The 2015 Review of My Investment Plan

As many as you remember, one of my first posts elaborated on my investment plan. Before I started this blog, I never really used any serious criteria when I made my investment choices. So although it’s really helped me to set it all down on paper, there are some parts of it that I feel are no longer fully “good” or appropriate. So today, I’m going to review my investment plan as it stands now, just to make sure it’s as timely and accurate as possible. I’ll make changes by highlighting or crossing out sections, then explain my rationale after.

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DividendDeveloper’s NEW 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 two or more of 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, and utilities, this number may be dropped down to 8.
      • An exception is also granted for Dividend Aristocrats, those stocks that have increased their dividends for 25+ years. If this condition holds, a Chowder number of 10 or more is acceptable.
    • 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.
      • The only exception is Disney (DIS).
  • 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.
      • For REITs and MLPs, a Quality Ranking of ‘B+’ and above is allowed.
    • 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).
    • Be fairly valued or, preferably, undervalued according 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.
• My holding period is forever.
  • I am allowed to, but not absolutely required to, sell on a dividend cut, after a dividend freeze that lasts 9 or more quarters, or if the company’s fundamentals are in doubt.
• This should ideally be about 85% of my portfolio, sans 401(k).

Technology Growth Portfolio:

• Goal: Capital appreciation
• I may only invest in technology companies in sub-sectors I understand (usually software).
• I may buy stock for this portfolio twice a year. No extra money I earn (bonuses, unexpected windfalls, side income/consulting, etc) may be invested in this category.
• My stock selection criteria are as follows:
  • The company must have a ‘narrow’ or better economic moat, based on Morningstar’s judgment.
  • The company must have a S&P Quality Ranking of ‘B’ or better (‘A’ or better preferred).
  • 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).

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, ideally 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).

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.

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So what’s changed, and why?

• Criteria failure number: I’ve found that ignoring only one criterion failure isn’t that big a deal, but if a company fails two or more, it’s most likely not a good investment at this time. Accounting for that now.
• Dividend Aristocrat exception: This one is a simple tradeoff – dividend growth or dividend history. There comes a point where a company has just been increasing the dividend for so long, the dividend can’t really grow faster than earnings without the company expanding the payout ratio/taking on debt/etc. Among many of the Dividend Aristocrats, earnings are starting to stabilize around a mid-single-digit growth rate. They’re no longer true growth stocks, and are slowly making their way to income-stock status. Honestly, I kind of prioritize a history of dividend growth over a very high rate of dividend growth. If a company has been growing a dividend for 25, 30, 40 years, it’s unlikely that that dividend will be cut severely. I mean, are you telling me that companies like Sherwin-Willims (SHW), Brown-Forman (BF/A), and Johnson & Johnson (JNJ) are suddenly going to cut or eliminate their dividend? Not likely, right? As an acknowledgement of that, I’m loosening my criterion for companies with 25+ years of dividend growth.
• Disney exception: As most of you know, Disney (DIS) pays its dividends annually. The company started doing this in 1999, and I actually am okay with that decision. I can’t find a source for this, but I do remember reading it, so take it with a grain of salt. Apparently, Disney stock certificates are extremely popular gifts for collectors and younger children. Although you have to be a registered shareholder to buy one, there’s nothing saying you have to buy a certain number of shares. As a result, many people just buy one share, just to qualify for a certificate. So that means that there are thousands of people out there with single shares of DIS in their portfolio. Since these shares are legit, the company has to pay dividends on them. However, if Disney were to pay these dividends quarterly, the administrative costs would be extraordinarily high. So by making the dividend payments annually, the company saves money on administrative costs while still paying its shareholders. I don’t know about you, but that makes sense. As a result, I’m modifying my must-pay-quarterly criterion to make an exception for DIS.
• Quality ranking: This is more of an acknowledgement of the ways REITs and MLPs operate. Most have a lower credit rating than what I like due to debt and leverage and other fun things I don’t really get. But that’s the norm, so penalizing a good company for doing business normally doesn’t seem fair. There’s enough good companies out there where I may not even need to look at companies with lower quality rankings, but that criterion is loosened should I need it. Examples of companies that this applies to include Omega Healthcare Investors (OHI) and W.P. Carey (WPC).
• Sell criteria: One word: ARCP. When the fraud was announced, I realized I hadn’t accounted for situations like that in my criteria. Just making it clear that a situation like that, where the company’s fundamentals are called into question, is a valid reason to sell.
• Tech growth purchases: Another simple reason – I want income, and the more the better. Since I don’t like selling, and since most of my tech growth ideas don’t pay dividends, I don’t want to focus heavily on this part of my portfolio. So limiting my purchases to twice a year as opposed to four times a year seems reasonable. Besides, there aren’t many tech growth stocks I like; Priceline (PCLN), Google (GOOGL), and Facebook (FB) are the only companies that come to mind. So it’s not like I’m missing too much here.

So that’s it! Not too many changes, but I think the changes I made are fair. This investment plan has served me well so far, so hopefully the changes keep me on the right path to FIRE!

How often do you review your investment plan?

Disclosure: Long JNJ. Image source is available here.

Tags: about-me, investment-philosophy, Investment-plan, personal, review