Saturday, September 6, 2014

August 2014 Portfolio Review

My Portfolio Constitution says I will do these reviews twice a year. I might have to amend that to just once a year! I'm in maintenance mode. I've planted my seeds and now I'm watching them grow. I trim a little here and add a little fertilizer there. The portfolio is growing slow and steady. What should a write about?!

Let me start with a recap of my goal


  • The target dividend income is 10% yield on cost. The cost is $211,281 and so a 10% yield (or income) will be $21,128.
  • The starting date of this portfolio s the date we rolled my wife's 401(k) into an IRA - July 2011.
  • The target date is 10 years from the start date - July 2021.
  • So, my goal is to build $21,128 of dividend income by July 2021.
  • Put another way, the average yield for high quality companies is 2.5%. 2.5% of $211,281 is $5,282. In 5 years, I will need to double that amount to $10,500 and in 5 more years double it again to $21,128.

Earnings Per Share


Steadily increasing earnings per share (EPS) is often followed by steadily increasing share prices and dividend payments. I’m looking for companies that will double their earnings every 5 to 10 years.

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 5% to 19%. The weighted portfolio average is 12% estimated annual EPS growth. No portfolio problems here.


Dividend Growth Rate


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 has improved from 16.8% to 17.9% and the Yield on Cost is up from 2.68% to 2.89%. This combination of yield and dividend growth rate will get me to a 10% yield on cost in about 9 years.

I will look to improve my holdings, specifically looking to improve my starting yield while maintaining the dividend growth rate. One way to do this is to sell off some of my Apple holdings and move a portion into McDonald's.

Apple has a nice run up these past few months and my portfolio is overweight in the stock. You'll notice too that Apple doesn't really fit into my DGR model. It's combination of Yield and DGR will provide a 10% yield on cost in about 17 years.

On the other hand, McDonald's should reach that same goal in 7 years!


Diversification


I plan to own about 20 stocks with no more than 15% of the portfolio in any one company. And no stock should contribute more than 10% of income. I have been selling some holdings lately that exceeded those numbers, such as Lorillard (LO), Coach (COH) and Apple (AAPL).

My wife’s IRA now has 15 stocks in five sectors. Last year, all of our holdings were Large Caps. I've since added some Small and Mid Cap holdings - Copa Airlines (CPA), Textainer Holdings (TGH), Orchids Paper Products (TIS) and AmTrust Financial Services (AFSI).

I've recently sold about 1/3 of my Apple (AAPL, Technology Sector) holdings and will use the cash to buy a mixture of McDonald's (MCD, Consumer Discretionary Sector), Helmerich & Payne (HP, Energy Sector) and BlackRock (BLK, Financial Sector) to bring still more diversification to my portfolio.


August 2014 Holdings


Monthly Income


The Monthly Dividend Income graph below shows how much dividend income varies from month to month.

One of the changes I made this year is to turn off automatic Dividend Reinvestment (DRiP). I now collect the dividends as cash. Once I accumulate $1000 or more than I choose which existing stock or new stock to invest it in.


Annual Income


The Annual Dividend Income graph below shows how I expect the income to grow over the years. The yellow line is a plot of my goal. The blue line is a plot of actual income. The 2014 goal is $6700. Actual income is estimated to be $7100, slightly ahead of schedule.



Wednesday, July 2, 2014

Does This Website Have a Purpose?

My fellow Scott Randolph asked me recently, “Whats the deal with this website? Does it have a purpose?”

Damn good question, Scott. I’ve been thinking the same thing myself for months and your question forces me to put some thoughts down onto paper.

This website started with posts of kids pictures, recipes, genealogy and such but, Facebook, Twitter, Pinterest, Snapchat and the like are faster and more fun than a blog post.

I tried turning this into a photography blog, and to jumpstart my creativity I did a 365 project. That's a project here a person takes at least one photo ever single day for a year. It certainly improved my creativity and thoughtfulness but, it also killed my desire to take any more photos. So I put the camera down for a few years.

Next, I tried turning the website into some sort of financial guide. I’ve made more than my share of investment mistakes but, now that I have a really good idea what direction to take, I’d like to share some my new found wisdom with my kids. My hope, like that of any parent, is that our kids avoid many of the mistakes we made. Unfortunately, I find writing about investments incredibly boring!

So, while my web log has turned into a cobweb log, I’ve been super busy with the wife, kids and family dog.

Skittles and I took an obedience class earlier this year. We had so much fun I’m planning on signing us up for agility classes in the fall.


Then in May I pulled out the camera gear for some family fun. Brian and Philip, my twin boys, played in a travel lacrosse team this summer. Watching the games was great fun but, even more so, I found that I love taking sports action shots!




