Investment Thesis
Last week I received a message from a Seeking Alpha reader asking me about my plans to rebalance The Dividend Income Accelerator Portfolio (the portfolio I am constructing here on Seeking Alpha). This question has contributed to my decision to write an article dedicated to the topic.
I considered this to be an excellent question since I am convinced that periodically rebalancing your dividend income portfolio is crucial for maintaining a continuously reduced risk level, resulting in elevated chances of positive investment results over the long term.
I will demonstrate this rebalancing process using the current composition of The Dividend Income Accelerator Portfolio as an example.
First, I will assess the risk level of the current portfolio composition to identify optimal rebalancing strategies that balance risk and reward.
Second, I will show you which positions I have added with the objective of effectively rebalancing the portfolio and to further enhance the likelihood of positive investment outcomes.
I have identified the relatively high proportions of Altria (NYSE:MO), Pfizer (NYSE:PFE) and Exxon Mobil (NYSE:XOM) as being higher risk factors for the portfolio.
After the incorporation of additional shares of BlackRock (NYSE:BLK), Apple (NASDAQ:AAPL), Johnson & Johnson (NYSE:JNJ) and Realty Income (NYSE:O), I see the portfolio as being further optimized in terms of risk and reward.
Additionally, Johnson & Johnson and Realty Income, with Beta Factors of 0.53 and 0.94 respectively, serve as crucial defensive plays in our portfolio, providing protection during times of strong market volatility.
If you were to rebuild the portfolio at the ETFs and companies’ current prices, you would reach a Weighted Average Dividend Yield [FWD] of 4.63%, while the portfolio’s 5 Year Weighted Average Dividend Growth Rate [CAGR] stands at 8.07%.
The Dividend Income Accelerator Portfolio Presently Consists of the Following Positions:
- Altria
- Apple
- Ares Capital (NASDAQ:ARCC)
- AT&T (NYSE:T)
- Bank of America (NYSE:BAC)
- BHP Group (NYSE:BHP)
- BlackRock
- BlackRock TCP Capital (NASDAQ:TCPC)
- British American Tobacco (NYSE:BTI)
- Cohen & Steers Quality Income Realty Fund (NYSE:RQI)
- Exxon Mobil
- iShares Core High Dividend ETF (NYSEARCA:HDV)
- Johnson & Johnson
- Main Street Capital (NYSE:MAIN)
- Mastercard (NYSE:MA)
- Microsoft (NASDAQ:MSFT)
- Nike (NYSE:NKE)
- Philip Morris (NYSE:PM)
- Pfizer
- Realty Income
- Royal Bank of Canada (NYSE:RY)
- Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO)
- Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)
- VICI Properties (NYSE:VICI)
The Dividend Income Accelerator Portfolio
The Dividend Income Accelerator Portfolio’s objective is to generate income via dividend payments, and to annually raise this sum. In addition to that, its goal is to attain an appealing Total Return when investing with a reduced risk level over the long term.
The Dividend Income Accelerator Portfolio’s reduced risk level will be reached due to its broad diversification over sectors and industries and the inclusion of companies with a low Beta Factor.
Below you can find the characteristics of The Dividend Income Accelerator Portfolio:
- Attractive Weighted Average Dividend Yield [TTM]
- Attractive Weighted Average Dividend Growth Rate [CAGR] 5 Year
- Relatively low Volatility
- Relatively low Risk-Level
- Attractive expected reward in the form of the expected compound annual rate of return
- Diversification over asset classes
- Diversification over sectors
- Diversification over industries
- Diversification over countries
- Buy-and-Hold suitability
The positions of The Dividend Income Accelerator Portfolio and their allocations
Symbol Company Name Sector Industry Country Total Acquisition Current Market Value in $ Current Allocation Allocation ETF Split SCHD Schwab U.S. Dividend Equity ETF ETFs ETFs United States 1200 1229.65 28.45% O Realty Income Real Estate Retail REITs United States 100 99.16 2.29% 2.66% PM Philip Morris Consumer Staples Tobacco United States 100 103.25 2.39% 2.79% RY Royal Bank of Canada Financials Diversified Banks Canada 100 108.28 2.51% 2.51% AAPL Apple Information Technology Technology Hardware, Storage and Peripherals United States 100 101.42 2.35% 2.35% T AT&T Communication Services Integrated Telecommunication Services United States 100 114.64 2.65% 2.65% MA Mastercard Financials Transaction & Payment Processing Services United States 100 112.35 2.60% 2.60% MAIN Main Street Capital Financials Asset Management and Custody Banks United States 100 123.88 2.87% 2.87% JNJ Johnson & Johnson Health Care Pharmaceuticals United States 100 98.08 2.27% 2.80% BAC Bank of America Financials Diversified Banks United States 100 144.42 3.34% 3.34% ARCC Ares Capital Financials Asset Management and Custody Banks United States 100 104.98 2.43% 2.43% TCPC BlackRock TCP Capital Financials Asset Management and Custody Banks United States 100 92.52 2.14% 2.14% BTI British American Tobacco Consumer Staples