Building A $50,000 Dividend Portfolio With 3 ETFs And 3 High Dividend Yield Stocks

William_Potter

Investment Thesis

In today’s article I will illustrate how you can build a $50,000 dividend portfolio with three ETFs and three individual companies. I will not only explain the reduced risk level of this dividend portfolio, I will also demonstrate the advantages of such a diversified dividend investment strategy when compared to a single ETF-approach.

I will show you in greater detail how combining ETFs like Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) and Vanguard S&P 500 ETF (NYSEARCA:VOO) can help you to merge the benefits of investing in sustainable, reliable dividend-paying companies through SCHD. Moreover, offering the opportunity to invest in technology giants like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), which offer particularly attractive risk-reward profiles, through VOO.

The portfolio that I will present today offers a Weighted Average Dividend Yield [TTM] of 3.36%, and a 5 Year Weighted Average Dividend Growth Rate [CAGR] of 8.63%. These figures indicate that the portfolio successfully combines dividend income with dividend growth.

Within this dividend portfolio, I have included the following three high dividend yield companies to increase its potential for generating income via dividend payments:

• Ares Capital (NASDAQ:ARCC)
• Realty Income (NYSE:O)
• BlackRock TCP Capital Corp (NASDAQ:TCPC)

I believe that each of these picks are not only excellent choices when it comes to risk and reward, they also pay an attractive Dividend Yield [FWD] and offer potential for dividend growth. Furthermore, only Realty Income is already included in one of the ETFs in this portfolio, thereby ensuring reduced company-specific concentration risk.

I have included the below ETFs, which not only ensure a broad diversification across companies and sectors, but also enhance the risk-return profile for our dividend portfolio:

• Schwab U.S. Dividend Equity ETF
• iShares Core Dividend Growth ETF (NYSEARCA:DGRO)
• Vanguard S&P 500 ETF

The Schwab U.S. Dividend Equity ETF is an excellent addition to this portfolio due to its inclusion of companies that pay sustainable dividends, reducing the likelihood of dividend cuts and increasing the potential for positive investment outcomes. SCHD’s lower risk level makes it particularly attractive compared to other ETFs.

iShares Core Dividend Growth ETF is an attractive complement to SCHD, due to its potential for dividend growth, its stronger focus on companies from the technology sector, and its reduced risk-level (its Annualized Volatility stands at 11.12% while the Median of all ETFs is at 12.80%).

I believe that the Vanguard S&P 500 ETF is particularly appealing for this portfolio because it significantly overweights companies in the technology sector. These companies are especially attractive in terms of risk and reward, offering investors elevated chances for positive investment outcomes.

The chart below illustrates how these selected ETFs and individual companies have performed within the past 5 years.

Source: Seeking Alpha

The graphic illustrates that among this selection, Ares Capital and the S&P 500, with Total Returns of 95.11% and 85.69% respectively, have performed the best.

This supports my investment thesis that building dividend portfolios comprising both ETFs and individual companies can offer significant benefits to investors.

With a Total Return of 4.19%, Realty Income has shown the lowest performance among this selection.

Overview of the 3 Selected ETFs and 3 High Dividend Yield Companies

Click to enlarge

Source: The Author, data from Seeking Alpha

Risk Analysis of The Current Composition of This Dividend Portfolio

Risk Analysis of the Portfolio Allocation per Company/ETF

Schwab U.S. Dividend Equity ETF constitutes the largest share of this dividend portfolio at 40%, followed by iShares Core Dividend Growth ETF at 28%, and Vanguard S&P 500 ETF at 20%, indicating that ETFs represent 88% of this portfolio.

This high percentage of the ETFs ensures that the proportion of each of the individual companies is relatively low, thereby reducing the company-specific concentration risk of this dividend portfolio. Realty Income, Ares Capital, and BlackRock TCP Capital Corp each account for 4% of the overall investment portfolio.

Source: The Author

Risk Analysis of the Company-Specific Concentration Risk When Allocating SCHD, DGRO and VOO Across the Companies they Are Invested in

The below graphic shows the portfolio’s current allocation when distributing each of the ETFs (SCHD, DGRO and VOO) across the companies they are invested in. The companies highlighted in blue are direct investments while the ones in green are indirect investments via ETFs.

