The Stein Demuth Dividend Stock Short List1) At least match the yield of DVY, iShares Dow Jones Select Dividend Index
2) Diversify across different sectors.
3) Perform fundamental analysis.
4) Invest in companies that pay dividends regularly and consistently never cutting or omitting them. You want steady payers.
How to make individual stock selections
1) Morningstar.com – lookup the trailing 12 month dividend yield of iShares Dow Jones, DVY.
2) This gives you the yield to beat – enter symbols.
3) Under Morningstar snapshot, check management grades for profitability, financial health, ignore growth.
4) Go to Charts and Returns page – Dividend history for past few years – has it benn cut for any reason? If so, cross it off the list.
5) Diversify if utitilites, e.g. Houston versus a Seattle utility. Larger market caps are more stable.
6) Consumer business and ind stocks are generally going to have lower yields than banks and utilities. If higher, achieved in one industry – tobacco.
DVY – let DVY do the heavy lifting.
· It’s an ETF which means low expense
· list of top dividend paying stocks
· excludes REITs (15%)
· positive 5 year dividend growth rate.
First dividends are “double-taxed.” Taxed once as income at corporate level and they’re taxed again as ordinary income when they’re distributed to shareholders.
- The Dow Jones Select Dividend Index
| | Ticker | Yield | Expense |
| iShares Dow Jones Select Dividend Index | DVY | 3.3% | .40% |
- List of the top dividend-paying stocks from the Dow Jones Total Stock Market Index.
- REITs are excluded so taxable at the 15% rate.
- Make sure each of the stocks has a 5 year positive dividend growth rate, so companies whose stock prices are plummeting (creating an artificially high temporary dividend yield) aren’t included. Weak players on the list are quietly replaced if their dividend yields fall and someone else’s becomes more attractive.
- 50 companies.
Open Versus Closed-End Mutual Funds
- Open End: management sells and redeems shares of the fund themselves at the day’s closing net-asset value. Investors buy and sell their shares in the fund directly from the management company. (Vanguard, fidelity) which in turn buys and sells the underlying securities that the fund holds to keep pace with this supply and demand.
- This equals most, standard mutual funds.
- A closed end fund issues shares only once at the initial public offering.
After that, their shares trade like ordinary stocks on the stock exchange where they’re listed. This protects the fund from massive inflows and outflows of dollars, which can confuse performance by flooding management with money or by compelling sales and allows management to concentrate on the primary job of managing the portfolio.
Since no new monies are added to the fund from new investors, the fund mgt. company may open several near-identical closed end funds to capture more assets, since (as with open end funds) fess are based on total assets under mgt.
This means that within the closed-end fund sponsors company, many funds tend to be run by the same mgrs with the same investment objectives, holding the same securities and performing similarly.
Closed end funds usually trade on the open market at a premium or a discount to the actual net asset value of the securities they hold.
Usually sinks below the NAV a few months after the initial offering.
ETFs
Technically, all closed-end funds are exchange traded funds, since they’re traded on stock exchanges, but ETFs usually refer to a subset of closed-end funds that are really like a hybrid of open and closed end funds.
Instead of issuing a fixed # of shares (like CEF) the mgt. co’s of these ETFs create and redeem shares to keep pace with mkt demand (like OEF).
Because of this flexibility, the price of ETFs usually tracks that of the underlying securities quite closely, which means they sell at a tiny premium or discount amount.
Mgt. expenses for these funds are also generally much lower than for funds that are actively managed. ETFs were designed to be used as building blocks, allowing investors to create portfolios with precise and stable characteristics.
This winning combination of low expenses and preicise asset – class targeting means that you should take a special interest in ETFs whenever they meet your needs.
Closed end funds (and ETFs) trade like stocks, which means you have to pay commissions when you buy and sell them. This also means that you can buy or sell them any time the market is open, while with open-end funds you have to wait until the days closing. Closed funds normally pay out their dividends and gains rather than reinvesting them = good for current income.
Difficult to get info on, but go to www.etfconnection.com and cefa.com.
Leveraged Closed End Dividend Funds
All closed end, preferred stock funds are leveraged.
The lower the s/t rates, the better the performance = attached to rate.
Payout will vary.
Examples:
| | Yield | Expense |
| DNP | 9.8% | 1.9 |
| HPS | 9.3% | 1.1 |
| PSY | 8.9% | 1.1 |
Invest in stocks that issue dividends as well as ordinary income interest = tax consequences.
But if the leveraged fund pays all its dividends from trusts rather than true preferred stock, the after-tax advantage shrinks to less than .5 a % for those in 35% bracket.
