Co-written by Robert & Sam Kovacs

The need for this article

While we’ve been SA contributors for a long time now, it is only in spring 2019 that we started publishing content on a regular basis. Being contributors here has been a blast. On top of all the feedback from our readers, writing articles has increased our father & son cooperation in managing our respective portfolios.

Source: Open Domain

We are very happy with the way things have been going. We’ve had plenty of great discussions with our readers who write us to ask follow up questions. One recurring question we get a lot of the time is: “I’m x years old with $yyy,yyy in the bank, what stocks should I buy?”

We’ve always been forced to turn down such inquiries with a boilerplate “We are not registered investment advisors, and cannot give individualized investment advice”.

As time has passed, this question has been asked more and more often. This got us thinking, and asking: is there some generalized opinions about how to approach the market which we could offer dividend investors?

Seeking Alpha is a great vector to do this, as it is clear that all is for informational purposes.

We’ve written many strategy articles, the most important of which is our “All Weather, Fair Weather & No Weather Stocks” article which exposes our stock selection framework. Next, is our “How to retire on dividends forever & ever” article, which explains the wider system within which we are working.

We have then also written a series of articles, once a month since May, tracking our model “All Weather Portfolio”. The idea was to show investors how we approach portfolio building, and how we would build one from scratch. We are buyers of all the stocks which are included in the portfolio, although it doesn’t exactly replicate our own portfolios.

But, as Sam was talking to some of his friends who wanted to get started with dividend investing, he realized they were overwhelmed with the quantity of information. How much in All Weather stocks, how much in fair weather stocks? How to size the positions? “All I wanted to know was which stocks to buy!”

These are all very important questions to ask, and to the seasoned investor, such considerations shouldn’t be paralyzing. But to the first time investor, it can seem like to much.

This reminds us of the story of two neighbors, who set out to start gardening. The first neighbor, John grabs a shovel and starts digging. The second, Tim decides to read about what sort of shovel would be best. John has now planted seeds. Tim is now looking up which sort of soil would be best for his garden. A few weeks pass, and Tim now has an excel spreadsheet with links to 3 different shovels, 2 soil types which are on back-order, the best flower seeds on the market, and the fertilizer. He has already set a watering calendar, with reminders on his phone, and has installed various apps and ordered 5 different books. Tim goes out for a smoke, and thinks to himself “Boy, I’m gonna have a beautiful garden”. He looks over the fence, and sees John watering a beautiful flowerbed. Tim is gobsmacked, and asks John, “Wow, how could you? This is amazing! What is your secret?”

John answers, “Well, for one, I got started”.

While a certain level of planning is of course desirable, and as you can tell from our articles, we spend a considerable amount of time planning. Yet we are also big on taking action and getting started. Planning is fine until it stops you from actually doing.

This article is for investors who have read our research, and want to shift gears and get started.

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A few practical considerations

Source: Open Domain

So what is the easiest way to get started? Build a diversified core of 10 All Weather stocks. This will give one a solid core of companies which have passed the test of time, and have the attributes which make them “keep forever” stocks.

1 stock per sector will be included. Only materials will not be represented in this article. This makes it easy for investors to work out equal amounts to invest in each stock.

The only other consideration for dividend investors is “how much of my available cash should I invest now ?” Dividend investors often ask whether it is best to invest everything now, or invest over time.

This should depend on the amount of cash one has to invest.

If an investor is just starting out and have $10,000 to his name and is saving $500 per month to invest, then any fancy timing might be overkill. Purchasing $10K of stocks means you can loose at most $10K. In 20 months of saving that would be made up for.

Then each month, monthly savings would contribute to building around the portfolio.

On the other hand if an investor has a sizeable amount of cash relative to monthly contributions which he’ll be making, spreading out over 6-24 months might make sense. In this case one would have to decide how much of that cash should be invested now.

Remember that the goal is to get started, and that the details can be figured out later.

If we take the approach we used when building the All Weather model portfolio we said that: “an all weather stock will be started at 2% of the portfolio.”

If we take this as a yardstick, one would invest 2% times 10 = 20% of one’s cash.

Obviously there are no fixed in stone rules here, but this would serve as a prudent way to get started.

The 10 starter stocks

The stocks we’ve decided to include are all stocks which we’ve covered quite recently. A small summary of why we decide to include them will be mentioned in this article, but links to past research will be provided for more in depth analysis.

Source: Open Domain

Financial Sector: Bank of America (BAC)

We’ve been extremely happy to see BAC yielding 3%, as we have personally loaded up the truck at this rate. BAC has been forced by the fed to keep its dividend flat for now. This gives the opportunity to snap up shares at a yield which is very rewarding. BAC remains one of the best banks to be owned, with more than enough capital reserves and earnings to cover the dividend payment.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

BAC

$24.02

3.00%

9.8x

91 / 100

40 / 100

Source: mad-dividends.com

To read our most recent article on BAC, click here.

Real Estate Sector: Federal Realty (FRT)

Federal Realty has encountered some difficulties with the Covid-19 pandemic, and only be collecting slightly over 50% of its monthly rents. This has driven the stock price down, and the dividend yield up. Management has pretty much stated that they will go the extra mile to maintain their 52 year dividend hike streak, and make it 53 years. What’s more, is they still very much have the liquidity to do so.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

FRT

$79.95

5.25%

17.65x

79 / 100

35 / 100

Source: mad-dividends.com

To read our most recent article on FRT, click here.

