Monday, February 20, 2006

Financial Leverage: $3.05 Diversification

An important safety component in any portfolio is based upon diversification. That means NOT buying companies that are all in just one sector or industry. This protects a portfolio against a dramatic cyclical decline based on one industry or sector weakening over time. Against that, hopefully other companies or sectors held within our portfolio will be experiencing an asendancy in their fortunes.

In short, diversifying sufficiently protects our portfolio, provides possible enhancement of returns, and best of all - allows us to sleep well at night.

Let's consider this portfolio. While it lacks some components of diversification (such as smaller companies, foreign companies, and emerging market companies) the large companies are well-suited to having the probability of providing a steady stream of dividend income to us - a very important consideration. So we are mainly looking to see that we haven't inadvertently selected companies in just one market sector. So let's look at them:

  1. ATT - Telecom
  2. Altria - Tobacco / Food
  3. Bristol Meyers Squib - Pharmacueticals
  4. Conagra - Foods
  5. Progress Energy - Utilities
  6. Reynolds American - Tobacco
  7. Sara Lee - Foods
  8. Southern - Utilities
  9. UST - Tobacco
  10. Verizon - Telecom
  11. Bank of America - Bank/Financial
  12. Citigroup - Bank/Financial
Although we can see some concentration, particularly in tobacco, most of these companies are in areas where there has traditionally been good dividend yields available, especially tobacco, banks, utilities, and telecoms. In general, given our insistence of a high dividend yield and the safety of large companies, this portfolio has fairly good diversification.

The point is here, that it's currently possible to construct a conservative portfolio that's initially close to cash-flow positive, after borrowing all the money to buy that portfolio. I'll talk about some other possibilities later ...


The Confused Capitalist

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