I thought comparing notes on dividend growth portfolio strategies would be informative. My goal in my taxable accounts (non-taxable is 401k limited to certain funds) is to create a reliable income stream that I can draw on in retirement, which will grow annually at a rate that outpaces inflation, without ever needing to touch the principal. Statistics say I would be best served by buying SPY as often as I can afford, and then selling off 4% annually in retirement. Mentally, the thought of selling off part of the golden goose each year in retirement, including during steep bear markets, gives me extreme anxiety. I would rather just be a rentier, and collect quarterly income payments.
Another dividend growth portfolio goal of mine is to manage risk through diversification into each of the 11 GICS Sectors. I don't go for an equal ~9% weighting by sector, as I am okay being overweight in certain sectors like Consumer Staples and Healthcare (12.5% or more), and underweight in more volatile sectors like Materials and Consumer Discretionary (5% or less). I also try to avoid any one holding generating more than 5% of portfolio income.
Another goal is to buy and hold. The portfolio should be generating passive income, not capital gains. Two general exceptions to this rule. If a company looks headed for financial ruin or bankruptcy, I'm okay with getting out to preserve capital. The hope is that signs will be there prior to the share price cratering 80%+. Was lucky enough to sell out of GE at $25 in the middle of last year for a nominal long term gain, before the first of two dividend cuts was announced. That said, can't always count on reading the tea leaves sufficiently far in advance. I would also consider selling after a dividend cut (not a freeze . . . BA has frozen more than once and is one of my best holdings). That said, the cut would have to be a signal (to me) that the long-term viability of the business is at risk. I have continued to hold a number of stocks subsequent to cuts (BP, BUD, NGG).
For me, given portfolio goals, everything tends to revolve around the initial purchase decision. It's all about whether I feel I can buy the income stream at a fair price. I don't always get the best price, as market timing isn't my thing. If it was, I'd be trading from my yacht in St. Barth's instead of posting here. My general rules of thumb for a purchase decision (I don't religiously require adherence to each and every one, but they are guidelines) are as follows:
1. Large or Midcap;
2. P/E or P/AFFO (REITs) 15 or Less (ideal), or below 10yr Average (ok);
3. Chowder Number of 8+ for Utilities/Telcos, and 12+ for all other stocks;
4. 25+ years of dividend growth (ideal), or 10+ (ok), subject to exceptions for quality blue chips like BA;
5. Investment-Grade Credit Rating (BBB+ or better);
6. Dividend Payout Ratio <75% (I will bend this rule for special cases like Tobacco companies, which typically have stable cash flows and expenditures); and
7. No obvious outward signs of systemic risk to the company/its business model.
Using these rules of thumb as best I could for the past several years, I've noticed some effects on my portfolio. As sectors tend to rotate in and out of favor, I usually find myself buying stocks within a lot of the same sectors for months on end, until the narrative changes. Also, I tend to accumulate a wide variety of individual stocks (80+ at the moment). Even when certain sectors cycle back on sale, the stocks I initially selected in that sector may not present the best value this time around. So, I end up buying shares in a more attractively-valued competitor. I seem to have built my own personal ETF, without the management fees.
Statistically, it is unlikely that I will outperform the S&P 500. Hardly any money manager does. That said, I am reasonably confident that this methodology will produce positive, inflation-beating results over a 20-30 year horizon, and generate the reliable passive income stream that I desire. I figure if a substantial percentage of the companies meeting these criteria become insolvent or eliminate their dividends in that time period, there are likely far greater problems in the world than what my portfolio is doing. Assuming that were to occur, investment in primitive skills and a thorough understanding of Mad Max would likely pay greater dividends.
Curious what strategies others are pursuing or using in bulding their DGI portfolios.
Another dividend growth portfolio goal of mine is to manage risk through diversification into each of the 11 GICS Sectors. I don't go for an equal ~9% weighting by sector, as I am okay being overweight in certain sectors like Consumer Staples and Healthcare (12.5% or more), and underweight in more volatile sectors like Materials and Consumer Discretionary (5% or less). I also try to avoid any one holding generating more than 5% of portfolio income.
Another goal is to buy and hold. The portfolio should be generating passive income, not capital gains. Two general exceptions to this rule. If a company looks headed for financial ruin or bankruptcy, I'm okay with getting out to preserve capital. The hope is that signs will be there prior to the share price cratering 80%+. Was lucky enough to sell out of GE at $25 in the middle of last year for a nominal long term gain, before the first of two dividend cuts was announced. That said, can't always count on reading the tea leaves sufficiently far in advance. I would also consider selling after a dividend cut (not a freeze . . . BA has frozen more than once and is one of my best holdings). That said, the cut would have to be a signal (to me) that the long-term viability of the business is at risk. I have continued to hold a number of stocks subsequent to cuts (BP, BUD, NGG).
For me, given portfolio goals, everything tends to revolve around the initial purchase decision. It's all about whether I feel I can buy the income stream at a fair price. I don't always get the best price, as market timing isn't my thing. If it was, I'd be trading from my yacht in St. Barth's instead of posting here. My general rules of thumb for a purchase decision (I don't religiously require adherence to each and every one, but they are guidelines) are as follows:
1. Large or Midcap;
2. P/E or P/AFFO (REITs) 15 or Less (ideal), or below 10yr Average (ok);
3. Chowder Number of 8+ for Utilities/Telcos, and 12+ for all other stocks;
4. 25+ years of dividend growth (ideal), or 10+ (ok), subject to exceptions for quality blue chips like BA;
5. Investment-Grade Credit Rating (BBB+ or better);
6. Dividend Payout Ratio <75% (I will bend this rule for special cases like Tobacco companies, which typically have stable cash flows and expenditures); and
7. No obvious outward signs of systemic risk to the company/its business model.
Using these rules of thumb as best I could for the past several years, I've noticed some effects on my portfolio. As sectors tend to rotate in and out of favor, I usually find myself buying stocks within a lot of the same sectors for months on end, until the narrative changes. Also, I tend to accumulate a wide variety of individual stocks (80+ at the moment). Even when certain sectors cycle back on sale, the stocks I initially selected in that sector may not present the best value this time around. So, I end up buying shares in a more attractively-valued competitor. I seem to have built my own personal ETF, without the management fees.
Statistically, it is unlikely that I will outperform the S&P 500. Hardly any money manager does. That said, I am reasonably confident that this methodology will produce positive, inflation-beating results over a 20-30 year horizon, and generate the reliable passive income stream that I desire. I figure if a substantial percentage of the companies meeting these criteria become insolvent or eliminate their dividends in that time period, there are likely far greater problems in the world than what my portfolio is doing. Assuming that were to occur, investment in primitive skills and a thorough understanding of Mad Max would likely pay greater dividends.
Curious what strategies others are pursuing or using in bulding their DGI portfolios.