cola (KO).

          Because of the price he initially paid and for the 20+ years he’s own the stock his annual yield is over 25%! I’ll take a 25% dividend yield over a chance of 25% increase in a stock anytime! While the chances of a decrease in dividend is possible, with many of these “boring” companies, it’s unlikely. It would upset too many investors in their company.

          In my case with KO stock, I’ve owned for only two years. I’ve had the stock increase 42% while dividends added another 11% to my return! I would be happy with just the 5.5% average annual dividend.

          Regarding taxes on dividends, the safe play is putting them into retirement accounts. I myself originally had my dividend stocks in my taxable accounts, and decided this year that it’s too risky to keep them there. We all know taxes will be going up, it’s not a matter of if, but when. I’m putting my dividend stocks into our Roth IRA accounts where they can grow tax free.

          • As always, fantastic additions to the conversation. That KO-Buffet tidbit is really interest. From that article,

            “Because Coca-Cola has raised its dividend by 12% on average over the past 21 years, Buffett now manages to get back about one-third of his original investment every year. If the company continues to increase its dividend at this historical rate, in about nine years Buffett will manage to get back his original investment in dividends every year!”

  8. I have been reading your posts about investing for dividends, and I’ve been turning over similar questions in my mind as the ones Nickel was asking.

    The idea of getting an income from dividends is nice, but my investment strategy is to focus on high risk diversified stocks over the long-term. Usually companies that pay out consistent dividends tend to be more mature, so that already limits you to statistically less risky, low growth stocks, maybe?

    Investing in dividend-paying stocks makes sense to me if you’re pursuing somewhat more moderate risk goal (you did say you’re looking at high growth, so still pretty risky.) So, if I had a kid going to college 5 years from now, then yeah, I would invest in that to get the income stream then. Because that’s like needing to use some of my capital gains in 5 years.

    Not disagreeing, just wondering outloud. I want to go get out my old corporate finance book now 🙂

    • We have MLP wholesalers that come into our office every month. To get involved you usually need high sums of liquid dollars to buy in.

  9. I have been thinking more and more about investing in dividend stocks more actively. I am going to bookmark this page and read it more thoroughly as I get closer to taking the step.

    I have used Buy and Hold in the past when I have bought multiple stocks in a month. I loved

    Quick question: Have you ever used PEG ratio to evaluate a stock? I actually prefer it to the PE, but I look at both.

    • Why not start tomorrow?

      PEG – Nope but I’d be happy to try that ratio next update! Thanks. It was a commenter who offered up the book value last time I updated.

  10. Good debate here; I think the historical makret returns favor dividend “increasers” over “current high yield” stocks since the market is often factoring in bad news on overly obnoxious high yields. But occasionally, you can pick up a high yielder that continues to grow dividends and capital gains. Various reasons. Tobacco stocks tend to win on both fronts due to litigation risk (that never really materializes), while the financials did well for most of the 90s and 2000s until that pesky housing crash.

    A few notes on your picks –

    CENTURYTEL – yield is perhaps a bit high; market is pricing in a div cut.

    Pitney Bowes – company is struggling with competition and dying a slow death. They’re downsizing annually, losing the battle. Probably not a long-term win. (my uncle was laid off from there years ago and they continue to cut annually).

    Aristocrats as a cohort usually performs quite well over long periods of time. I’ve been enamored by high current yielders occasionally, but I’ve been burnt a few times as well.

    • CTL – I am confused with your statement. CTL is up 27% YTD and 7% in one month (not that I am selling anytime soon). so what do you mean by pricing in a div cut? Also, do you think a company prides themselves in being on this list since it will take another quarter century to get back on? Or do you think that they don’t care?

      PBI – I agree I stopped investing in them as their Price to Book was rounding around 400!

      When you say “I’ve been enamored by high current yielders occasionally” do you think I am enamored by them? I only ask because it seems like nickel thought that too but with this ‘safer’ list with all the speed bumps I put in place I think it is the opposite

  11. Enamored; not like an insult, just “attracted” to them. I hadn’t checked CTLs performance; sounds impressive. It’s just a high current yield even for telecom, but maybe you’ve got a winner there!

  12. I’m including this article on my upcoming weekend links. I haven’t been reading as many fellow blogs during this season so I was a bit late to it.

    Good article overall, and I find the two companies you’ve selected to be appealing. And Chubb continues to be a particularly good choice in my opinion as well.

    I do still think that the P/B step could be improved a bit so that it doesn’t favor certain industries over others.

      • I think that might be a better route.

        Industries that require a lot of asset needs, infrastructure, or manufacturing tend to have lower book values than other industries (all else being equal). So by using an absolute P/B comparison, you’re setting yourself up to favor certain industries over others.

  13. Thanks for sharing your process. I have a similar process but I am a little more open in my selection.

    I like the thread you had with Evan. I would add that if anyone could pick the right stock for growth and make a killing, I think we all would. The reality is just not the case. I did make money (and lost some) on picking stocks like APPL, CROX and other momentum companies only to settle with dividend investing with compound growth. There is a certain predictability of income that I can’t leave without.

    • I share the process because I like to hear about how people would change it and their reasoning (sort of like what The Monk and FCN had to say).

      Did you keep CROX as it came crashing down or were you able to sell it prior? Do you own index funds as well?

      • It crashed hard and I lost. I was dumb about the markets then and was a little too hopeful. I was buying more as it went down too thinking about averaging down.

        In the end, I did not really do research in the company. Now I do!

  14. I am going to have to bookmark this too. I try like heck to understand the stock market…. but I don’t get it.


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