The Big Picture for the Week of June 13, 2010

On the heels of yesterday's post looking a comments about diversification from an investment manager who prefers to hold ten stocks (hat tip to longtime reader Sam for that info) and a week where we've had a lot of Nassim Taleb to digest (Trader Mark provides the video) I thought it might be interesting to think about a combo of concentrated portfolios and Taleb's idea of 80-90% in t-bills from around the world and going berserk with the rest (Taleb doesn't actually use the word berserk).

While this will be far from original maybe it can spark a dialogue. Instead of t-bills the idea would be some large portion (to be determined by the end user) in a few relatively stable dividend stocks and some small portion of the portfolio in a high octane name or two.

I pulled out four dividend names that I keep tabs on for one reason or another that tend to pay a decent yield and are not usually that volatile but of course just because they worked in the last meltdown does not mean they will work in a future panic.

Although I've never owned Public Storage (PSA) I have always been intrigued by it. Obviously the story is properties that rent out storage space for people's crap. The story is not about abandoned leases or empty storefronts, the risk is people who stop paying for the storage (I'm not sure but I can't imagine that selling the contents of someone's locker pays off very often). Revenues for 2011 are estimated to go up modestly and earnings are estimated to go up a little better than modestly. It has more cash than debt and yields about 3.5%. For the last three years the name is up 8% (not including dividends) versus down 38% for the iShares DJ REIT ETF (IYR).

Consolidated Edison (ED) is a name some clients have owned for a long time. It will never be the best performer on the way up or the worst performer on the way down. Over the last three years it is down 7% (not including dividends) compared to down 26% for the iShares Utilities ETF (IDU) which is a name some clients own and down 27% for the S&P 500. ED yields 5.5% and the risk that I think is most important is that a lot of its infrastructure is very old.

Kinder Morgan Partners (KMP) is another name I have owned for some clients for a while. This is one of the mega caps of the pipeline space. If you have ever done any research in this space you have no doubt come across this name. It has done a good job of increasing the dividend over the years. A few years ago there was a broken bit of pipe in the southwest that while short lived did impact the price. Although there is no fundamental link to commodity prices it has correlated to the price of crude a couple of times for short stretches. For the last three years it is up 17% not including dividends.

One last example could be McDonalds (MCD) which yields a little over 3% and it seems as though the recent (or current, depending on how you view it) bear market happened without McDonalds. The growth estimates are not earth shattering but they are not bad either. You obviously know enough about McDonalds to know whether it is worth your time to study it further.

As far as the aggressive tranche, what interests you? Things like smart grid, Chinese agribusiness, beef companies in Brazil, something from Africa could all fit bill along with some faddish tech stock. On a more serious note if you really are inclined to swing the for the fence on something then you have to have reason to believe you really understand the space/theme. There are Chinese seed companies and some folks know this space very well and can succeed in the space. Personally I think this is very difficult.

The names above are just examples pulled together with very little time spent. Putting an overly large portion into low beta dividend payers means getting left behind during certain phases of the market cycle. Also there are times where these types of stocks do poorly. These stocks cannot be left on autopilot either as occasionally stories change and dividends get cut.