Strategies for Building a DGI Portfolio

[Otter]

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.

[navyasw02]

Easiest way for me to start was to pull up the top holdings of popular dgi index funds and look for the overlaps and ranked them based on relative weight throughout my sample set of index funds. I decided what my full position was based on trade fees and bought one position of each that was below their 50 and 200 day moving averages and put alerts on the rest. Throughout the years I doubled down based on market happenings.

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[Otter]

(12-12-2018, 06:50 PM)navyasw02 Wrote: Easiest way for me to start was to pull up the top holdings of popular dgi index funds and look for the overlaps and ranked them based on relative weight throughout my sample set of index funds. I decided what my full position was based on trade fees and bought one position of each that was below their 50 and 200 day moving averages and put alerts on the rest.  Throughout the years I doubled down based on market happenings.

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There’s a lot to be said for the simplicity of index skimming. I follow Dale Roberts on Seeking Alpha, and he seems to have been very successful with skimming DGI funds.

[fenders53]

Great idea for a thread. I'm sure I'll have some questions for you after I study your post a little more. I could type pages as my strategy has evolved with my age and current income. This post will no doubt be too long to keep anyone's attention. We really need to share what we personally desire from our DGI Port, and when, for it to have much context to others.

I am 56yrs old, and desire income from my port at age 60-61. I prefer to stay out of my "golden goose" until at least age 70. I have fat pensions coming from the US GOV, and a paid off rental house so I have some options here. I'm pretty much debt free. I'd be better off than most even of my portfolio vanished overnight. I drive older autos and many must think I am in financial trouble lol. I need 4% return from here top achieve my goals the next 15 years. I can start setting up some loved ones if I can achieve 6%. I could almost skip investing in stocks, but it's a passion so here I am.

I used a hybrid approach to investing. I do believe 100% DGI could work, but I believe that leads to close minded viewpoint of the investment options available to us. Things change from decade to decade. I know, and/or read of too many people piling up 8-10 consumer non-durable stocks in their port because that has always been safe and worked out fine in recent memory. Bonds were great, then they stuck for decades, now they might be fairly attractive soon. We need to be flexible as Gumby over an investing career. Did I just date myself again?

Anyway, here are some of my general rules, and this is a work in progress so % may evolve over time.

-I start with a crash fund in a money market mutual fund. I can adjust to a harsh market if 20% of my port is liquid and paying 2.1% for now.

-I have a very ST bond fund that yields 2.7% and is not volotile. That is the basket where I transfer my investment income for year 5-6 from now. Hope to keep feeding when I begin to withdraw. This basically ensures I have five years for any bad equity investment idea to recover. It will happen someday. To put a real number on it I'd like to withdraw $50K annually from this "basket". If I get scared this ST bond fund could be an MM fund easy enough.

-About 25% of my port is in index or sector funds. It's diversified and leans toward above average dividends, and some funds dividend growth as well. I do have S&P 500 and a small cap index fund as well. Average DIV of funds will be 3% when I am done. I would hope I can get a few % capital appreciation over time. My mutuals and ETFs are diversified by themself.

-About 40% of my port is in individual stocks, and almost all of them are high current yielders. My stock basket is diversified by itself. I try to own two stocks per sector, and maintain a half dozen sectors. I do research my stocks, but my rules are loose. I value current yield over div growth unless I am HIGHLY confident the growth will be real (AAPL would be an example). V is a great stock, but not a great DGI stock if you are 50 years old when you start a position. Just my opinion. My idea of DGI includes....

Utes and healthcare that are actually expected to grow in the 5% range for years. Add the typical DGI mix of equities like consumer durables and non-durables, telecom which I consider a utility with potential to be more, a financial, transport, real estate and energy. The obvious omission is tech. I'll confine most of that to ETFs. My record with individual techs is great for three years, and mediocre at best over 20yrs with an individual stocks. It's harder than it looks so tech bets will be small when it comes to stocks. My list of trusted techs is very short. Best suited for purchase during the next extreme market pullback, and then wait it out. I consider them speculative rather than DGI plays with VERY few exceptions.

-About 5% of my port is reserved for high flyers, but not baseless MOMO. I prefer a dividend but I reserve the right to swing trade at least part of the position it so the Div is more for the possibility I get stuck in a position much longer than I originally planned. AMZN is the stock currently in this category. Truth is I could close my eyes and it will probably be fine in five years. Reality is it's bit painful to I watch it swing $50-100 per day when I probably should have been trimming and adding on the volatility for months. I like sorta techy stocks for this small part of my strategy, and I have no intent of riding them into the ground and waiting 5 years to maybe recover.

