Tuesday, April 04, 2006

Four ETFs to create an income portfolio for conservative investors

Recently there has been quite a bit of discussion on ETFinvestor about investing for income. My position is that dividend payouts are a concrete sign of corporate maturity and strength as well as proof that management has its eye on shareholder value.

Dividends are a cushion against declines in stock prices: If stock's price fell by 10% but it paid out 3% in dividends, your net loss would only be 7%, conversely if the stocks price were to rise by 10% your net gain would be 13%. When combined with dividend reinvestment, income portfolios provide impressive amounts of capital appreciation

An income portfolio made up only of stocks will not yield very much, even the highest yielding dividend ETF's don't pay much more than 3.3%.To get higher returns you need to own "income producing securities" such as REIT's, bonds, income trusts, MLPs, and preferred stocks.

At the moment there are ETF's that cover the main sources of investment income: dividend paying stocks, REITs, and Bonds. When combined these will provide most of the diversification that could be created in a

I propose that the "Market Participant Income Portfolio" will provide conservative investors with good income as well as the potential for capital growth.

Market Participant Conservative Income Portfolio

  • 25% SDY --SPDR Dividend Aristocrats
  • 25% PID -- Powershares International Dividend Achievers
  • 25% VNQ -- MCSI US Equity REIT index
  • 25% AGG -- Lehman Aggregate Bond Fund.
It's possible to get much higher yields by replacing the REIT ETF with with a few well chosen REITs and Business Development Companies (BDCs). The bond portion could be improved by adding exposure to high-yield bonds and/or mortgages possbily via a Mortgage REITor a no load mutual fund that invests in high yeild bonds. For the US dividend portion, (SDY) could be replaced with (DVY) to get more yield, I chose SDY as it is the most conservative of the dividend ETFs. These idea's are explored in a later post on a more agressive conservative income portfolio

(FD: I own shares of PID and SDY)

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