Constructing A $50,000 Dividend Growth Portfolio With A Reliable 3.4% Yield

Introduction

Last month, following the sale of his home for a sizable profit, one of my friends, Tim, asked me to help him construct an investment portfolio into which he would place the after-tax proceeds of the sale. Once I made it abundantly clear that I thought he should consult a certified financial planner rather than his old friend, he said he would do so. A week or so later, Tim called me and said that he had spoken with a financial advisor and had decided to invest the bulk of his available funds in accordance with his advisor's suggestions. In the conversation that followed, however, my friend mentioned that he was still intrigued by my income-oriented approach to investment and suggested that I help him construct a smaller portfolio for a taxable account he planned to open. Despite my misgivings, I eventually agreed and asked if he would let me write about it for Seeking Alpha. Tim said that I could, provided I did not give away any personal information besides his name.

In the article that follows, I will outline the portfolio rules and its initial construction.

The Portfolio

When Tim and I discussed his investment goals, he expressed a desire to use some of his excess cash to generate a reliable stream of income that he could use to fund some discretionary expenses. While he does intend to use the income he generates today, he is also hoping that the cash flow not only continues as he approaches retirement, but grows a bit, too. While that seemed a reasonable enough task to me, the real challenge in constructing the portfolio came from Tim's specific desires for where that income originated. Together, we devised a set of "rules" to guide Tim's investments and to ensure that we stayed as close to his ethical standards as possible.

The Rules:

1. The portfolio should consist of roughly 25 American-based companies and 25 international companies. This was Tim's idea. His financial advisor had urged him to look beyond the United States in his investments, so I tried to find a nice mix of international companies to add into the mix. I admit I favored Canadian companies and financial institutions over European, Asian, African, and Australian companies. Thus, I make no promises that the portfolio is geographically balanced or without a few overweight sectors. I did include several European consumer staples such as Nestle (OTCPK:NSRGF), Reckitt Benckiser (OTCPK:RBGLY), and Unilever (UN) for their stability, though the energy and pharmaceuticals sectors got a bit more attention because of the higher yields they offer.
2. While some stocks could have a yield below 3%, we want a target yield for the entire portfolio that is above 3%, before factoring in taxes. Since Tim is approaching retirement age, but still has a solid decade or more before he does retire, I suggested that he aim for a 3% current yield by balancing high-yield stocks such as Verizon (VZ) with some lower-yielding ones with the potential for significant dividend growth moving forward such as Mastercard (MA). I also aimed for a somewhat higher yield when looking at the international stocks we would be adding because exchange rates and taxes can take a substantial bite out of those dividends.
3. All of the companies must have a track record of dividend growth. We decided to eliminate stocks with very short dividend histories from our consideration. I tended to favor Dividend Aristocrats and Canadian banks because of their long track records of dividend payments. As I mention earlier, I am aware of the risks associated with the financial sector, but I do feel that institutions such as The Bank of Nova Scotia (BNS) and the Bank of Montreal (BMO) will manage to maintain and even raise their payouts in the years to come. Similarly, I did include 3M (MMM) in the portfolio despite the company's dismal performance in recent years. I do believe that the high yield is unlikely to be cut even as the company faces litigation related to forever chemicals and faulty earplugs.
4. Minimize the number of companies that have cut or suspended their dividend over the past decade. This was my suggestion. I told Tim a few horror stories about General Electric (GE) and AT&T (T) and we decided to try to avoid companies with recent cuts or suspensions. While I did find a couple of stocks that have had a somewhat inconsistent history of dividend payouts, the overwhelming majority of the companies we ultimately included in Tim's portfolio have hiked their annual payouts for more than five consecutive years.
5. Minimize the number of companies that profit from tobacco, firearms, private prisons, or military weapons. Tim said he did not want to profit from anything he personally found conflicted with his values. He objected to tobacco, weapons, and prison industry, so I did my best to screen all the stocks I considered, in accordance with his wishes. While it was easy enough to move past Philip Morris (PM) and British American Tobacco (BTI) for instance, it was somewhat more challenging to eliminate those companies with ties to the military and prison industries. However, I did enough research to rule out a few otherwise strong candidates such as Honeywell International (HON) and Siemens (OTCPK:SIEGY).
6. The portfolio would start with a $50,000 initial investment, spread evenly across all 50 stocks. Although Tim had quite a bit more money to invest, we both decided that he should not invest all of it. I suggested a combination of high-yield CDs, treasury bonds, and savings. He did buy his entire annual allotment of $10,000 in I bonds and spread the rest around other equally vanilla investments. With that out of the way, we settled on a round $50,000 for the initial portfolio investment, knowing more could always be added at a later time.

