Focus on total return

The way I have been running my Dividend Income Portfolio and tracking its performance, I'm chagrined to admit, did emphasize yield and income from dividends over total return. The stated goal of the portfolio was to beat the yield on the 10-year Treasury with less risk. And each time I reported on the portfolio's performance, I emphasized how much cash the portfolio threw off -- and assumed that investors in the portfolio would withdraw that cash rather than reinvest it.

All this had a tendency to de-emphasize total return.

Going forward, I'm going to try to fix that. I will continue to report on the cash thrown off by the portfolio, since I recognize that many investors are looking for ways to increase their current cash incomes. But I'm also going to report the total return on the portfolio -- so you can compare its performance with other alternatives -- and assume that investors will reinvest the cash from these dividend stocks back into other dividend stocks. That will give the portfolio -- and investors who follow it -- the advantage of compounding over time, one of the biggest strengths in any dividend income strategy.

How to make the transition? I could go back to October 2009, the last time I did a major revision of this portfolio, and assume that I reinvested all the dividend cash flow from each of those years into other dividend stocks. That would be especially rewarding if I could put the money each year into the dividend stocks that I now know -- with 20/20 hindsight -- have done best since 2009 or 2010 or whatever.

That does strike me as cheating, though, for the obvious reasons.

How I'm retooling

Instead, I'm going to assume that I've been sitting on the cash generated by the portfolio since October 2009 -- let's say I was paralyzed by fear of the market -- but that I've now been convinced by my own arguments in favor of pursuing a dividend income strategy to put that cash to work. That gives me $29,477 in dividends received since October 2009 to put to work in new dividend picks that I will add to the portfolio today. 

Where does that $29,477 number come from? It's the total of dividends collected by the picks in the portfolio from October 2009 through December 2012 on what was an original $100,000 investment. That comes to a 29.5% payout on that initial investment over a period of 39 months. That's a compound annual growth rate of 8.27%.

And since we care about total return, how about capital gains or losses from the portfolio? The total equity price value of the portfolio came to $119,958 on Dec. 31, 2012. That's a gain of $19,958 over 39 months on that initial $100,000 investment, for a compound annual growth rate of 5.76%.

The total return on the portfolio for that period comes to $49,435, for a compound annual growth rate of 13.2%.

How does that compare with the total return on the S&P 500 over those 39 months? For that period, $100,000 invested in the S&P 500 would have grown to $141,468, with price appreciation and dividends included. That's a total compounded annual rate of return of 11.26%.

I would point out that these performance numbers for the S&P 500 do have the benefit of real compounding, unlike my Dividend Income Portfolio, since each year's gains or losses on the S&P stocks work off of the gains and losses from the previous year. That's part of the reporting handicap my revision of the Dividend Income Portfolio is designed to close.

But even so, an annual advantage to the Dividend Income Portfolio of almost 2 percentage points isn't something I'd turn down in this or any other market.

And now the moves

Going forward, I'm going to drop one disappointment from the current portfolio:

  • Brazilian utility CPFL Energia (CPL) has been clobbered by regulatory changes in the country's utility sector. The stock is down 16.05% since I added it to the portfolio on Sept. 20, 2011. Just as important, the company has cut its dividend payout this year.

I'm also going to add three positions to the portfolio -- one to replace CPFL Energia and two others to soak up the cash sitting in the portfolio from past dividend flows. I'll have more on these three buys when I post each one to the portfolio over the next day or two.

  • I'm going to add Targa Resources Partners (NGLS). The master limited partnership, a member of my Jubak's Picks portfolio, pays a 6.81% dividend. Targa has recently acquired its first big foothold in the Bakken Formation in North Dakota. The pipeline operator recently raised its target for 2013 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by 10% to 15% and kept its projections for distribution growth for 2013 over 2012 at 10% to 12%.
  • I'm also going to add take advantage of depressed oil prices to add shares of ConocoPhillips (COP). The company has one of the strongest portfolios in the liquid-rich Eagle Ford, Permian Basin and Bakken boom regions. The reserve replacement ratio looks to be greater than 100%, thanks to a $15 billion capital-spending budget. The shares yield 4.51%.
  • Finally, I'm going to add shares of Intel (INTC), now yielding 4.1%. I'm pretty sure most of you will hate this pick. The stock is down 12.4% in the past 12 months on well-justified fears of the continued slowdown in the PC market. PCs continue to lose share to tablets and smartphones, where Intel has a less-than-imposing presence. We are seeing the end of the "Wintel" Intel/Microsoft (MSFT) duopoly that has dominated desktop computing. (Microsoft publishes MSN Money.) But you can already see the next transition at Intel taking place with its own small- and lower-power chips clawing for share in the smartphone and tablet market, and the company gradually joining the ranks of the few remaining global foundries that make chips for other chip companies. Intel's foundry business is currently very small, with only three customers as of December. But I think that will change in 2013 and that will once again start to transform the way investors think of Intel.

I have the cash in this portfolio to add another pick or two, but I'm going to wait until after the great debt ceiling battle is over and it's clearer to me how the market is going to break in the first half of 2013. Even with dividend stocks -- or maybe especially with dividend stocks -- it's good to look for bargains.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

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At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any stock mentioned in this column as of the end of September. For a full list of the stocks in the fund as of the end of September, see the portfolio on the Jubak Global Equity Fund website.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

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