This is my first formal portfolio review and I hope to do one of these twice a year - in January and July.

Managing a portfolio is similar to managing a business. I am investing in companies that will provide me with dividend income during retirement and I expect every stock to pull its own weight. If not, I’ll sell it and buy into a better company.

(1) I’m looking for companies that will double their earnings every 5 to 10 years. Steadily increasing earnings per share (EPS) is often followed by steadily increasing share prices and dividend payments. Using the Rule of 72 as a rough guide for estimating an investment’s doubling time, 72 / 10 years = a minimum EPS growth rate target of 7.2%. The companies in my portfolio have future EPS growth rate estimates of 9% to 16%. The weighted portfolio average is 12% estimated annual EPS growth. No portfolio problems here.

(2) I’m looking for a combination of Yield and Dividend Growth Rate (DGR) that will provide a 10% yield on cost in about 10 years. If a starting yield is 2.5% on the day I buy a stock, then the dividend will need to double to 5% in 5 years and double again to 10% in 5 more years. Using the Rule of 72 as a guide, 72 divided by 5 years tells me I need to look for a minimum DGR of 15%. The weighted portfolio DGR is 16.8% and the Yield on Cost is 2.68%. This combination of yield and dividend growth rate will get me to a 10% yield on cost in about 10 years.

(3) I’m looking for companies with fairly low debt and low dividend payout ratios. This gives some indication of the stability of the dividend payment. The portfolio average for Debt to Capital is 40% while the average dividend payout is 36%. I own one company well outside these bounds. LO has a debt/cap ratio of 238% and a dividend payout ratio of 71%. I’ll keep a watchful eye on LO but, I have no plans on selling the stock at this time.

(4) I’m looking for a certain level of diversification. I plan to own about 20 stocks with no more than 15% of the portfolio in any one company. My wife’s IRA has 12 stocks and one, AAPL, makes up 17% of the portfolio value. I’m not going to sell AAPL at this time though. However, all 12 stocks are Large Caps. I will look to add Mid or Small Cap stocks during future purchases.

June 2013 Holdings |