The Portfolio

Part I: U.S. Companies

1. Apple Inc. (AAPL)
2. Microsoft Corporation (MSFT)
3. Johnson & Johnson (JNJ)
4. Procter & Gamble Company (PG)
5. Walmart Inc. (WMT)
6. McDonald's Corporation (MCD)
7. PepsiCo, Inc. (PEP)
8. Visa Inc. (V)
9. Mastercard Incorporated (MA)
10. Comcast Corporation (CMCSA)
11. Verizon Communications Inc. (VZ)
12. The Home Depot, Inc. (HD)
13. Abbott Laboratories (ABT)
14. Medtronic plc (MDT)
15. Amgen Inc. (AMGN)
16. Waste Management, Inc. (WM)
17. NextEra Energy, Inc. (NEE)
18. Consolidated Edison (ED)
19. 3M Company (MMM)
20. United Parcel Service, Inc. (UPS)
21. Dominion Energy, Inc. (D)
22. Duke Energy Corporation (DUK)
23. American Electric Power Company, Inc. (AEP)
24. Lowe's (LOW)
25. Target (TGT)

Part II: International companies:

1. Nestle S.A. (NSRGF)
2. Unilever (UN)
3. Novo Nordisk A/S (NVO)
4. Roche Holding AG (OTCQX:RHHBY)
5. Novartis AG (NVS)
6. Sanofi (SNY)
7. Shell plc (SHEL)
8. AIA Group Limited (OTCPK:AAGIY)
9. BP p.l.c. (BP)
10. Enbridge Inc. (ENB)
11. Canadian National Railway Company (CNI)
12. Toronto-Dominion Bank (TD)
13. Royal Bank of Canada (RY)
14. Commonwealth Bank of Australia (OTCPK:CBAUF)
15. Reckitt Benckiser Group plc (RBGLY)
16. BHP Group Limited (BHP)
17. Rio Tinto Group (RIO)
18. BASF SE (OTCQX:BASFY)
19. The Bank of Nova Scotia (BNS)
20. Schneider Electric S.E. (OTCPK:SBGSF)
21. Bank of Montreal (BMO)
22. Brookfield Renewable Partners L.P. (BEP)
23. Engie SA (OTCPK:ENGIY)
24. EDP - Energias de Portugal, S.A. (OTCPK:EDPFY)
25. Orsted A/S (OTCPK:DNNGY)

Thanks to the fact that Tim opted to use a broker that allows for the purchase of fractional shares, we were able to distribute the $50,000 in fifty equal purchases of $1,000, to allow for each holding to start off with an even 2% of the portfolio's weight. Furthermore, the brokerage offers "fee-free trading," which Tim estimated to have saved him some $250 in fees. The initial breakdown of the portfolio can be seen here:

This amounts to a forward yield of 3.44%. Tim's unofficial goal is to use the dividends from the portfolio to fund an annual vacation for his family, so he will not be reinvesting his dividends at this time, though I have and will continue to encourage him to do so.

Looking Forward

If there is any reader interest in Tim's portfolio, I will be glad to provide occasional updates and will pass along any and all suggestions readers may have for him. Thanks for reading!