-This year I have begun entering positions by selling puts, and leaving the positions very occasionally when the market forces me too if I sold a call when the stock ran. While it is not my intent to trade excessively, this has been a lucrative. The premiums make my dividends look puny, and I only do it with stocks I love. Mostly they expire worthless (90% lately), and I just make money off the gamblers buying options. Over and over I sell the same options on the same stocks. Occasionally I am forced into stocks most of you own, but at a discount. I won't stop until the market makes me stop. A severe correction will force me into a "proper" DIV stock buy and hold. Until then I ring the cash register every few weeks, even when the market mostly stinks the past 90 days.

A few more random rules I try to adhere to but I have weak moments sometimes.
-Aristocrats are a GREAT place to start, but I am not married to a list, nor any mechanical strategical. Examples are endless. T is not necessarily better than Verizon and it sure as hell is riskier than AAPL, CSCO and perhaps even high PE AMZN five years from now. LOW is not necessarily better than HD. There are better financial stocks not on the list IMO. That's another thread I may start.
- Stock valuation ALWAYS matters in the end. An aristocrat with a PE of 25 and sub 2% yield is not severe market proof. That's just wishful thinking.
-My commissions are next to free, so small buys almost always make sense. I'm rarely as smart as I think I am on a short term basis.
-Buy quality even if it looks somewhat more expensive than a troubled stock in the sector. It's often cheaper for a reason.

Is my plan too complicated? Perhaps, but I only work part-time so I got time to manage it, and it's a labor of love to do so. I have that in common with many of you I suspect

[fenders53]

Otter, take this in the context I intend it, for the purpose of our discussion. I hope you know I am laughing when I mess with you guys and gals to stir up conversation. It's just my personality and I mean no harm. I get a lot of good stock ideas to research from you guys, and sometimes I even buy them. I'm grateful for the help I receive here.

That said, how can you justify holding 80 stocks? It sounds like stock collecting. You have your own S&P ETF. More specifically what does it accomplish for you? It may not hurt anything, and you are certainly diversified five times over. If I am honest I only have a dozen great ideas in any particular year, unless the market is like it is right now with marketwide sales. I don't believe I can properly keep track of 80 stock and make sound investment rules, not even 30, unless I just do what others do on TV and stock forums.

I very much like your strategy to buy and hold. That should be the default strategy for any DGI investor. But there are times when great companies reach crazy overvaluation, especially if you hold 80 stocks. That's when it's time to put that stock in an IRA and trim it if that is age appropriate advice. Not suggesting one must cash out of their best stocks. Pigs get slaughtered so I take a profit and park it somewhere safe for redeployment. 95% of my port is IRA or Roth IRA so I don't need to wait around for the stock to return to reality and take the loss because there are no tax liabilities.

[crimsonghost747]

First of all, I agree with the notion that 80 stocks seems to be way too much. Even if you just skim through their quarterly reports and spend 10mins on each, you'll end up using 13h everytime the quarter changes. I know I spend 10min on some, 1h on other reports. I've been between 20 and 30 stocks for a while now and personally that feels like a good range to be in.

Secondly, I'm not too sure why everyone feels like they can't eat out of the portfolio when they get old. Even if you plan on going somewhere after you die, you can't take any of it with you! I get that you want to leave some for your family and that is fine but it's not like you have to leave every dollar you've managed to acquire in your lifetime. Do the math on it, you probably have figured out an X amount of yearly income that you would like to have so you can retire early, right? And you've probably got an estimated sum of where your portfolio needs to be to accomplish that? Just see how that amount (and the time it takes to get to that amount) changes if you choose to withdraw different amounts on top of the dividend income. Even a 2% withdrawal will significantly reduce the amount that you need to get to your goal. And while you withdraw 2% annually, I'm still pretty certain that the value of the portfolio will keep going up.

[Otter]

(12-12-2018, 10:06 PM)fenders53 Wrote: Otter, take this in the context I intend it, for the purpose of our discussion.  I hope you know I am laughing when I mess with you guys and gals to stir up conversation.  It's just my personality and I mean no harm.  I get a lot of good stock ideas to research from you guys, and sometimes I even buy them. I'm grateful for the help I receive here.

That said, how can you justify holding 80 stocks?  It sounds like stock collecting.  You have your own S&P ETF.  More specifically what does it accomplish for you?  It may not hurt anything, and you are certainly diversified five times over.  If I am honest I only have a dozen great ideas in any particular year, unless the market is like it is right now with marketwide sales.  I don't believe I can properly keep track of 80 stock and make sound investment rules, not even 30, unless I just do what others do on TV and stock forums.

