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17 September

Model Portfolio

Ok, I came up with a first crack at a model portfolio. I took a look at the different sector weights that the iUnits Canadian Dividend Income Fund uses. According to their quarterly disclosure document they have the following breakdown:

Financials: 46.9%
Telcom: 18.0%
Consumer Discretionary: 6.9%
Energy: 5.7%
Materials: 5.4%
Industrials: 3.1%
Consumer Staples: 2.6%

The first thing that I wanted to adjust on this list is the lack of real estate exposure. I think that adding a couple of REITs to the mix should help with overall returns. The second thing that I wanted to change is the Consumer Staples category. The only company the XDV has in that category is Rothmans, i.e. tobacco. I don't want to invest in a tobacco company even if they do pay out a good dividend. I do think that consumer staples are a good thing to have though and I will get into that later.

So making some adjustments and dropping some companies and categories I came up with the following list:
Financial: 40%
REIT: 10%
Telcom: 10%
Utilities/Pipelines: 10%
Energy: 10%
Consumer Staples: 5%
Health Care: 5%
Consumer Discretionary: 5%

So based on those numbers and the fact that I want to come up with a portfolio that will generate $3500 in the first year (and will hopefully increase nicely after the first year) I came up with the following cash flows per sector:

Financial: $1400
REIT: $350
Telcom: $350
Utilities/Pipelines: $350
Energy: $350
Consumer Staples: $175
Industrials: $175
Health Care: $175
Consumer Discretionary: $175

So given these categories and cash flows I will go through each sector over the next week or so and talk about the companies that I put in the model portfolio. Hopefully by next weekend I will have gone through all the sectors and then I can give a summary of the model portfolio. I am currently not comfortable with all the companies I have chosen to put into the model portfolio. I will discuss my reasons for being uncomfortable and maybe between now and the new year I can take a closer look at the companies in the model portfolio and see if I can become comfortable with all of them...

posted at 18:45:00 on 09/17/06 by 0xCC - Category: Model Portfolio


Dave wrote:

Those indexes are all market-cap weighted. What makes you think that market-cap weighting is a good way to construct a portfolio?

Your method of constructing a model portfolio based on the allocation of sectors in XDV doesn't make any sense to me. If that method made sense it would have to work in any scenario including one where Telecom made up 95% of XDV.
09/27/06 16:26:08

0xCC wrote:

Dave, I just used the XDV weightings as a starting point. As you can see I added a couple of categories (Real Estate or REITs for example) and also decreased the percentages of some things (like telcom). The XDV isn't a market-cap weighted fund (note the low exposure to energy for example). According to iShares.ca:
"The Index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio."
They also mention that they are trying to match the performance of the Dow Jones Canada Select Dividend index which (again, according to iShares.ca)
"The Dow Jones Canada Select Dividend Index consists of 30 high yielding Canadian stocks that have consistently paid dividends and meet minimum liquidity screens. These stocks are included in the index based on their proportionate dividend-per-share weight."
The conditions for companies to be in the XDV (or the DJ Canada Select Dividend Index) are pretty close to the conditions that I look for when investing in a company I am looking for income out of. So using the sector weightings in the XDV seemed like a pretty good starting point for me.

I probably didn't do a very good job of explaining what I wanted to accomplish with this model portfolio. I wanted to have a way to measure an increase in the income a fictional portfolio generates that is independent of additional money invested in the portfolio.

I mentioned in the post that I am not entirely comfortable with the companies I have chosen for the portfolio. This model portfolio isn't what I think I would want as a portfolio to base my financial independence on. Having said that I hope it offers a starting point that I can use to measure growth in income from the portfolio and over time I expect to be making adjustments to this portfolio.
09/30/06 11:37:14

0xCC wrote:

Oh, and sorry for taking so long to respond (and approve your comment). I don't usually get too many real comments here and I have been a little lax in approving comments recently. I will try to check a little more often.
09/30/06 11:38:11

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