How do you state your goals, and how do you measure outcomes?

[hendi_alex]

Most of you investors seem to be a bit to anal in tracking performance, for my taste. That is not a slam, as factoids is way over the top on crunching numbers, and gets real kudos for his efforts and for sharing. But I'm just not into elaborate spread sheets with all kinds of detail tracking. Nevertheless, your discussion has prompted me to review thoughts on performance goals and measurement. The thoughts below are a bit rambling as they were constructed real time, unfolding as the piece was typed. Hope that the ideas express enough clear content to generate some responses or stimulate some discussion.
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I know that my main goal relates to cash flow generated, and I know that my secondary goal relates to total return which adds capital appreciation to the expectation.

In the past, probably 10-12 years ago my goal was stated simply: [for existing investments to grow by at least 10% per year.] Later I decided that such was really a hope or a wish, and not really a goal. So the goal was changed to [outperform the S%P500 each year.] The measure of that out performance would obviously be a measure of my success. But once again it hit me that such was not a real goal, but was still just a wish or a prayer. I said the heck with it, and just started appreciating the gains that the portfolio generated from the various strategies employed. I guess the goal became, [do the best I can as the market is going to do what it does, and I have little control over the outcome.] Well there have been very few years since 2002 that my investments didn't generate over 10% per year return. Of course there was the one year period between 2008 and 2009 tafter which it took almost four years to once again hit the previous high from 2007.

Now I'm revisiting this idea. With the same primary goals related to income and total return. I'm thinking that in the short run, there is no reasonable goal that can be stated that relates to total return. Share price is just too volatile, too fickle. Could the goal best be stated in terms of CAGR of the dividend stream? Problem there is that fresh money is constantly being added to the portfolio, and making adjustments for that becomes at the least very confusing to me.

What about looking at average annual growth rate of dividends per share. The problem there comes from the fact that the portfolio consists of some high yield low growth stocks as well as lower yielding higher growth stocks, and everything in between. These two categories would have to have different standards. How should those standards be stated? And when should a stock be put on probation, and what would trigger either a sell or accumulate reaction?


So this is where I currently am. It would reasonable to see a certain growth in income stream. That growth should be greater for dividend growth stocks than with higher yielding slower growth issues. What is a reasonable standard for growth of a 3% or 4% yielding stock? What is a reasonable standard for growth of a greater than 6% yielding stock? When should a ticker be placed on probation? How long should the stock stay on probation before a sell? How much emphasis should be placed on total return, as an income stock could have slow dividend growth but could still be giving an excellent total return?

At this point, I'm thinking that the focus is now in the right direction and many of the right questions have been stated. Perhaps with some appropriate reasearch, some participation on this board, and accumulating some data from existing positions, I can begin to state some realistic goals and over time track performance toward those goals.

Thanks in advance for any replies.

[rnsmth]

(08-16-2014, 10:24 AM)hendi_alex Wrote: Most of you investors seem to be a bit to anal in tracking performance, for my taste. That is not a slam, as factoids is way over the top on crunching numbers, and gets real kudos for his efforts and for sharing. But I'm just not into elaborate spread sheets with all kinds of detail tracking. Nevertheless, your discussion has prompted me to review thoughts on performance goals and measurement. The thoughts below are a bit rambling as they were constructed real time, unfolding as the piece was typed. Hope that the ideas express enough clear content to generate some responses or stimulate some discussion.
**************

I know that my main goal relates to cash flow generated, and I know that my secondary goal relates to total return which adds capital appreciation to the expectation.

In the past, probably 10-12 years ago my goal was stated simply: [for existing investments to grow by at least 10% per year.] Later I decided that such was really a hope or a wish, and not really a goal. So the goal was changed to [outperform the S%P500 each year.] The measure of that out performance would obviously be a measure of my success. But once again it hit me that such was not a real goal, but was still just a wish or a prayer. I said the heck with it, and just started appreciating the gains that the portfolio generated from the various strategies employed. I guess the goal became, [do the best I can as the market is going to do what it does, and I have little control over the outcome.] Well there have been very few years since 2002 that my investments didn't generate over 10% per year return. Of course there was the one year period between 2008 and 2009 tafter which it took almost four years to once again hit the previous high from 2007.