List of closed-end leveraged funds that invest in preferred as well as ordinary dividend stocks. Their yield is taxable entirely at the lower dividend rate.
Leveraged Tax-Friendly Dividend Funds
| Fund | Yield | Expense |
| John Hancock Patriot DIV | 7.8% | 1.9 |
| John Hancock Patriot DIV2 | 7.1% | 1.9 |
| John Hancock Patriot SELECT | 7.7% | 1.7 |
| John Hancock Patriot GLOBAL | 7.3% | 1.9 |
| John Hancock Patriot PREFERED | 8.2% | 1.9 |
Day to day can be expected to fluctuate more so than an unleveraged – but can still get a steady dividend in light of this just attached to s/t rates.
Should the yield curve invert and the fund managers fail to get out of the way you could receive less interest from the fund than simply from owning an unleveraged bundle of preferred stocks.
In that event, the discount at which the fund sells would increase sharply and you would risk a loss if you sold.
REITS
Real Estate Investment Trusts
An equity REIT owns physical property – skyscrapers, malls, hospitals, hotels, shopping centers, nursing homes and the like.
It also manages them – leases space, screens tenants, collects the rent, renovates, paints, patches carpets and fixes the water heater and air conditioning – doing whatever it takes to keep the properties operational.
Manages a portfolio of real estate, selling existing properties and buying new ones as it deems advantageous.
Pros: Diversification in Real Estate
1) A REIT is a collection of properties that are often located in diverse geographic regions by buying several REITs you can cover the entire states = you can own a stake in a nationally diversified portfolio of commercial real estate properties with as little as $100.
2) Since they trade on stock exchanges, shares can be bought and sold within ten seconds any time the market is open,whereas an individual rental property might take months to unload.
Commission to sell = $10 versus a single million dollar rental at $60k.
3) REITs are leveraged at 50% and you can equalize with a rental leverage at 80% by buying REITs on margin or in a leveraged closed-end mutual fund.
4) The yields on REITs are fairly comparable to those from owning an apartment house.
5) They have a transparency and accountability previously unknown in real estate.
By law, a REIT must distribute 90% of its annual taxable income as dividends to its shareholders.
Depreciation used for tax purposes is returned through dividends – usually about 25 – 30% of the dividend yield from equity REITs constitutes such a return of capital and is ultimately taxed at the lower long-term capital gains rate.
This makes for a better after-tax yield on REITs.
Traditional, Real Property Real Estate Advantages:
1) Leverage
2) Tax Advantages through depreciation
3) Control to improve value of property
4) Not correlated to the stock market
Big, important point here: Although a REIT can give you national or global real estate diversification, and let you avoid tenant and property headaches with an investment that can be leveraged with a tax advantage, you are still correlated to the stock market. Not a strong correlation to small stocks, but a correlation nonetheless. Thus, with a stock market crash while real estate holds, you would still lose value in a REIT versus if you were in real property real estate. In my opinion, this defeats the purpose of true asset diversification – investing across asset classes; paper, real estate and business.
So, the question becomes, or at least, one of the questions becomes, is it still delivering yield? Perhaps you are not as concerned with underlying value if the check is still arriving in the mail. Still, you do not have asset diversification.
How to Buy a REIT
You can invest in a REIT by purchasing a low-expense-index mutual fund that simply tracks the entire sector. One is enough since they all sample form the same master list of 200 or so REITs.
Vanguards and Fidelity’s are open end mutual funds.
The others are ETFs which means you will pay a commission for each investment making it harder to dollar cost average.
| Fund | Ticker | Index | Yield | Expense |
| Vanguard REIT Index | VGSIX | Morgan Stanley REIT Index | 4.8% | .24% |
| Cohen & Steers Realty Majors | ICF | Cohen & Steers Realty Major Index | 4.5% | .35% |
| Dow Jones Realty Index Fund | IYR | Dow Jones Realty Index | 4.8% | .60% |
| Wilshire REIT | RWR | Wilshire REIT Index | 4.2% | .26% |
How REITs are Divided – Equity REITs
| Segment | Market Share |
| Industrial/Office | 31% |
| Shopping Centers | 13% |
| Fashion Malls | 13% |
| Retail Freestanding | 2% |
| Apartments | 18% |
| Manufactured Housing | 1% |
| Diversified | 6% |
| Hotel/Resort | 4% |
| Health Care | 4% |
| Self-Storage | 4% |
| Specialty | 4% |
An index fund will typically own a “chocolate box” of assorted REITs weighted to approximate each segments market share.
