The Coffee Can Dividend Portfolio

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A lot has been written about dividend stocks in the past year. According to Google Trends, the search and news volume for the phrase "dividend stocks" has been on the rise, and quite naturally so as income-thirsty investors find few alternatives in this low interest rate environment.

If you've been following the dividend renaissance, you've probably read about the benefits of dividends, including studies that have shown that:

  • Over an examined 100-year period, a market-oriented portfolio that included reinvested dividends would have yielded 85 times the return of the same portfolio that relied solely on capital gains.
  • Dividend-paying stocks tend to be less volatile as a group.  
  • Reinvesting dividends can shorten the time necessary to recoup losses in declining markets.
  • Dividend-paying stocks as a group tend to outperform in declining markets.

That's great, you might think, but parking all your money in a dividend portfolio, reinvesting the payouts, and holding for decades sounds a little, well, boring.

Where's the action?
As the advisor of The Motley Fool U.K.'s dividend service, I believe boring is beautiful when it comes to dividend investing, but I also understand that there are investors who want to benefit from a long-term dividend strategy while spending most of their time on other, perhaps more exciting, stocks.

For these investors, I offer the "Coffee Can Dividend Portfolio": seven high-quality dividend-paying stocks from different industries whose share certificates I think you could literally stick into a coffee can, bury in the backyard, focus on other investments, and be happy with your Coffee Can returns when you dig it up a decade or more from now.

Of course, if you think you have the willpower to keep your hands off these stocks for that long -- and that's the trick -- you're better off keeping them in a brokerage account that allows dividend reinvesting. Not to mention the fact that a brokerage account is much safer than your backyard, where the dog or cartoonish burglar may find it first.

Folgers or Maxwell House?
Buying stocks that you don't intend to trade for a decade or more isn't as easy as it sounds.

In such a strategy, you ideally want to own companies with sustainable competitive advantages that will help them maintain and increase profits and dividend payouts.

It's not impossible to find companies with sustainable competitive advantages, of course, but those companies tend to be well-known by the market and rarely go on sale. With that said, however, the recent market decline has opened a window of opportunity to pick up shares in some great companies that, when put together, can create a solid Coffee Can portfolio.

Company

Sector

Dividend Yield

Procter & Gamble (NYS: PG) Consumer goods3.4%
Johnson & Johnson (NYS: JNJ) Health care3.6%
Intel (NAS: INTC) Technology4.3%
Illinois Tool Works (NYS: ITW) Industrials3.4%
Chevron (NYS: CVX) Energy3.3%
Exelon (NYS: EXC) Utilities5.0%
Aflac (NYS: AFL) Financials3.5%
Portfolio Average 3.8%
S&P 500 Average 2.2%

Source: Capital IQ, as of Sept. 12.

Each of these companies has a distinguished dividend track record, and five of them are constituents of the Mergent U.S. Broad Dividend Achievers Index. As such, I would expect the dividend payouts from this group to grow steadily over the next decade and beyond.

In addition to the average dividend yield that's almost 75% above the S&P 500 average, other portfolio metrics are equally compelling:

Metric

Average of Coffee Can Companies

Forward P/E11.4 times
Interest coverage ratio22 times*
5-year dividend growth rate12.2%
Payout ratio39%

Source: Capital IQ. *Median used, and not counting Intel's zero net interest expenses.

Foolish bottom line
If you want to harness the power of dividends, but prefer not to make them the full focus of your portfolio, consider putting the Coffee Can portfolio to work. By all means, keep track of developments at your Coffee Can companies, but try your best to leave them alone and let the compounding interest go to work.

If one or two of the proposed companies in the Coffee Can portfolio aren't your cup of tea, consider replacing them with one of the 13 names found in a free report from Motley Fool expert analysts called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this report, and I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

At the time this article was published Todd Wenningis advisor of Motley Fool UK Dividend Edge. He owns shares of Johnson & Johnson, Intel, and Procter & Gamble. You can follow him onTwitter. The Motley Fool owns shares of Johnson & Johnson, Intel, and Aflac and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of all companies mentioned, along with creating a diagonal call positions on Intel and J&J and writing a covered strangle position on Exelon. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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