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Communications Services Sector: AT&T (T)

AT&T has the typical characteristic of a stock we are happy investing in. The dividend is well covered by an all weather business which generates incredible amounts of cash, and which will likely continue to increase at this slow rate. This is the typical case of the dividend carrying your returns, and when you get 6.9% from the dividend alone, you don’t need much more to do very well.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

T

$30.13

6.9%

15.37x

90 / 100

85 / 100

Source: mad-dividends.com

To read our most recent article on AT&T, click here.

Healthcare sector: Pfizer (PFE)

Pfizer’s 4.5% yield makes it a strong buy in our book. The stock, unlike many other healthcare names, hasn’t performed up to its full potential. Yet it remains a strong candidate in developing a Covid-19 vaccine, which could give a nice bump. While the dividend is expected to decrease following the Upjohn spinoff, selling the Upjohn position and reinvesting in PFE would likely resolve any concerns here.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

PFE

$33.03

4.49%

12.08x

81 / 100

67 / 100

Source: mad-dividends.com

To read our most recent article on PFE, click here.

Utilities Sector: WEC Energy (WEC)

WEC Energy is one of our all time favorite utilities. The company is super well run, and as solid as a rock. The dividend can be expected to grow at a stable 7% per annum, which makes it a great buy below 3%. The current yield of 2.87% is slightly below that threshold, but not enough to prevent an investor to get started with a position at current prices.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

WEC

$88.05

2.87%

23.93x

95 / 100

61 / 100

Source: mad-dividends.com

To read our most recent article on WEC, click here.

Information Technology Sector: IBM Corporation (IBM)

Our decision to invest in IBM came in the past months after years of refusing to do so. Our reticence to invest in IBM has long been explained in Robert’s past articles on the company. Valuation was mainly the problem, as we feared that the company was maturing and that dividend growth would stall and turn from significant growth to small, token bumps. As such we required a higher yield. Well, a higher yield is here now, and investors should make the most of IBM’s 5.5% yield.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

IBM

$118.35

5.51%

11.73x

94 / 100

75 / 100

Source: mad-dividends.com

To read our most recent article on IBM, click here.

Industrials Sector: 3M Co (MMM)

Just like IBM, we refrained from purchasing 3M because of its valuation. We didn’t believe that 3M’s future dividend growth made an investment worthwhile when its price was high. In October 2019, Robert stated that we expected the stock to go down more. Then in May, we got in around $145. The stock’s dividend yield of 3.85% still makes it a good buy today

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

MMM

$152.85

3.85%

17.95x

84 / 100

69 / 100

Source: mad-dividends.com

To read our most recent article on 3M, click here.

Consumer Staples Sector: Phillip Morris (PM)

We understand that many investors are reticent to investing in tobacco companies, and this is well understood. We don’t take such moral high ground. From the eyes of a dividend investor, PM has what it takes to pay you regular dividend checks for years to come. The decision in the sector for us, was mostly between PM and Altria (MO), and we decided that for a starter position, PM would be more appropriate for its exposure to countries in which smoking is still growing. For instance, Sam is currently in Indonesia, where he sees cigarette brands making ads with large banners which say “Never quit”. Of course, this is a cynical investment, and we as usual expect the comments which will come with it. However, Tobacco is a very defensive product, and it makes sense to have it as part of an equity portfolio. What’s more, you get paid a fantastic 6.4% yield which grows steadily each year.

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Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

PM

$72.96

6.41%

14.86x

62 / 100

60 / 100

Source: mad-dividends.com

To read our most recent article on PM, click here.

Energy Sector: Chevron (CVX)

Investors would be well advised to tread lightly when considering energy stocks to invest in given the current state of the market. Every time we look at it however, CVX’s fantastic management always brings it to the top of our list. At 6%, any future growth becomes secondary.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

CVX

$85.23

6.05%

40.98x

90 / 100

78 / 100

Source: mad-dividends.com

To read our most article on CVX, click here.

Consumer Goods Sector: VF Corp (VFC)

As yields go down, the sensitivity of future income to a few basis points in yield goes up. This has been documented in multiple of our articles, one good example is our recent “The dividend race”. VF Corp now yields 3.16% rather than the 3.4% it yielded when we recently bought into the stock again. This still makes it borderline acceptable as an investment, and for exposure to this dangerous sector, it is our favorite pick for the combination of dividend history, quality management, and strong portfolio of brands.

Ticker

Last Price

Dividend Yield

P/E

Dividend Strength Score

Stock Strength Score

VFC

$60.7

3.16%

35.73x

48 / 100

35 / 100

Source: mad-dividends.com

To read our most recent article on VFC, click here.

Portfolio summary

This portfolio would provide one with exactly 10% in all 10 sectors. One would only lack exposure to materials.

Source: mad-dividends.com

This portfolio would have no bias to any sector. It would form a strong basis to start adding more to. Investors could include more All weather dividend stocks and some fair weather dividend stocks in upcoming months, and also bolster their position in these names.

Such a portfolio would yield 4.75% in aggregate. It include some more modestly yielding positions like WEC, VFC & BAC, mixed with higher yielding positions. As such, it achieves dividend diversification across yields and growth rates.

These stocks are all mature businesses, who we believe at current prices will offer good returns from the dividends alone. This should give dividend investors the confidence to start such a portfolio in any market, including this one. The important in investing, like in any worthwhile pursuit, is to get started.

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Disclosure: I am/we are long VFC, T, IBM, FRT, MO, PM, WEC, PFE, CVX, MMM, BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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