My Investment Plan, Made Real!

While making the rounds of some of the blogs I follow, I came across a great post by My Own Advisor that summarizes some mistakes do-it-yourself investors make. All those points were great, but the one that jumped out at me was #5, “Lack of a plan”. When I sat down to think about it, I don’t believe I’ve really had a plan while investing until recently. I just looked at some S&P Capital Reports and Thompson Reuters StockReports, maybe glanced at P/E ratios and debt levels, and that was it. After I left my broker, I began to take my investing much more seriously. I became aware of dividend growth investing, and began to modify it to suit my own needs. Now, I need to crystallize it once and for all. So here we go, DividendDeveloper’s Official Portfolio Investment Plan!

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DividendDeveloper’s Portfolio Investment Plan:

Overall Portfolio Goal: To replace my current earned income with a mix of dividends and growth stock sales, such that I may retire safely and without financial worry. My target retirement age is 35.

Dividend Growth Portfolio (includes standard taxable account and personal IRA):

• Goal: Replacement of earned income
• I will invest solely in stocks that pay a dividend.
• I will invest in stocks as follows:
  • My starting point is David Fish’s US Dividend Champions list.
  • I will remove companies that do not meet the following criteria:
    • Have 5 years of dividend increases.
    • Have not frozen their dividend for over 8 quarters since appearing on the list (an exception is granted for the years 2008-2010, due to the financial crisis).
    • Have a Chowder number of 12 or more.
      • For REITs, MLPs, telecoms, utilities, and other such special cases, this number may be dropped down to 8.
    • Have an EPS payout ratio of less than 70%.
    • Pay a dividend monthly or quarterly.
      • A semi-annual dividend is acceptable for ADRs/international stocks only.
  • With this abbreviated list, I shall use FAST Graphs to remove companies that do not meet the following criteria:
    • Have an S&P Quality Ranking of ‘A-‘ or better.
    • Have generally increasing earnings over the past 10 years.
    • Be fairly valued or, preferably, undervalued according to their Normal P/E ratio (the blue line).
      • Special consideration will be given to companies who are also undervalued compared to their Intrinsic P/E ratio (the orange line).
  • Criteria used to make my final choice may include, but is not limited to: economic moat (according to Morningstar), stewardship rating (according to Morningstar), dividend yield, dividend growth rate, debt levels, and expected total return (according to FAST Graphs).
• Dividends shall always be reinvested into the company that generated them (see this SeekingAlpha comment and a different article that summarizes that philosophy nicely)
• My holding period is forever.
  • I am allowed to, but not absolutely required to, sell on a dividend cut, or a freeze that last more than 8 quarters.
• This should ideally about 85% of my portfolio, sans 401(k).

Notes: This is the meat and potatoes of my investment strategy. I want this to be a solid portfolio, as I hope it generates enough income to cover my expenses, my definition of FIRE. I don’t want to sell a stock if I don’t have to, since if I do, I lose out on the power of compounding, which to me is a Very Bad Thing. As an aside, here’s a great article by Dividend Growth Investor on the power of compounding. Going off of my desire to not sell if possible, here’s a great post by DivHut that summarizes why I may not want to sell even on a dividend cut or freeze. I also don’t care too much about capital appreciation, although it is nice. As long as my income stream is undamaged, I’ll be okay even if my overall portfolio is in the red. I will not modify my current portfolio to apply to these rules, and reserve the right to add to existing positions that do not meet these rules, if needed.

Technology Growth Portfolio:

• Goal: Capital appreciation
• I may only invest in technology companies in sub-sectors I understand (usually software).
• I may buy one stock for this portfolio every 3 months. No extra money I earn (bonuses, unexpected windfalls, side income/consulting, etc) may be invested in this category.
• My stock selection criteria is as follows:
  • The company must have a ‘narrow’ or better economic moat, based on Morningstar’s judgment.
  • The company must have a quality rating of ‘B’ or better (‘A’ or better preferred), according to S&P’s credit ratings.
  • Earnings must be on a consistent and significant uptrend since going public or 5 years, whichever is shorter.
  • FAST Graphs must show undervaluation based on the Normal P/E ratio (the blue line).
  • Expected return is 8% or more over the next 5 years, according to FAST Graphs.
• All dividends collected, if any, shall accumulate in cash.
• My holding period is as long as possible.
  • I may sell only I notice significant fundamental deterioration or loss of competitive advantages. This restriction may be loosened upon early retirement, should I no longer be able or willing to follow industry trends. In which case, I shall sell this section of my portfolio and move my money to normal dividend growth stocks.
• This portion of my portfolio must never exceed 10% of my total assets, sans 401(k).

Notes: As I mentioned before, I’m a software developer. Part of my job is keeping up with industry trends. I actually understand what these companies do, what makes them tick, how they make their profits. I feel that gives me a ‘leg up’ on many other investors, who just invest in Apple or Facebook for no real reason other than momentum chasing or the hope of quick profits. The one reason I don’t like dividend growth investing per se is because there are so few tech companies that I can invest in. Essentially, I feel my knowledge is going to waste. Hence, I want to invest in certain companies that don’t often get invested in by DGIs (usually because of the lack of dividend). However, I want to cap my exposure to this area to 10%, since I a) get my income from the sector, and b) want to retire on dividends within 15 years or so, and not have to sell stock. That’s also the reason I won’t reinvest dividends, in the off chance that the company pays them.

Hard assets:

• Goal: Pseudo-inflationary hedge; diversification into non-standard assets
• I may invest only in investment-grade emeralds, with my criteria as follows:
  • The emeralds must be certified untreated.
  • The emeralds must be from Columbia, specifically the Muzo, Chivor, Gachala, and Coscuez mines.
• I may purchase up to 2 emeralds per year.
• I will never sell an emerald.
• This portion of my portfolio must never exceed 5% of my total assets,, sans 401(k).

Notes: I chose emeralds here, instead of the common gold/silver/platinum, because I have had an interest in gemstones going back to childhood. I know gemstones much better than I do precious metals, and I am reasonably versed in their value and market. I like Columbian emeralds, since they generally have a more vivid green color, are often freer of inclusions, and most resemble a ‘pure’ emerald. The mines listed are known for producing top-quality gems, with Muzo being the best. The purchase cap is to limit my portfolio’s exposure to hard assets, and my holding time is forever since it takes a very long time for a gem collection to appreciate significantly in value. And hey, I just like shiny things!

401(k):

• Goal: Preservation of capital
• This portfolio must contain only index funds.
• These index funds must be balanced accordingly:
  • 80% domestic/US stock fund
  • 20% US bond fund
• I may only view my portfolio once per month, for net worth tracking.
• I may change my balance ratio once every 6 months.

Notes: I view my 401(k) as a failsafe of sorts. It’s a sort of protection for me. If I have a chain of stock choices go wrong, or I make terrible investment decisions overall, I’ll still have this backup, so I can still have a decent retirement. Accordingly, I want it well-balanced, with a small but noteworthy amount of my assets in a bond fund for diversification. I don’t want to choose individual stocks here. I know I may sacrifice income, but I feel that comes at the expense of minimized risk, so I’m willing to deal with it. A nice feature of my employer’s plan is that it automatically reinvests my monthly contribution such that my 80/20 ratio is best preserved; that makes life even easier for me.

Do you have a investment plan in place to guide your investment choices? What’s in it?

Image source is available here.

Disclosure: None.

Tags: about-me, Investment-plan, personal