Friday, April 07, 2006

A more agressive conservative income portfolio

Four ETFs to create an income portfolio for conservative investors described how to use four ETF's to make a portfolio that would combine current income with capital gowth.

Original 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.
With a few tweaks we can increase the yield without taking on excess risk. The first step is replacing (SDY) with (DVY). SDY is the most blue chip of the dividend funds, made up of companies which have raised dividends for over 25 years. DVY is little more lenient, looking only for a five year history of non negative dividend growth and a payout ratio of less than 60%. DVY's Dividend weighting scheme results in a index with greater emphasis on absolute dividends paid. The yield difference between SDY and DVY is about 0.6%.

The second step is to replace 10% of the (VNQ) allocation with 5% each of (KFN) and (ALD). KFN is KKR Financial Corp., a real estate investment trust launched by buyout firm Kohlberg Kravis Roberts, to engage in equity investment and investments in residential, corporate, commercial loans as well as mortgage and asset-backed securities. Like most things associated with KKR, KFR uses leverage and a finely tuned capital structure to enable the REIT to punch far above its weight. KFN is currently yielding 7.1%.

ALD is Allied Capital, the oldest and largest Business Development Company [BDC] in America. Established in 1958, Allied makes loans and takes equity positions in small and midsized private companies. ALD is currently yielding 7.6%. Adding these higher paying non-equity REIT assets to the portfolio will both increase income and provide diversification from the property REITs in VNQ.

Aggressive Conservative Income Portfolio

  • 25% (DVY) --Dow Jones Select Dividend Index
  • 25% (PID) -- Powershares International Dividend Achievers
  • 15% (VNQ) -- MCSI US Equity REIT index
  • 5% (KFN) -- KKR Financial Corp
  • 5% (ALD) -- Allied Capital
  • 25% (AGG) -- Lehman Aggregate Bond Fund.

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