It is worth mentioning that Realty Income is the largest position of this portfolio, accounting for 4.02%, followed by BlackRock TCP Capital (4%), and Ares Capital (4%). The slightly higher allocation to Realty Income, compared to BlackRock TCP Capital and Ares Capital, results from the Vanguard S&P 500 ETF’s minor investment in Realty Income.

All other companies are indirect investments via the previously mentioned ETFs and account for less than 3% of the overall portfolio, indicating a low company-specific concentration risk: with 2.69%, Chevron is the fourth largest position of the portfolio, followed by PepsiCo (with 2.26%), Microsoft (2.26%), Coca-Cola (2.22%), Amgen (2.18%), AbbVie (2.18%), The Home Depot (2.10%), Cisco Systems (2.04%), and Apple (2.00%). All other companies represent less than 2% of the portfolio and are not part of this illustration.

Source: The Author, data from Seeking Alpha and Morningstar

Risk Analysis of the Portfolio’s Sector-Specific Concentration Risk When Distributing SCHD, DGRO, and VOO Across their Sectors

The illustration below demonstrates the portfolios current sector allocation when distributing SCHD, DGRO, and VOO across the sectors they are invested in.

The five sectors with the largest proportion compared to the overall portfolio are the Financials Sector (accounting for 22.82%), the Information Technology Sector (14.41%), the Health Care Sector (13.21%), the Industrials Sector (10.39%), and the Consumer Staples Sector (10.02%).

The remaining sectors each account for less than 8.5% of the overall portfolio, indicating its reduced sector specific concentration risk: the Energy Sector represents 8.43% of the overall portfolio, the Consumer Discretionary Sector 7.89%, the Real Estate Sector 4.46%, the Communication Services Sector 4.00%, the Utilities Sector 2.54%, and the Materials Sector 1.83%.

The reduced sector-specific concentration risk further indicates the decreased risk level of this portfolio, enhancing the likelihood of positive investment outcomes.

Source: The Author, data from Seeking Alpha and Morningstar

Risk Analysis: Analyzing the 5 Largest Positions of This Dividend Portfolio

Analysis of the Dividend Yield and Dividend Growth Potential of the 5 Largest Positions

The chart below illustrates that the selected dividend portfolio effectively combines dividend income and dividend growth, given the attractive dividend income and dividend growth potential of the five companies with the largest proportion of the portfolio.

With a Dividend Yield [TTM] of 9.10% and a 5 Year Dividend Growth Rate [CAGR] of 4.24%, Ares Capital mixes dividend income and dividend growth. Similarly, Realty Income, Chevron, and PepsiCo balance income and growth, boasting Dividend Yields [TTM] of 5.59%, 3.71%, and 2.81% along with 5-Year Dividend Growth Rates [CAGR] of 3.55%, 6.25%, and 6.40%, respectively.

Although BlackRock TCP Capital has experienced a negative 5-Year Dividend Growth Rate of -1.14%, it offers a double-digit Dividend Yield [TTM] of 12.78%, strongly contributing to the portfolio’s income generation via dividend payments.

These numbers reflect the sustainable dividends paid by the companies that are part of this portfolio along with the reduced risk they offer to investors.

Source: The Author, data from Seeking Alpha

Analysis of the 24M and 60M Beta Factors of the 5 Largest Positions of This Dividend Portfolio

The reduced risk level is further underscored by the low 24M and 60M Beta Factors of the five largest positions of this dividend portfolio.

It can be highlighted that all of the five largest companies exhibit a 24M Beta Factor below 0.8, indicating that this portfolio provides investors with a reduced volatility, which in turn implies a lowered risk-level: Realty Income, Ares Capital, BlackRock TCP Capital Corp, Chevron, and PepsiCo exhibit 24M Beta Factors of 0.62, 0.77, 0.64, 0.71, and 0.44 respectively.

Source: The Author, data from Seeking Alpha

Risk Analysis of the Equity Style of This Dividend Portfolio

The equity style of this dividend portfolio further underscores its reduced risk level. The chart below shows that 32% of the companies in the portfolio are large-cap value-focused, while 24% are large-cap companies balancing both value and growth (core), reinforcing my investment thesis that this dividend portfolio presents a lower risk level to investors.

