We have made some changes to our income biased stock portfolio for 2013. These include sector and stock rebalancing, base-lining for the start of the year, and the replacement of David Jones with an additional industrial stock, Toll Holdings.
With the S&P/ASX200 increasing by 14.6% in 2012, and company earnings growing at a much lower rate, forecast dividend yields have fallen. Our income-biased portfolio is forecast to generate a yield of 5.23% pa in 2013, franked to 98.3%.
Construction Rules
The construction rules we applied are:
- we used a ‘top down approach’ looking at the industry sectors, and introduced biases that favour lower PE, higher yielding sectors;
- so that we are not overly exposed to a market move, we have determined that in the major sectors (financials, materials and consumer staples), our sector biases will not be more than 33% away from index. For example, the ‘materials’ sector weighting on the S&P/ASX 200 is 21.6%, and under this rule, our possible weighting is in the range from 14.4% to 28.8% (ie plus or minus 7.2%);
- we eliminated property trusts (as there is no real tax advantage to a SMSF), the IT sector is small, and from an industry perspective, we are no real fans of the consumer discretionary sector. Consequently, we are overweight financials, consumer staples, utilities and telecommunications; underweight materials, energy and consumer discretionary; and broadly index-weight healthcare and industrials.
On a sector basis, our portfolio compares as follows:
[1]Stock Rules
The stock rules are:
- we require 15 to 20 stocks (less than 10 is insufficient diversification, over 25 it is too hard to monitor);
- we confined our stock universe to the ASX 100;
- we avoided stocks from chronically underperforming industries such as airlines or general insurance;
- within a sector, the stocks are broadly weighted to their respective index weight. That said, we have applied some biases to favour those stocks that pay higher dividend yields. For example, in the ‘financials’ sector, we are overweight NAB and underweight Commonwealth Bank; and
- of course, we looked for companies that pay franked dividends and have a consistent earnings record.
Portfolio
Our income biased portfolio per $100,000 invested (using prices as at the close of business on 31 December 2012) is as follows:
[2]Forecast Returns
Using consensus forecasts from FN Arena, the portfolio has the following characteristics:
- Forecast PE for 2013: 13.56
- Forecast Dividend Yield for 2013: 5.23% pa
- Franking: 98.25%
For an SMSF in the accumulation phase, the 5.23% dividend yield will translate to a return of 6.32% pa (after tax), and for a fund in pension phase, the income return will increase to 7.43% pa.
In a bull market, we expect that the income biased portfolio will underperform relative to the standard S&P ASX200 price index due to the underweight position in so called “growth” sectors, and conversely in a bear market, it should moderately outperform.
We will keep a close eye on the portfolio, and report back in coming editions of the Switzer Super Report.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Could stocks be up 40% in 2013? [3]
- Margaret Lomas: Investing in mining town properties risky business [4]
- Tony Negline: Case study: retires? Sign a declaration [5]