Now I'm revisiting this idea. With the same primary goals related to income and total return. I'm thinking that in the short run, there is no reasonable goal that can be stated that relates to total return. Share price is just too volatile, too fickle. Could the goal best be stated in terms of CAGR of the dividend stream? Problem there is that fresh money is constantly being added to the portfolio, and making adjustments for that becomes at the least very confusing to me.

What about looking at average annual growth rate of dividends per share. The problem there comes from the fact that the portfolio consists of some high yield low growth stocks as well as lower yielding higher growth stocks, and everything in between. These two categories would have to have different standards. How should those standards be stated? And when should a stock be put on probation, and what would trigger either a sell or accumulate reaction?


So this is where I currently am. It would reasonable to see a certain growth in income stream. That growth should be greater for dividend growth stocks than with higher yielding slower growth issues. What is a reasonable standard for growth of a 3% or 4% yielding stock? What is a reasonable standard for growth of a greater than 6% yielding stock? When should a ticker be placed on probation? How long should the stock stay on probation before a sell? How much emphasis should be placed on total return, as an income stock could have slow dividend growth but could still be giving an excellent total return?

At this point, I'm thinking that the focus is now in the right direction and many of the right questions have been stated. Perhaps with some appropriate reasearch, some participation on this board, and accumulating some data from existing positions, I can begin to state some realistic goals and over time track performance toward those goals.

Thanks in advance for any replies.

Great questions Alex!!

All of my stocks are dividend growth stocks. If they do not grow the dividends on an annual basis they are gone. Period. End. of. story.

This goes for my high yield stocks as well. APU, current yield 7.6%, 5 year dividend growth rate 4.3%, 3 year is 6%. Not bad.

BCE - Current yield 5%, 3 year growth rate 7.6%

My utilities all have dividend growth.

For many companies I am looking for dividend growth rates double the rate of inflation. That works for now. But, there are allowances made for individual companies. O had a big dividend increase when it acquired ARCT - 19%. They get some slack for the very low increase rates since then. I need to see a pick up in dividend growth by the end of 2015, but they have earned some patience by front-loading those increases.

Finally, in the dividend growth side of the portfolio - which is 87% of the total I am good with paraphrasing chowder's goal - a reliable and growing income stream from financially strong companies.

[hendi_alex]

Well said!

[cannew]

Over the years I attempted to develop a list of solid, non-cyclical, large company stocks which had a long history of paying and growing their dividends. They did not have to raise their dividend each year as long as I felt there was an explainable reason for not raising it. I expected the stocks to have an initial yield 2.5% or higher and a growth rate slightly above the market conditions. There was a time when 10% growth was expected, today 6% is good.

Now that I have the companies which met my criteria (twenty stocks), I just monitor the dividend and dividend growth. I do have a buy range for each stock in case the price drops and I can add to my current positions. I don't look to add other stocks to the list, any growth stocks, funds or etf's. I'm not overly concerned about Allocation, Diversification or Re-balancing (which I don't do). As long as my portfolio continues to generate higher income, I'm happy.

ps: I don't sell unless I feel the dividend will no longer be raised or becomes un-safe.

[Robandcindy2]

Alex,

Your well written thoughts are so important it had my gears turning and I had to sleep on a reply. Indeed what are our performance goals?

I have walked the same path (although still far behind you!). And like you grow weary of the details of my spreadsheet and data tracking.

Every year I update a list of lifetime results of benchmark indexes and funds that I average to create a minimum threshold for our DGI efforts. These are:

Dow 8.8%
Total Mkt 9.4%
S&P 500 11.01%
NASDAQ 8.95%
Total Stock 9.45%
Total Bond 6.41%
Wellington 8.31%
Wellsely Income 10.15%
Balanced 8.29%
Average 8.97% (I need to update these, 6 months old)

So at a minimum I need to beat 8.29%. Having been raised a Boglehead I am by nature a "Lazy Portfolioist". So I also crosscheck my results against the various Lazy Portfolios at Dr. Paul Farrell's page at Marketwatch. Could I do better in the accumulation phase with a simple, lazy, portfolio of low cost index funds at Vanguard?

