JamesBrey
Two of the most popular investors in modern times – Charlie Munger of Berkshire Hathaway (BRK.A, BRK.B) and Ray Dalio of Bridgewater Associates – each provided valuable wisdom to investors on how to successfully compound wealth over the long term.
Charlie Munger emphasized reaching six figures in savings as a key milestone along the pathway to financial freedom:
The first $100,000 is a *****, but you gotta do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.
Meanwhile, Ray Dalio proposed the All-Weather Portfolio as a way for a retail investor to position their portfolio to weather all sorts of economic environments, including inflation, deflation, expansion, and recession.
Finally, we believe that income investing is a great way to position a portfolio for supporting a retirement because:
- It focuses the investor’s attention on the company’s fundamentals rather than getting caught up in short-term momentum swings in the stock price. If you are investing in a stock for the dividend income, then you won’t be as concerned if its price goes up or down tomorrow. As a result, you will be more likely to hold and even buy when the market is panicking and avoid chasing stocks when they soar to nosebleed valuations.
- It also reduces your sequence of returns risk, because it means that you do not need to sell your stocks consistently in order to meet living expenses. Instead, you can live off of your dividend checks without having to worry about what is going on in the stock market at the moment.
Still, many investors may think that the passive income approach to retirement sounds great, but then when they actually put their hard-earned money into the market and experience its volatility firsthand, they end up panicking and selling their shares. As a result, the Ray Dalio All-Weather Portfolio approach – which leads to more stable portfolio performance over time – combined with the income approach may end up being the best overall methodology for investors who have a relatively low tolerance for volatility as well as a strong desire to build passive income through dividend investing.
In this article, we will combine the All-Weather Portfolio approach and the dividend investing approach and then share a model portfolio of $100,000 invested in this strategy to show what achieving Charlie Munger’s first major milestone of financial independence might look like.
The All-Weather Portfolio
Ray Dalio’s All-Weather Portfolio is defined as:
- 30% Stocks (SPY)
- 40% Long-Term Treasury Bonds (SPTL)
- 15% Intermediate-Term Treasury Bonds (SCHR)
- 7.5% Commodities (BCI)
- 7.5% Gold (GLD)
While you can replicate this approach with ETFs and even recreate a high-yielding version of it with ETFs, in this article, we will seek to optimize it even further by using a combination of individual stocks and ETFs.
How To Invest $100,000 To Build An All-Weather High-Yield Passive Income Snowball
To achieve our objective of achieving a high yield through common stock exposure, we want a diversified set of blue-chip dividend stocks. For example, we might want to select:
- Real Estate: W. P. Carey (WPC) and Simon Property Group (SPG) given their status as large blue-chip REITs that also pay substantial and well-covered dividends that should grow at a decent clip moving forward.
- Technology: Broadcom (AVGO), International Business Machines (IBM), and Microsoft (MSFT) given that they all pay dividends, with IBM leading the way in terms of yield and MSFT and AVGO providing fairly robust dividend growth.
- Infrastructure: Brookfield Infrastructure (BIP)(BIPC) and Brookfield Renewable Energy (BEP)(BEPC) provide diversified exposure to a world-class portfolio of infrastructure assets that throw off an attractive dividend yield alongside strong dividend growth.
- Financials: Ares Capital Corp (ARCC) – while not my favorite BDC of the moment – has a proven track record and significant scale to go with an attractive and safe dividend yield. As a result, it serves as a good proxy for the broader BDC sector. Old Republic International (ORI) is an excellent long-term compounder and dividend grower in the insurance industry that can help to round out this segment.
- Health Care: A sampling of blue chips like Johnson & Johnson (JNJ), AbbVie (ABBV), and Pfizer (PFE) – while I am not particularly bullish on any of them – offers an attractive combination of yield and exposure to the main components of the healthcare industry.
- Consumer: While true high yields in this sector are rare – especially among blue chips – Coca-Cola (KO) and The Home Depot (HD) make for a solid combination of decent current yield and solid long-term dividend growth.
- Communication: While I am not particularly bullish on any of the major telecom companies, I think that Crown Castle (CCI) is a solid play on communications infrastructure given its undervaluation and activist involvement right now and Verizon (VZ) is probably my favorite pick in a bad neighborhood so to speak in the telecom space.
- Industrials: Amcor (AMCR) and United Parcel Service (UPS) are two solid blue chip dividend payers in the industrials space.