I very much like your strategy to buy and hold.  That should be the default strategy for any DGI investor.  But there are times when great companies reach crazy overvaluation, especially if you hold 80 stocks.  That's when it's time to put that stock in an IRA and trim it if that is age appropriate advice.  Not suggesting one must cash out of their best stocks.  Pigs get slaughtered so I take a profit and park it somewhere safe for redeployment.  95% of my port is IRA or Roth IRA so I don't need to wait around for the stock to return to reality and take the loss because there are no tax liabilities.

No harm taken. 

The short answer on how I deal with tracking 80 stocks is, I don't. Once I've made the buy decision, the work is done. The buy criteria are designed to ensure that a reasonable value for the income stream is obtained at the time of purchase. I can't track 80 stocks in detail, and I don't need to. The risk mitigation is built in to the buy criteria, and diversification across sectors and holdings. If any one holding goes to zero or cuts a dividend, it's not a big deal. It's essentially an index of DGI stocks that represented fair (or better) value at the time of purchase, nothing more, nothing less. So far, current yield has averaged around 3.5-3.75% for the past several years, and annual dividend growth (not counting reinvested dividends) averages around 8%. 

I do have Seeking Alpha news alerts set up for each of my holdings, and I'll read an article that seems interesting every now and again. Every once in awhile I may get lucky and spot a rotten apple like GE and toss it out, but I probably won't catch every dog in the portfolio (and don't need to). 

If there is a broad-based and permanent impairment of a significant portion of my holdings, that means something has gone horribly wrong with the global economy, in which case, all of this investing stuff has been pointless. The holdings themselves (which are not all equal weighted), broken out by sector, are:

Consumer Discretionary:
DIS, F, HD, LEG, SCI, TGT, VFC

Consumer Staples:
ADM, BTI, BUD, CLX, CVS, DEO, GIS, KHC, KMB, MO, PG, SJM, PEP, PM, UL, WBA

Energy:
BP, CVX, ENB, XOM

Financials:
AFL, CFR, CTBI, EV, JPM, ORI, PRU, RY, SLF, TD, TRI, TROW, WFC

Healthcare:
A, ABBV, AMGN, CAH, JNJ, LLY, MRK, PFE, SNY

Industrials:
BA, DOV, EMR, ETN, GWW, JCI, SIEGY, UPS

IT:
AAPL, ADP, CSCO, IBM, INTC, QCOM, SQ (No dividend)

Materials:
BMS, DWDP, LYB, NUE, SON

REIT:
BPY, FRT, NNN, O, SKT, WPC

Telco:
BT, T, VZ

Utilities:
AEP, BEP, BIP, BKH, CNP, D, DUK, NGG, PPL, SO

Even with this many holdings, there are still quality companies out there that I wouldn't mind buying next time they present an attractive value. ED, KO, MSFT, and WMT immediately come to mind. I doubt I would regret adding any of those to my holdings.

[fenders53]

(12-13-2018, 04:34 AM)crimsonghost747 Wrote: First of all, I agree with the notion that 80 stocks seems to be way too much. Even if you just skim through their quarterly reports and spend 10mins on each, you'll end up using 13h everytime the quarter changes. I know I spend 10min on some, 1h on other reports. I've been between 20 and 30 stocks for a while now and personally that feels like a good range to be in.

Secondly, I'm not too sure why everyone feels like they can't eat out of the portfolio when they get old. Even if you plan on going somewhere after you die, you can't take any of it with you! I get that you want to leave some for your family and that is fine but it's not like you have to leave every dollar you've managed to acquire in your lifetime. Do the math on it, you probably have figured out an X amount of yearly income that you would like to have so you can retire early, right? And you've probably got an estimated sum of where your portfolio needs to be to accomplish that? Just see how that amount (and the time it takes to get to that amount) changes if you choose to withdraw different amounts on top of the dividend income. Even a 2% withdrawal will significantly reduce the amount that you need to get to your goal. And while you withdraw 2% annually, I'm still pretty certain that the value of the portfolio will keep going up.

There is no arguing that logic or math.  The math actually supports a 4% draw down for capital and that idea is back tested.  A devastating market pull market right before, or after you initially retire are among your risk factors.  At the very least it would shake most of us who decide to maintain equities during retirement.  And in my case retiring a little too early is a risk factor.  But that was the plan since day one.  I sacrificed considerably at times to invest through thick and thin, so I am doing it!  I agree I don't need to leave it all to my family.  They have some responsibility to provide for themselves as well.   

I don't want to run out of money but I don't obsess about reduced income at age 90 if I am blessed to live that long, and who knows if I actually care if I have much money then.  I have time to decide, and for now I intend to leave my capital alone the first few years, then draw it down very slightly for a few years.  Perhaps the 2% you mention.  Then assess it from there and adjust.  It won't notably effect the way I invest now even if I decided today.