As we are in the accumulation phase I am not as concerned with the income received as long as it safely exceeds the 10 Year Treasury (currently 2.41%). Safely by limiting high yield high risk. Safely by limiting as much as possible our choices to dividend Champs, Contenders, Achievers, Aristocrats.

Individual investments are another matter. A well diversified asset allocation is all of the classes you mentioned but also cash, bonds and dare I add, a little growth to spice things up? Then there is diversification across the "Caps". And being a follower of your posts I know I'm preaching to the choir here.

Can there truly be a "single rule" with which to evaluate our holdings? 'Chowder' seems to think so. His(?) system works. Bob Wells over at SA has a well thought out "Business Plan" that he and his wife closely adhere to. Works for them. Same with David Van Knapp.

Not helping? Ya, I know....bear with me....

So what about Moi'? I treat each investment on it's own merits which may be many while avoiding the "paralysis of analysis" if at all possible.

Macro View
I hold to the belief that risk is reduced (and I sleep better at night) by holding a lot (maybe too many) but a lot of stocks. If one tanks while I'm out of touch the "hit" is minimal.

I then religiously stay within my Equity/Fixed ratios. Currently 85/15 but ideally in a non-QE world 60/40.

This is further broken down into Domestic/Foreign/Emerging- both stocks and bonds....(No wonder I never get anything done around the house!)

I also stick to my Morningstar Sector diversification ratios (and diversified in those sectors) and to a slightly lessor degree my Large, Mid and Small Cap ratios (60/20/20).

Micro View
So filtering down from the above factors some things I look at company specific:

Can I wrap my head around the business? What do they do, does the world need them?

How do they look on FastGraphs? This is my first stop. Only buy them if they are undervalued. If I own them and they have dropped in value, why? What are they forecasting? How do they look under Morningstar's analysis? (Often FG and M* disagree)

Do they have a reasonable yield (above the 10 year Treasury Bond)?
If not, what is their 5 year dividend growth rate? Historic, sure but you have to start somewhere... Will they be above the bond when I retire? Is it worth the risk now?

If it is below the 10 year Bond, how desirable is the company? Would it compliment my portfolio? Would it fill a niche AND provide reasonable income AND reasonable growth? Where might they be when I retire in 4-7 years?

Egads there is that word GROWTH! Darn it we are an income forum, watch your tongue!

Yes I have some growth stocks. But I also want and insist that our DGI stocks grow at a rate that will exceed inflation. Currently SBUX, a favorite business I frequent has a 5 year growth of 7.6%(FastGraphs), well that barely is the inflation rate (5x1.5) last time I looked. And since it only yields 1.33% I'm not thrilled.

I've far exceed my bandwidth here and I apologize for rambling but you bring up an internal discussion we all have as "our own advisors".

So to sum up:
*I strive to meet my ratios in a macro way
*I want to buy fair to undervalued companies
*I want a reasonable yield that is worth the traditional risk in Treasuries (QE events not withstanding). Currently, I find bonds risky.
*I want corporate growth, estimated returns, to exceed inflation
*I want dividend growth to exceed inflation
*If a stock is losing money it better have a good reason (the market, cyclical, some hedge fund manager spouting off manipulating the stock, etc)

Deciding between two similar stocks I will pick the company that:
*Reasonably yields more
*Reasonably returns more
*Has the better 5 year growth forecast
*Has the better dividend growth
*Has the better Credit Rating (BBB+ minimum)
*Has the lower debt ratio
*Whose product, services, purpose I understand the clearest

But a Chowder Like formula....I think there are too many other factors for that to be the be all-end all. (Full disclosure-I do use the Chowder formula when I do my "Holdings Review" because if he wouldn't own that stock I need to be rethinking why I do).