Tobacco United Kingdom 100 92.32 2.14% 2.14% BHP BHP Group Materials Diversified Metals and Mining 100 90.63 2.10% 2.10% MSFT Microsoft Information Technology Systems Software United States 100 107.03 2.48% 2.48% NKE Nike Consumer Discretionary Footwear United States 100 84.49 1.96% 1.96% XOM Exxon Mobil Energy Integrated Oil and Gas United States 100 113.33 2.62% 3.47% HDV iShares Core High Dividend ETF ETFs ETFS United States 400 420.55 9.73% VICI VICI Properties Real Estate Other Specialized REITs United States 100 97.32 2.25% 2.46% BLK BlackRock Financials Asset Management and Custody Banks United States 100 94.93 2.20% 3.23% RQI Cohen & Steers Quality Income Realty Fund Real Estate REITs United States 400 376.13 8.70% PFE Pfizer Health Care Pharmaceuticals United States 100 106.68 2.47% 3.51% MO Altria Consumer Staples Tobacco United States 100 106.97 2.48% 3.75% SCHO Schwab Short-Term US Treasury ETF Taxable Bond Short Government United States 200 198.58 4.59%
Source: The Author
Analysis of The Risk Level of the Current Composition of The Dividend Income Accelerator Portfolio
In the following, I will analyze the current risk level of The Dividend Income Accelerator Portfolio. This is crucial for identifying the best strategies to rebalance the portfolio and to maintain a reduced risk level within the coming months.
The Current Allocation of The Dividend Income Accelerator Portfolio across Companies
With a current proportion of 28.5% compared to our overall investment portfolio, the Schwab U.S. Dividend Equity ETF is presently the largest position, followed by the iShares Core High Dividend ETF with a share of 9.7%, the Cohen & Steers Quality Income Realty Fund (with 8.7%), and the Schwab Short-Term U.S. Treasury ETF (4.6%).
The fact that the largest four positions of our dividend portfolio are ETFs is an indicator of its reduced risk level, which is further underscored by the fact that no single company accounts for more than 3.5% compared to the overall portfolio, as illustrated by the graphic below.
The Current Allocation of The Dividend Income Accelerator Portfolio across companies when allocating the ETFs across the companies they are invested in
For a more detailed analysis of the current allocation of The Dividend Income Accelerator Portfolio it is crucial to take a closer look at its composition when allocating the ETFs across the companies they are actually invested in. This is especially important for us as our portfolio includes several companies that are both direct and indirect investments.
The below graphic illustrates the actual composition of the portfolio when allocating the ETFs across the companies they are invested in.
First, it can be highlighted that no single company represents more than 4% of the overall portfolio, even when allocating the ETFs across the companies they are actually invested in. This metric suggests that rebalancing the portfolio is not urgently needed.
With a proportion of 3.75%, Altria is presently the largest position of The Dividend Income Accelerator Portfolio, followed by Pfizer (with 3.51%), and Exxon Mobil (3.47%), Bank of America (3.34%), and BlackRock (3.23%).
I believe that we can further reduce the downside risk by providing Altria, Pfizer and Exxon Mobil with a slightly lower proportion when compared to the overall portfolio.
In particular, I see a slightly elevated risk level for Pfizer investors, given the company’s Dividend Payout Ratio [FY1] [Non GAAP] of 73.08%. This indicates a dividend reduction risk, which could affect the price of the share negatively. Moreover, it could have a stronger impact on the Total Return when providing Pfizer with a particularly high share compared to the overall portfolio.
Exxon Mobil’s financial performance is strongly related to the price of oil and I prefer to overweight companies that I expect to perform well in any market environment.
Regarding Altria, it is worth highlighting that I see the company’s growth prospects as being limited, particularly when considering the declining number of smokers.
Even though it is worth noting that none of the most represented companies account for more than 4% of the overall portfolio, I have identified opportunities to further optimize it in terms of risk and reward by providing Altria, Pfizer and Exxon Mobil with a lower proportion.
The Current Allocation of The Dividend Income Accelerator Portfolio across Sectors
With a proportion of 25.62%, the Financials Sector currently represents the largest of the overall investment portfolio, followed by the Consumer Staples Sector (with 14.15%), the Health Care Sector (11.58%), and the Real Estate Sector (10.91%).
While the elevated share of the Financials Sector (25.62%) in our overall portfolio does introduce some risk, I do not consider it to be significant for long-term investors. I want to emphasize that The Dividend Income Accelerator Portfolio is designed for long-term investors aiming to steadily increase their wealth with a low level of risk.
