I am retired and take educated guesses on all things financial.

September 30, 2010

October 1, 2010: 12-Pack, Worthy Dividend Income Portfolio

I have been a long time proponent of a two portfolio investment approach. Following in the footsteps of Harry Browne, who brought the idea to the fore in the 1970s, I assembled a Permanent Portfolio which was designed as an all-season capital preservation, modest appreciation vehicle, and a Speculative Portfolio which was designed to place bets on high risk securities that offered the possibility of high reward. Given the era in which we live, perhaps it is time to adjust the mindset of the concept and add a third leg to your investment scheme. You may want to consider an Income Portfolio which would be designed to obtain a current satisfactory yield using a mix of ETF's and stocks, with an awareness of the possibility of deflation, inflation and currency fluctuations.

If this tweaks your curiosity, examine the following twelve securities for starters in your search:

PIMCO Enhanced Short Term Maturity Strtegy ETF (MINT) $100.83/share 0.84% yield
Best used as a money market-type fund.

IShares S&P U.S. Preferred Stock Index ETF (PFF) $39.78/share 7% yield
Nice yield, but more than a few securities are trading over the call price, which
could negatively impact long term performance.

SPDR Barclay's Capital Convertible Securities ETF (CWB) $38.87/share 3.99% yield
Ditto the PFF red flag.

Guggenheim International Multi-Asset Income ETF (CVY) $19.18/share 4.69% yield
The old "yield hog" ETF. Excellent basket of US (78%) and International stocks.

Vanguard Short Term U.S. Bond ETF (BSV) $80.74/share 2.34% yield
Vanilla, ultra low expense ETF.

Market Vectors Emerging Markets Local Currency Bond ETF $27.03/share 4.79% yield
Interesting foreign currency exposure with an attractive stated yield.

One to watch:

Alerian Master Limited Partnership ETF (AMLP)
Basket of twenty-five midstream energy MLP's.

Preferred Securities may well be an integral portion of the Income Portfolio. Here are four rules to follow in their selection:
Yield a minimum of 2.25x that of the Vanguard Short Term Bond Fund ETF.
Investment grade rating.
Purchased below the call price.
Sufficient share volume to facilitate a reasonable trade (buy on a limit order, sell when security trades 3% above the call price), such as:

Deutsche Bank Contingent Capital Trust Fund II (DXB) $24.56/share 6.65% yield

National City Capital Trust II (NCCpA) $24.91/share 6.63% yield

KeyCorp Capital Enhanced Trust IX (KEYpE) $24.94/share 6.77% yield

Securities with a degree of inflation protection are in order, such as:

Metropolitan Life Preferred A (METpA): $23.32/share 4,36% yield with inflation protection features.

PIMCO 1-5 Year U.S. TIPS Index Fund ETF: $52.28/share 1.58% yield +/-, providing a conservative measure of inflation protection.

Certainly, there is a universe of common stock that provides dividend income, be it more or less. There are many avenues to devise an income portfolio - different from the somewhat eclectic teasers above. My belief is that total returns from a common stock portfolio will be nowhere near the 8% assumed by pension funds and other investors over the coming years. Tangible returns from a separate Income Portfolio, coupled with the Permanent and Speculative Portfolios will add both discipline and thoughtfulness to your investment scheme.

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