Richard Drury
In the current environment where interest rates are elevated and inflation is still running fairly hot, income investors are pickier than ever. While they want their investments to pay them income yields that at least match what they can get from a CD (i.e., 5%+), they also want their payouts to grow at a rate that can at least keep up with inflation (i.e., 3%+). With that in view, in this article we will outline a seven fund portfolio that aspires to meet both requirements.
Fund #1: Schwab U.S. Dividend Equity ETF™ (SCHD)
SCHD is a great core holding for any dividend growth portfolio given its combination of a decent yield (3.5%), impressive dividend growth track record (over 11% CAGR over the past five years), very low 0.06% expense ratio, and broad diversification across the financials, health care, consumer defensive, industrials, energy, consumer cyclical, and technology sectors. As a result, it goes a long way towards helping us to achieve our dividend growth goals without setting us too far back on our yield target for the overall portfolio.
Fund #2: iShares Core Dividend Growth ETF (DGRO)
DGRO has many of the same qualities as SCHD, with a solid 2.41% dividend yield, an only slightly higher 0.08% expense ratio, a 9.7% dividend CAGR over the past five years, and substantial diversification across financials, technology, health care, industrials, consumer defensive, energy, and utilities, thereby serving to further diversify and balance out the portfolio already provided by SCHD.
Fund #3: JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
JEPQ provides exposure to mega-cap technology stocks that we would otherwise lack with its ~50% exposure to the technology sector, while also boosting our exposure to the communication sector with its 16.11% exposure to that sector. While it won’t provide much – if anything – in the way of dividend growth over the long term, its 9.15% trailing twelve-month yield due to its covered call strategy also helps us towards our portfolio’s overall yield goal.
Fund #4: Cohen & Steers Quality Income Realty Fund (RQI)
RQI gives our portfolio exposure to REITs (VNQ), a sector that is very attractively priced currently, along with a nearly 9% dividend yield that is paid out monthly and has been sustained through the COVID-19 lockdowns. It is unlikely to deliver much long-term dividend growth, but the current yield is attractive enough to make it worth including in our portfolio.
Fund #5: Energy Select Sector SPDR® Fund ETF (XLE)
The energy sector has been booming lately and – with geopolitical tensions growing between the West and major energy producers Russia and Iran – it remains prudent to have exposure to the sector. XLE gives us that along with a solid current yield, decent long-term dividend growth expectations, and a low expense ratio.
Fund #6: Alerian MLP ETF (AMLP)
AMLP combines exposure to the energy sector with exposure to the infrastructure sector, both of which are benefiting from strong tailwinds right now. Even better, AMLP combines decent dividend growth expectations with a very attractive and well-covered dividend yield.
Fund #7: Vanguard Dividend Appreciation Index Fund ETF (VIG)
Last, but not least, VIG rounds out our portfolio nicely with its low expense ratio of 0.06%, its impressive 11.4% three-year dividend CAGR, and significant exposure to technology and financials along with health care, industrials, consumer defensive, and consumer cyclical stocks. While its 1.9% dividend yield is unimpressive, we already have our dividend yield needs met elsewhere, and we like VIG for its strong dividend growth potential and further diversification benefits.
Investor Takeaway
As illustrated by the table below, this portfolio meets both our yield and our dividend growth requirements, with a weighted average dividend yield of over 5% and a projected weighted average dividend growth rate of 5.7% that easily exceeds the current rate of inflation:
| Tickers | Amount | % | Yield | Growth |
| VIG | $ 225,000.00 | 15.00% | 1.86% | 10.00000% |
| SCHD | $ 225,000.00 | 15.00% | 3.52% | 10.00000% |
| RQI | $ 187,500.00 | 12.50% | 8.87% | 0.00000% |
| AMLP | $ 225,000.00 | 15.00% | 7.58% | 3.00000% |
| DGRO | $ 225,000.00 | 15.00% | 2.41% | 10.00000% |
| JEPQ | $ 225,000.00 | 15.00% | 9.15% | 0.00000% |
| XLE | $ 187,500.00 | 12.50% | 3.09% | 6.00000% |
| Total | $ 1,500,000.00 | 100.00% | 5.17% | 5.70000% |
Furthermore, this portfolio enjoys pretty good sector diversification, with funds like VIG, SCHD, and DGRO providing broad diversification across sectors like financials, industrials, technology, healthcare, and consumer goods, while RQI gives the portfolio exposure to real estate, AMLP gives the portfolio exposure to infrastructure and some energy, and XLE gives the portfolio exposure to energy.
Last, but not least, JEPQ gives the portfolio exposure to mega-cap technology stocks while also implementing a covered call strategy to enhance income, while VIG also gives us significant exposure to these stocks except without the covered call limits placed on them. As a result, investors who implement a strategy like this one can enjoy the best of both worlds: attractive current income along with growth that easily exceeds inflation, while also being well-diversified.
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