Hotel/Resort REITs do bad in a down economy vs. aptmts. And commercial which = 1 year to multi-year leases.
Shopping centers do better, dry cleaners, drug stores, a bank.
Ones to look at:
1) Shopping Centers
2) Manufactured Housing
3) Health care
4) Self-storage facilities
| Ticker | Yield | Ticker | Yield |
| UMH | 6.5% | O | 5.4% |
| PSA | 3.6% | NNN | 7.1% |
| KIM | 4.4% | HCN | 6.7% |
| REG | 4.5% | UHT | 6.6% |
| NXL | 6.6% | HR | 6.5% |
| ASN | 5.4% | DRE | 5.6% | CUZ | 4.3% |
| BRE | 5.1% | LRY | 6.1% | LXP | 6.4% |
| HPT | 6.8% | CLI | 5.7% | | |
| BDN | 6.2% | PEI | 5.6% | | |
The Recommended Stein/Demuth REIT - 9/2004
| Company | Ticker | Yield | Sector |
| United Mobile Homes | UMH | 6.5% | Manufactured Housing |
| Kimco Realty | KIM | 4.4% | Shopping Centers |
| Realty Income | O | 5.4% | Freestanding |
| Healthcare Realty Trust | HR | 6.5% | Health Care |
| Arch Stone-Smith Trust | ASN | 5.4% | Apt. |
| Merch-Cals | CLI | 5.7% | Office |
| Hospitality Properties | HPT | 6.8% | Hotel |
| Cousins Properties | CUZ | 4.3% | Diversified |
Leveraged REIT Mutual Funds = a fatter yield and it addresses the leverage issue of being able to leverage real estate and not stocks. Here, you can.
| Fund Ticker | Yield | Expense |
| RIF | 6.8% | 1.4 |
| RRE | 6.6% | 1.0 |
| RLF | 7.2% | 1.0 |
| RPF | 6.7% | 1.1 |
| RQI | 6.8% | 1.1 |
| NRL | 6.3% | 1.8 |
| NRI | 6.4% | 1.4 |
| JRS | 6.8% | 2.1 |
| RIT | 7.0% | 1.1 |
- Any of the above would suffice as far as covering the gamut of REIT sectors.
- Some are closed-end funds.
- Yields will fall as interest rates go up.
Royalty trust – a financial wrapper for holding a group of assets and their operating companies
They own hard assets such as oil reserves, timber, natural gas or minerals. The cash flows generated by the sale of the trusts’ assets are passed directly through to the shareholder.
· RTs tend to be concerned with energy exploration thus less susceptible to interest-rate risk as inflation represents a large component of that danger and the underlying oil and gas resources the trusts own act as a hedge.
Cons
1) The income will fluctuate with commodity prices up to about 15% yield.
2) The underlying assets are depleting – thus a return of principle.
3) Currency risk – Canadian dollar.
Pro – you receive a tax break
| Ticker | Business | Yield |
| BPT | Oil and Gas | 8.0 |
| DOM | Gas | 8.2 |
| GNI | Iron | 6.4 |
| MSB | Iron | 7.0 |
| PBT | Oil and Gas | 7.1 |
A Good Income Allocation
| Asset Class | Percent Allocation |
| REITs (stocks) | 20% |
| Inflation Indexed Bonds | 30% |
| Dividend Stocks | 20% |
| Bonds | 30% |
Conservative Income Portfolio
| Percent | Asset | Ticker | Yield | Expense |
| REITs 20% | Vanguard REIT Index | VGSIX | 4.8% | .24% |
| Stocks 20% | iShares Dow Jones Selected Dividend | DVY | 3.3% | .40% |
| TIPs 30% | Vanguard Inflation Prof. Securities | VIPSX | 3.5% | .18% |
| Bonds 30% | Vanguard ST Bond Index | VBISX | 2.9% | .20% |
The Aggressive Income Portfolio
| Percent | Asset | Ticker | Yield | Expense |
| REITs 20% | Cohen & Steers Quality Income | RQI | 7.7% | 1.1% |
| Stocks 20% | John Hancock Patriot Premium Dividend | PDF | 6.9% | 1.9% |
| TIPs 30% | iShares TIPs | TIP | 4.9% | .2% |
| Bonds 30% | Pimco Corp. Income Fund | PCN | 8.5% | 1.2% |
The asset column feeds the income column with passive cash flow and provides financial independence once cash flow is equal to or greater than expenses. 
The Stein Demuth Dividend Stock Short List
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