Dividend Growth Portfolio Constitution

My goal:

The target for this portfolio is to deliver 10 percent yield on cost within 10 years of inception. 

What does that mean in real numbers?

In July 2011 we rolled my wife’s 401k into an IRA. The beginning balance was $216,508 and the goal of this portfolio is to generate a 10% yield in 10 years. 10% of $216,508 equals annual dividend income of $21,651 by July 2021.

Strategies to attain the goal:
  • Keep the total portfolio average Dividend Growth Rate at 15% or better
  • Reinvest dividends
  • Buy stocks with “Fair” or better valuations. When is a stock in my buy zone?
    • It’s PE ratio is at or below it’s five year average
    • It’s Yield is at or above it’s five year average
    • It has a Morningstar rating of 3 or better
    • It has a minimum current yield of 2.5% plus a dividend growth rate of 15% or better
    • A graph of a stock’s EPS and Dividend shows steadily increasing numbers. Avoid stocks with “uncomfortable” or unpredictable swings in either number.
    • Avoid stocks at or near their 52-week high. They will certainly reverse direction by anywhere from 20% to 40%. Be patient and wait for these better buying opportunities. Waiting for these corrections also helps improve yields.
  • Limit a stock's income contribution to about 15%
  • Make opportunistic switches from one stock to another if such a swap will upgrade the portfolio yield, dividend growth, diversification, and the like.
  • Since the major focus is on dividends and not share prices, the portfolio will usually be 100% invested.  Don’t “sit out” bear markets. Cash does not generate dividends.
  • Investigate and seriously consider selling any stock for these reasons:
    • It cuts, freezes, or suspends its dividend.
    • It bubbles or becomes seriously overvalued.
    • You receive news of significant changes impacting the company.
    • It is going to be acquired.
    • It announces plans to split itself or spin off a separate company.
    • Its size increases beyond 15 percent of the portfolio or it's income exceeds 20% of the total portfolio income.
  • Conduct a thorough Portfolio Review twice per year. Review stocks for the following:
    • Is the Yield on Cost steadily increasing? Each stock must carry its own weight toward the goal of 10% Yield on Cost in 10 years. Look for dead wood and clean it out.
    • Has the price skyrocketed? If the stock is well overvalued, consider taking some profits and reinvesting the funds.
    • Has the EPS Growth Rate slowed? This will show up as a high PEG value where the Price/Earnings ratio is much higher than the earnings growth rate.
  • Review this constitution at least once per year and adjust it for changed circumstances, new knowledge, and the like. 

Strategies and Practices Not Used:
Options, futures, or other derivative investments.
Mutual funds or ETFs.
Trailing sell-stops. Exception: If I have determined to sell a stock and it is in a price uptrend, I may use a tight trailing sell-stop to milk capital gains out of the stock before selling it.

Credit for this Dividend Growth Portfolio Constitution goes to Dave Van Knapp. His original constitution can be found here while mine has been modified to suit my goals. If you’d like to learn more about Dividend Growth Investing, please visit David’s articles on Seeking Alpha.

The goal of my Dividend Growth Portfolio is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies.

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