The reduced portfolio allocation to small-cap companies (6% of the companies in the portfolio are small-cap value-focused and 1% are small-cap companies balancing both value and growth (core)) further strengthens this thesis.

Source: The Author, data from Morningstar

The Additional Advantages of The Dividend Income Accelerator Portfolio in comparison to This Dividend Portfolio

With a Weighted Average Dividend Yield [TTM] of 3.36% and a 5 Year Weighted Average Dividend Growth Rate [CAGR] of 8.63%, this dividend portfolio effectively merges dividend income with dividend growth.

Here on Seeking Alpha I am building The Dividend Income Accelerator Portfolio, which offers investors a superior mix in terms of dividend income and dividend growth.

At this moment in time, the portfolio provides investors with a Weighted Average Dividend Yield [FWD] of 4.63%, and a 5 Year Weighted Average Dividend Growth Rate [CAGR] of 8.07%, while, at the same time, offering a broad diversification across companies and sectors in addition to a geographical diversification and an optimized risk-reward profile.

The primary goal of the Dividend Income Accelerator Portfolio is to enable you to invest with a reduced risk level, thereby increasing the chances of positive investment outcomes while generating substantial extra income through dividend payments. Additionally, the portfolio is designed to annually increase this dividend income due to its strong potential for dividend growth. In contrast to the portfolio presented in today’s article, The Dividend Income Accelerator Portfolio includes a bond ETF, contributing to further reducing portfolio volatility and decrease the overall portfolio risk-level. For these reasons, I believe that The Dividend Income Accelerator Portfolio provides investors with an even better risk-reward profile when compared to the portfolio presented in today’s article.

Conclusion

Building a diversified dividend portfolio with several ETFs and individual companies can provide investors with multiple advantages. These include an even broader diversification, optimized risk-reward profiles and better positioning to the investor’s personal financial goals and personal risk-tolerance.

The dividend portfolio presented in today’s article not only provides investors with a stable dividend income, but also positions the portfolio for growth, underscoring the advantages of a diversified dividend investment strategy over a single ETF-approach.

Even though a single ETF-approach with exclusively investing in SCHD would imply a superior mix of dividend income and dividend growth (SCHD’s Dividend Yield [TTM] and 5 Year Dividend Growth Rate [CAGR] are 3.37% and 11.80% when compared to the 3.36% and 8.63% of this dividend portfolio), the portfolio presented in today’s article provides you with an even broader diversification across companies and sectors when compared to exclusively investing in SCHD.

In addition to that, such a portfolio offers the advantages of including companies from the S&P 500, which are particularly attractive when it comes to risk and reward but are not part of SCHD. Both Apple, which represents 5.64% of the S&P 500, and Microsoft, accounting for 7.09%, can be named as examples. By investing exclusively in SCHD, for example, you would miss out on the attractive risk-reward profiles of these U.S. tech giants.

The elevated diversification of this dividend portfolio provides you with increased chances to perform well in any market condition, which is one of the objectives of the dividend portfolios I am building and constantly publishing here on Seeking Alpha.

In case you prioritize the generation of dividend income, you could slightly increase the proportion of SCHD and include additional companies that pay an attractive Dividend Yield.

Alternatively, if your primary goal is to achieve a higher Total Return, you might boost the proportion allocated to VOO and include additional single companies that are particularly attractive in terms of risk and reward. Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) can be named as an example that is particularly attractive when it comes to risk and reward, given its portfolio of companies with wide economic moats and its long track record of outperforming indices.

One of the primary risk-factors of the dividend portfolio presented in today’s article is the absence of fixed income assets. This elevates the risk level for investors, especially for those that do not invest over the long-term. For this reason, I generally suggest a long-term investment-approach.

In case you would like to further reduce the volatility of this dividend portfolio, I suggest including U.S. government bonds. This approach can help you to further reduce the downside risk of this portfolio, particularly over the short term.

The strategies mentioned allow you to tailor your portfolio to meet your personal financial goals and risk tolerance, enabling you to create a portfolio that best suits your needs.

It would be great to hear if you also combine ETFs with single companies within your dividend portfolio. Do you?

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