[Otter]

(12-13-2018, 04:34 AM)crimsonghost747 Wrote: First of all, I agree with the notion that 80 stocks seems to be way too much. Even if you just skim through their quarterly reports and spend 10mins on each, you'll end up using 13h everytime the quarter changes. I know I spend 10min on some, 1h on other reports. I've been between 20 and 30 stocks for a while now and personally that feels like a good range to be in.

Secondly, I'm not too sure why everyone feels like they can't eat out of the portfolio when they get old. Even if you plan on going somewhere after you die, you can't take any of it with you! I get that you want to leave some for your family and that is fine but it's not like you have to leave every dollar you've managed to acquire in your lifetime. Do the math on it, you probably have figured out an X amount of yearly income that you would like to have so you can retire early, right? And you've probably got an estimated sum of where your portfolio needs to be to accomplish that? Just see how that amount (and the time it takes to get to that amount) changes if you choose to withdraw different amounts on top of the dividend income. Even a 2% withdrawal will significantly reduce the amount that you need to get to your goal. And while you withdraw 2% annually, I'm still pretty certain that the value of the portfolio will keep going up.

It's a mental thing for me. The thought of selling the principal gives me extreme anxiety. I get the statistics and understand the 4% rule, but it's just not for me. If I needed to, I could live off of the dividends generated by my DGI portfolio today. It would be a bare subsistence sort of Lean-FIRE existence, and not really pleasant or what I'm aiming for long-term. So, I have every expectation that in 20-30 years' time, when I am contemplating a proper "retirement," the income stream will be sufficient to meet my goal of living off the eggs and leaving the golden goose alone.

[fenders53]

That is quite a list Otter. I personally believe all my stocks should be re-evaluated from time to time, or I am just stock collecting and an index would serve me better in the end. Certain sectors may trend towards irrelevancy unless the companies diversify. (fossil energy for example). I use sector ETFs for part of my investment in sectors I feel less informed. It just seems safer and the income is still there. That said, your port is well diversified and your inclination towards dividend paying stocks should keep you out of trouble. It may even outperform the broad indexes during certain market climates. That is part of the core DGI strategy in the first place.

[Otter]

(12-13-2018, 10:35 AM)fenders53 Wrote: That is quite a list Otter.  I personally believe all my stocks should be re-evaluated from time to time, or I am just stock collecting and an index would serve me better in the end.  Certain sectors may trend towards irrelevancy unless the companies diversify.  (fossil energy for example).  I use sector ETFs for part of my investment in sectors I feel less informed.  It just seems safer and the income is still there.  That said, your port is well diversified and your inclination towards dividend paying stocks should keep you out of trouble.   It may even outperform the broad indexes during certain market climates.  That is part of the core DGI strategy in the first place.

What can I say. Buyandhold2012 on Seeking Alpha is my spirit animal.

I am a poor student, though. I have in fact sold shares, including this year. Trimmed XOM, CVX, and LLY as they were generating more than 5% of portfolio income at one point. Also sold UNIT for a roughly $50 long term capital gain, as it was just a speculative play in which I invested a small amount. The 12.5% yield was fun for a year, but meh.

[fenders53]

(12-13-2018, 10:44 AM)Otter Wrote:

(12-13-2018, 10:35 AM)fenders53 Wrote: That is quite a list Otter.  I personally believe all my stocks should be re-evaluated from time to time, or I am just stock collecting and an index would serve me better in the end.  Certain sectors may trend towards irrelevancy unless the companies diversify.  (fossil energy for example).  I use sector ETFs for part of my investment in sectors I feel less informed.  It just seems safer and the income is still there.  That said, your port is well diversified and your inclination towards dividend paying stocks should keep you out of trouble.   It may even outperform the broad indexes during certain market climates.  That is part of the core DGI strategy in the first place.

What can I say. Buyandhold2012 on Seeking Alpha is my spirit animal.

I am a poor student, though. I have in fact sold shares, including this year. Trimmed XOM, CVX, and LLY as they were generating more than 5% of portfolio income at one point. Also sold UNIT for a roughly $50 long term capital gain, as it was just a speculative play in which I invested a small amount. The 12.5% yield was fun for a year, but meh.

Buy and Hold is quite a character.  I love it when an SA noob first reads him saying "my mother told me to do this so I did"  Then claims he is better at mowing lawns than investing. The reactions are epic sometimes.    

I enjoy investing in oil but I don't know why as I always time my entry wrong lol.  I see no harm in you trimming them if they were violating your diversity of income stream rules.  Well thought out rules are important.  We don't have to get this perfect to succeed as long as we have appropriate investing discipline.