Hope others will chime in. Thank you for sharing your thoughts.

Cheers,

Rob

[Dividend Watcher]

Alex, that is quite the thought-provoking question.

I went back to my portfolio business plan to see if I'd included anything about measuring metrics along the way. Of course, I knew I didn't. I have a goal for when I reach retirement age but nothing I could use to measure my progress other than watching the projected dividend stream when I enter dividend re-investments or sales/purchases.

Since my end goal is the dividend stream, I think I'll do a little pondering on how I'm going to measure that. There is no index for dividend streams. They're all based on value and that's not my big concern.

Thanks for making me think about this.

[Dividend Gamer]

At this point for me, I am really only trying to increase my invested capital. I try to invest at least 10% of each paycheck, or set it aside for a larger purchase(investment). Fortunately, I've had a few months where I managed to get around 35% of total monthly net pay invested.

The only debt I have is a moderate car loan, so all I really try to beat is at least 4% to gain at least 2% over the loans APR of 1.98%. As young as I am(relative to many here at 27) I have decades to go, and I may never even traditionally retire. I know that if I can get paid to talk and write about financial matters and insights, that is something I would gladly do until the day I die.

I do have the end goal of achieving stable yearly livable income off of my dividends and other incomes/distributions, and one of the great things about slowing down and getting older is needing less to get to where I need to be.

I can learn a lot by one great example, my grandfather, who is very happy and doesn't even spend all of the money he gets from his pensions and SS, he gains at decent amount a month, and just puts it away into a bank account. He doesn't even need to use his investment income, he has only had to use it a few times to pay for unexpected medical bills.

Learning to live on less and appreciate the simple things can go a long way with stretching your investments. Minimalism and the stoic philosophy go along very nicely with dividend investing and people trying to be FIRE and ERE'ers.

[Be Here Now]

(08-16-2014, 10:24 AM)hendi_alex Wrote: What about looking at average annual growth rate of dividends per share. The problem there comes from the fact that the portfolio consists of some high yield low growth stocks as well as lower yielding higher growth stocks, and everything in between. These two categories would have to have different standards. How should those standards be stated?

I too have some HYLG stocks and some LYHG stocks. I tackled the problem of measuring dividend growth rates by calculating the weighted average growth rate for the entire portfolio. To do this I weight each stock's growth rate by the percentage of the total market value of the portfolio represented by that stock, then sum the weights.

For example, MO is 8% of my portfolio by current market value. Its one year DGR is 8.24%. 8% x 8.24% = 0.66%.

The one year total for my portfolio is currently 9.22%. I do the same for 3 and 5 year DGRs.

When I decided to measure my DGR as I do, one factor in the decision was that my portfolio is dynamic. I reinvest some dividends, and the dividends that I do not spend, I accumulate for opportunistic reinvestment. Thus my portfolio has a lot of moving parts - 36 positions currently - and they all change fairly often. Another factor was the same problem posed by alex. The weighted average method seemed like a reasonable solution.

I use the same spreadsheet to perform some other statistical analyses. I compute the weighted average beta and standard deviation. I compute the 1-, 3-, and 5-year chowder numbers; since I want DGRs to be fairly consistent over time, I think multiple chowder numbers have some merit.

I have a written investment plan, and I have published the goals and some of the strategy from my plan in my Seeking Alpha profile. Some highlights: I want high current income and income that increases faster than inflation. I want to never spend any of my capital; this was how people accumulated wealth before MPT became popular. Thus, I do not care about or measure total return. I own no bonds and have no plans to ever own a bond, even though I am retired. Bonds are fixed income, and I have several pensions that provide fixed income. If I were to receive the same amount of income from 10 year treasury bonds, I would need ~$2.1MM in bonds, which is more than the value of all of my brokerage accounts combined.

I use Morningstar for the DGRs, betas, and standard deviations. If you create a portfolio or watch list with Morningstar, you can export it as a spreadsheet, which I find to be very handy.