Investors who follow The Dividend Income Accelerator Portfolio's investment approach and prefer a smaller allocation to the Financials Sector could rebalance the portfolio by adding companies from other sectors. This strategy would naturally reduce the Financials Sector's proportion within the overall portfolio, thus providing another strategy to rebalance the portfolio.
Since they currently represent a small proportion of our dividend portfolio, companies from the Industrials Sector, the Materials Sector or the Utilities Sector could be added.
However, I suggest that we continue to overweight the Financials Sector as it contains a number of companies with attractive risk-reward profiles that offer higher chances of positive investment outcomes.
The Reasons for buying additional shares of BlackRock, Johnson & Johnson, Apple and Realty Income to rebalance the portfolio for optimized risk-reward outcomes
The positions of an investment portfolio that hold the largest share are crucial to its overall success.
For these reasons, my investment strategy follows overweighting companies that are particularly attractive when it comes to risk and reward.
This strategy helps as the portfolio not only becomes suitable for investors looking for an attractive Dividend Yield and appealing Dividend Growth Rate, but also for those aiming to reach an attractive Total Return.
This is crucial because achieving a high Weighted Average Dividend Yield with our dividend portfolio will hold less significance if we do not attain an attractive Total Return at the same time.
I believe that BlackRock, Johnson & Johnson, Apple, and Realty Income offer particularly attractive risk-reward profiles. Given their fair Valuations and relatively low risk levels, these companies provide elevated opportunities for positive investment outcomes.
I am convinced that adding an additional $100 in shares of each will help us to effectively rebalance and optimize our portfolio for better risk-reward outcomes.
Below you can find the current composition of our portfolio after the additional incorporation of BlackRock, Johnson & Johnson, Apple, and Realty Income.
Conclusion
In this article, I have shown how you can effectively rebalance your dividend income portfolio by using the current composition of The Dividend Income Accelerator Portfolio as an example.
I am convinced that by adding additional shares of Apple, BlackRock, Johnson & Johnson and Realty Income, we have effectively rebalanced our dividend portfolio.
These incorporations have decreased the portfolio's dependence on higher-risk companies with lower growth potential such as Altria, Pfizer, and Exxon Mobil. Previously, these companies comprised the largest shares. They now represent a smaller percentage, reflecting a reduced overall risk level.
After the incorporation of these companies, BlackRock represents the largest proportion of our dividend portfolio. The company effectively combines dividend income and dividend growth, exhibits an attractive Valuation and provides investors with a reduced risk-level. In my opinion, these characteristics make BlackRock an excellent choice to be the leading position of our dividend portfolio.
When allocating the ETFs across the companies they are invested in, BlackRock makes up 5.07% of the portfolio, followed by Johnson & Johnson (with 4.64%), Realty Income (4.56%) and Apple (4.37%). I believe that the proportion of each of these companies are not too high, since all of them come attached to a relatively low risk level and their Valuation is at least far.
I see each of these companies as being particularly attractive in terms of risk and reward, which helps us to significantly enhance the chances of achieving positive investment outcomes.
The primary focus of the portfolio remains on delivering a balanced approach to dividend income and growth, evidenced by an attractive Weighted Average Dividend Yield [FWD] of 4.63% and a robust 5 Year Weighted Average Dividend Growth Rate [CAGR] of 8.07%.
With these strengths, the portfolio is now even better positioned to achieve its secondary goal of attaining an attractive Total Return.
What do you think about the current composition of The Dividend Income Accelerator Portfolio and which are your favorite strategies for rebalancing your own dividend portfolio?
Frederik Mueller
I specialize in constructing investment portfolios aimed at generating additional income through dividends. My focus lies on identifying companies with significant competitive advantages and strong financials that can provide you with an attractive Dividend Yield and Dividend Growth, thus enabling you to augment your dividend income annually. By combining high Dividend Yield and Dividend Growth companies, you can gradually reduce your dependence on the broader stock market fluctuations.I also assist you in achieving a well-diversified portfolio across various sectors and industries. This diversification strategy aims to minimize portfolio volatility and mitigate risk. I also suggest incorporating companies with a low Beta Factor, which further contributes to reducing the overall risk level of your investment portfolio. My suggested investment portfolios commonly consist of a blend of ETFs and individual companies, emphasizing broad diversification and risk reduction.The selection process for high dividend yield and dividend growth companies within the investment portfolio is meticulously curated. I prioritize the pursuit of total return, encompassing both capital gains and dividends, rather than solely focusing on dividends in isolation. This approach ensures that your portfolio is designed to maximize returns while considering the full spectrum of potential income sources. By leveraging my expertise, you can benefit from a well-crafted investment portfolio that aims to generate extra income through dividends, while reducing risk through diversification, and prioritizing total return.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SCHD, O, PM, RY, AAPL, T, MA, MAIN, JNJ, BAC, ARCC, TCPC, BTI, BHP, MSFT, NKE, XOM, HDV, VICI, BLK, RQI, PFE, MO, SCHO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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