Brianna, my daughter turned 16 in June and we took her to the Whitewater Center. Here are two of my favorite photos…







Trina and I celebrated our 25th wedding anniversary on June 24th. We spent a week with the kinds in the NC mountains, hiking and visiting waterfalls. 







I really enjoy nature photography but, you know what, I like action in my nature photography even more!





That’s what I’ve been up to for much of the past year but, back to Scott’s original question, does this website have a purpose?

Nope, not one bit, at least for the moment!

Monday, July 8, 2013

July 2013 Portfolio Review

My wife rolled her 401(k) into an IRA in July 2011 and in September 2012 I took over management. Between September and June 2013, I pulled together the rules and goals of the portfolio and put them in writing in this blog. Years from now I’ll have a record of my thoughts and decisions and which of those were successful and which were total failures.

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


Monthly Income

I will use this graph to illustrate my rising dividend income. The graph looks more impressive now than it will in the future. That’s because the sharp rise from $200 to $800 is due to my transition from non-dividend paying ETF’s to dividend paying individual stocks. By this time next year I will have all of the ETF’s converted and the light blue income trend line will flatten out.



Monday, July 1, 2013

Doubling Income Every 5 Years, My 10x10 Plan

The portfolio I will be documenting is my wife’s IRA. She spent 24 years (1987-2011) with a major bank before leaving to stay home with the kids. She spent most of those years contributing to a 401(k) and when she left, we rolled $211,281 into an IRA. This number will become important in just a few minutes.

To some people that amount seems like a fortune. To others, it’s pocket change. To an average, middle class man like me, nearly 50 years old, it’s no where near enough to retire on. But, I have a plan.

Managing a portfolio is similar to managing a business.

One business model, used by many money managers guiding you along the 401(k) path, is to build up wealth during your working years and spend it down to zero in your retirement years.

My method is a bit more old fashioned. I’m using the model my grandfather, Howard Counts, tried to instill in his children and grandchildren. He bought shares of high quality companies and lived on the dividend income.

The model is called Dividend Growth Investing and the idea is to grow dividends for income instead of selling off shares.

Thousands of companies pay regular dividends but, only about 500 of them have a historical record of increasing their dividend payment each and every year. After all, it’s important in retirement that the income stream, no matter what method you use, increases each year to keep up with inflation.

My goal is much more aggressive than just keeping up with inflation. Instead, it's to reach a 10% yield on cost in 10 years. My 10x10 plan.

Almost everyone knows what a dividend yield is. Apple (AAPL) recently started paying one. They pay an annual dividend of $12.20 per share. Their current share price is $402.63. $12.20 / 402.63 = 3.03% dividend yield.

Apple has increased their dividend once so far. Let’s suppose they increase (hypothetically) their dividend about 15% every year. In about 5 years their dividend would double to $25 per share. If I had bought a share at the original $402.63 price then my yield on the original cost would be $25 / $402.63 = 6.21%.

If the same trend continued, then in 10 years the dividend would grow to $50 per share and the yield on my original cost would be over 12%, well ahead of my 10% goal.
401kcalculator.org


That, briefly, is my plan. To invest in companies that grow their dividend about 15% every year, doubling my dividend income every 5 years.

A plan is no good without starting points and end points. Without end points, how will we know when reached our goal?

Mentioned earlier, my starting portfolio amount is $211,281 but, my starting dividend payment is zero. The bank, like many 401(k) plan providers, didn’t allow investment in individual stocks so I’m selling shares of mutual funds and replacing them with dividend paying stocks. My starting dividend income will be about $5000 once I’ve completed the transition.

The starting date is the date we rolled the 401(k) into an IRA - July 2011.

The target dividend income is 10% yield on cost. The cost is $211,281 and so a 10% yield (or income) will be $21,128.

The target date is 10 years from the start date - July 2021.

So, my goal is to build $21,128 of dividend income by July 2021.

Put another way, the average yield for high quality companies is 2.5%. 2.5% of $211,281 is $5,282. In 5 years, I will need to double that amount to $10,500 and in 5 more years double it again to $21,128.

The project doesn’t end there. In 5 more years, $21k doubles to $42k. It doubles again to $84k 5 years after that. By July of 2031, when I’m well into retirement, this little IRA nest egg could be returning $84,000 a year in dividend income!

It’s exciting having a well laid out plan but, I kick myself for not figuring this out 20 years ago! My grandfather certainly knew the power of compounding interest. I was too stubborn to listen though. Perhaps my kids will pick up a few nuggets from this blog and learn from my mistakes!