A Quality Dividend Portfolio Using 5 Investments

There has been a number of posts lately about building a portfolio using only a small number of specific investments. I think this really stems from a recent article run in this months edition of Money Magazine in which they outlined a diversified portfolio using 7 investments. I thought I would put my dividend spin on this and create a dividend based portfolio using five investments.*

Let’s start with the three basic principles I used when building this portfolio. The first principle is passive investing. You can still own dividend stocks and be a passive investor. Many people think that to be a dividend investor, you need to hold individual stocks. This is not the case as there are dividend ETFs available for investing. Buying individual securities is much riskier than buying an index fund. Personally, I am comfortable with this risk – make sure you are. If you are not, or are even the slightest bit unsure, then the best bet is to use index funds. You can still be a dividend investor and invest in index funds!

The second principle of the portfolio is KISS (keep it simple stupid – no offense). With that in mind, I am only going to use a total of 5 investments to build a diversified portfolio, which leads us to the 3rd principle.

The third principle is all about asset allocation. Drawing on materials from SoundInvesting.com, The Intelligent Asset Allocator, and other investing resources we are going to build a portfolio using a 60/40 percent split between equities and fixed income. That should provide us with a nice balance between risk and reward.

With these three principles in mind and an understanding that this portfolio may not be for everyone, here is my take on a quality dividend portfolio using only 5 investments.

U.S. Equities – 25%

WisdomTree Dividend Index

The WisdomTree Dividend Index is a fundamentally-weighted index that defines the dividend-paying portion of the U.S. stock market. The Index measures the performance of US companies, listed on the NYSE, AMEX or NASDAQ Global Market, that pay regular cash dividends and that meet other liquidity and capitalization requirements established by WisdomTree. Over the past 5 and 10 year periods it has managed to beat the Russell 3000 index.

Canadian Equities – 10%

iShares CDN Dividend Index Fund

The iShares CDN Dividend Index Fund seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the Dow Jones Canada Select Dividend IndexSM through investments in the constituent issuers of such index, net of expenses. The Index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.

Global Equities – 25%

WisdomTree DEFA Fund

The WisdomTree Dividend Index of Europe, Far East Asia and Australasia is a fundamentally weighted Index that measures the performance of dividend-paying companies in the industrialized world, excluding Canada and the United States, that pay regular cash dividends and that meet other liquidity and capitalization requirements. It is comprised of companies incorporated in 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore. Companies are weighted in the Index based on annual cash dividends paid.

Fixed Income – 40%

Short-Term (20%) Vanguard Short-Term Bond ETF – 20%

The fund employs a “passive management”—or indexing—strategy designed to track the performance of the Lehman 1–5 Year U.S. Government/Credit Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of between 1 and 5 years and are publicly issued. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. Under normal circumstances, the fund’s dollar-weighted average maturity is not expected to exceed 3 years.

Inflation-Protected (20%) iShares Lehman TIPS Bond Fund

The iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund seeks results that correspond generally to the price and yield performance, before fees and expenses, of the inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. Treasury TIPS Index.

Note: If you are a Canadian investor, it might be more beneficial to buy a short-term and real-return (inflation protected) ETF focused specifically on the Canadian market. iShares Canada offers these products.

I know for sure that there are a million different options to build a portfolio such as this – swapping different ETFs from different companies to get the desired results of a dividend focused portfolio. That is up to you to do. Just be sure you are constantly watching the fees – higher fees does not equal better results. Also, make sure the dividend ETFs invest in a wide variety of stocks. Some only try to match the performance of the 30 companies in the Dow Jones. Remember that diversity and proper asset allocation is the key.

*Disclaimer: As with all articles on The Dividend Guy blog, this post is not a recommendation to buy any of the above securities or funds. Please do your own research and build the portfolio that is right for you.