Investors often ask me how to build a portfolio that holds its own in down times but hands them soli...
Dividends on Steroids
10/20/2010 1:00 pm EST
Richard C. Young, editor of Intelligence Report, likes a closed-end fund that buys stocks which have long histories of raising dividend payouts.
I have long advised you to focus on buying the stocks of companies that consistently raise their dividends and put cash in your pocket, serving as a hedge against inflation.
Over the last five years, the Standard & Poor’s 500 Dividend Aristocrats (which comprise stocks in the S&P 500 that have raised dividend payouts for 25 consecutive years—Editor) have returned 31.1%, while the S&P 500 has returned only 4.3%, or near-inflation levels.
BlackRock Enhanced Dividend Achievers Trust (NYSE: BDJ) is a closed-end fund focused on equities of companies that have long, steady records of dividend increases. BDJ maximizes its own distributions by using a covered-call strategy to increase payments to shareholders. Every year management rebalances the trust.
In 2010, only 7.3% of North-American-listed dividend-paying common stocks were picked as "dividend achievers." Out of those, the top 100 highest-yielders are chosen for potential positions in BDJ. Then, using a method based on yield, sector, industry, market capitalization, and volatility, the managers of BDJ narrow down the list to the final 60–90 equities that are purchased for the fund.
BlackRock Enhanced Dividend Achievers Trust is loaded with names from my master list. In its top-10 holdings you'll see plenty of them, including Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), McDonald's (NYSE: MCD), AT&T (NYSE: T), General Dynamics (NYSE: GD), and Coca-Cola (NYSE: KO).
The allocation of the trust's holdings is heavily weighted in my favored consumer staples sector, representing over 20% of the trust.
Procter & Gamble has a history of uninterrupted dividend increases going back 56 years. And, in the past ten years, P&G has increased dividends at an annualized rate of 11.01%. P&G yields over 3% today. Coca-Cola has increased dividends for 47 years straight, posting annualized increases of 9.87% for the last ten years. Today, Coke is yielding just below 3%.
Some other names owned by BDJ are tech-giant IBM (NYSE: IBM) and pharmaceutical company Abbott Laboratories (NYSE: ABT). The two companies have raised dividends for 15 consecutive years, in the case of IBM, and for an impressive 37 consecutive years, in the case of Abbott.
To boost distributions from the trust, the managers of BDJ write covered calls on its assets. The money BlackRock makes from selling the options is paid out as distributions to shareholders. The reason the call options are called "covered" is that BlackRock already owns the shares it sells the rights to. This is a nice way to boost yield on the portfolio, though it does diminish the gains from capital appreciation that investors will see on the shares.(BDJ closed around $8.70 Tuesday—Editor.)
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