For long-term treasury bonds and intermediate-term treasury bonds, we will simply use the Vanguard Long-Term Corporate Bond Index Fund ETF (VCLT) and the Vanguard Intermediate-Term Corporate Bond Index Fund ETF (VCIT) given their higher yields and only incrementally more risk than what is paid by treasuries of similar duration.
For commodities and gold exposure, we will pick a diversified set of blue-chip mining, agricultural, and energy stocks that pay high yields:
- Mining: Rio Tinto (RIO) and Newmont Corporation (NEM) are two blue-chip miners that offer attractive dividend yields and currently trade at attractive valuations.
- Agricultural: Nutrien (NTR) and Archer-Daniels-Midland (ADM) – its recent accounting practices investigation notwithstanding – are solid dividend growth blue chips in the agricultural space.
- Energy: Enterprise Products Partners (EPD) and Exxon Mobil (XOM) are stellar blue chips in the sector that also pay attractive and growing dividends.
Putting it all together, we get the following portfolio
| Ticker | Amount | % | Yield |
| VCLT | $ 40,000.00 | 40% | 4.92% |
| VCIT | $ 15,000.00 | 15% | 3.85% |
| WPC | $ 3,000.00 | 3.00% | 6.05% |
| SPG | $ 3,000.00 | 3.00% | 5.19% |
| AVGO | $ 2,500.00 | 2.50% | 1.71% |
| IBM | $ 2,500.00 | 2.50% | 3.70% |
| MSFT | $ 2,000.00 | 2.00% | 0.75% |
| BIP | $ 3,000.00 | 3.00% | 5.09% |
| BEP | $ 3,000.00 | 3.00% | 6.04% |
| ARCC | $ 3,000.00 | 3.00% | 9.59% |
| ORI | $ 2,500.00 | 2.50% | 3.44% |
| JNJ | $ 2,500.00 | 2.50% | 3.00% |
| ABBV | $ 2,500.00 | 2.50% | 3.54% |
| PFE | $ 2,500.00 | 2.50% | 6.07% |
| KO | $ 2,500.00 | 2.50% | 3.17% |
| HD | $ 2,500.00 | 2.50% | 2.47% |
| CCI | $ 2,500.00 | 2.50% | 5.81% |
| VZ | $ 3,000.00 | 3.00% | 6.47% |
| AMCR | $ 2,500.00 | 2.50% | 5.43% |
| UPS | $ 2,500.00 | 2.50% | 4.40% |
| RIO | $ 2,500.00 | 2.50% | 5.41% |
| NEM | $ 2,500.00 | 2.50% | 3.24% |
| NTR | $ 2,500.00 | 2.50% | 4.21% |
| ADM | $ 2,500.00 | 2.50% | 3.71% |
| EPD | $ 2,500.00 | 2.50% | 7.46% |
| XOM | $ 2,500.00 | 2.50% | 3.62% |
| Total | 100000 | 100.00% | 5.50% |
Risks
While this portfolio allocates capital by sector in a manner very similar to Ray Dalio’s All-Weather Portfolio and offers the upside of high yield, potentially stronger dividend growth, and ultimately potentially higher total returns, it also comes with some potential drawbacks:
- While it is still somewhat diversified, it is more concentrated than if it were invested in broadly diversified ETFs. As a result, there is much greater company-specific risk with this portfolio and also needs to be actively monitored.
- The commodities and gold exposure is made up of miners, producers, and infrastructure businesses rather than pure direct exposure to commodities and gold themselves. As a result, while there will be some correlation in the performance of this portion of the portfolio, there will also likely be a divergence that may even be significant at times.
As a result, investors who adopt a portfolio similar to the one outlined in this article should expect it to perform somewhat differently from Ray Dalio’s All-Weather Portfolio, though it will likely also still experience some of its benefits.
Investor Takeaway
Mr. Munger’s advice on diligently building a foundational six-figure nest egg to ignite the power of compounding can be truly life-changing if properly implemented. Once an investment portfolio, primarily consisting of high-yielding dividend growth stocks, is in place, the emphasis shifts from hustling to make active income contributions to letting time – and the magic of compounding – run its course.
This 5.5%-yielding dividend growth portfolio – modeled in part off of Ray Dalio’s All-Weather Portfolio – gives investors access to the best of both worlds through less volatility across economic cycles along with the ability to keep calm and let the dividends flow even during periods when their portfolio may not be performing at peak levels. On top of that, with a strong dividend growth engine undergirding the portfolio, the income stream should be growing at an exponential rate over time through a combination of reinvested dividends and per share dividend growth from many of its holdings.
