Sunday, March 1, 2015

Getting Started Part II


Hello, this is Div4Son,

This is my high level strategy:
  • Build a diversified portfolio of 30 to 50 stocks of high quality companies with high dividend growth and current high dividends.
  • Reduce risk of downside (don't chase the yield, require a high margin, buy when the company is fairly valued or below).
  • Continuously build up cash capital for investments - invest in at least one company every month, with spare capital for 'black friday' events.
  • Balance the portfolio by investing in under represented positions & sectors.
  • Reinvest the dividends during the accumulation phase. Live off parts of dividends, reinvest the rest in retirement.
  • Monitor the portfolio quarterly 
  • Sell based on what the dividends tell you. e.g. Sell when it is cut. 


Guidelines

1) Build a diversified portfolio of 30 to 50 stocks of high quality companies with high dividend growth and current high dividends.
  • Follow SBI -High Quality + High Current Dividend + High Dividend Growth 
  • Quality - Steady ROE, Operating Margins, Earning Growth, Moat Indicator
  • High Dividend Growth - Incorporate with Chowder rule
  • High Yield - Dividend Yield theory, Yield/Avg Yield
  • Chowder rule variant (>12% for regular stocks, >8% for utilities)
  • Buy at fair value or below using the following valuation methods - P/E, P/S & P/B, DDRM & Gordon growth, Dividend Yield Theory. 
  • Diversify 30-50 companies in different sectors & industry
  • Don't pursue short term capital gains ie don't sell for the short term. 

2) Reduce risk of downside (don't chase the yield, require a high margin, buy when the company is fairly valued or below).

  • Require a high margin of safety - Use Dividend Yield Theory
  • Don't chase the yield. Stay within 2% to 6%.
  • Focus on Payout Ratio < 60% 
3) Continuously build up cash capital for investments - invest in at least one company every month, with spare capital for 'black friday' events.
  • Build up capital as quickly as possible -- War Chest
  • Save at least 50% of monthly income for investments
  • Invest monthly at a minimum
  • Make sure extra capital is at hand for market dips
4) Balance the portfolio by investing in under represented positions & sectors.
  • Using current portfolio and watch list invest in stocks with no positions or sectors / under represented that are the well 'valued'. 
  • Building on existing position if no positions found for the month. 
  • Balance by adding -- not by selling. 
5) Reinvest the dividends during the accumulation phase. Live off parts of dividends, reinvest the rest in retirement.
  • Either reinvest the dividends in the same companies or collect the dividends to reinvest in new positions. It is not clear which method is better -- my current approach is to reinvest in the same companies. Regardless, reinvestment is vital for compounding and future gains. 
  • During retirement, follow the 50% rule to reinvest 1/2 the dividends. 

6) Monitor the portfolio quarterly 
  • Monitor your positions (original reasons for buying & payout ratio). 
  • Review the companys' reports. 
  • The goal here is not to sell immediately based on any bad news, but to be aware of what's going on with your portfolio and in particular, the elimination or major cut of the dividends. If this is the case, then this is when you you sell. 
7) When to sell
  • Ideally, we want to hold as long as possible (decades).
  • However, when a company is in (a fundamentally) bad shape and the dividend is cut then it is time to sell. 
--




Remember that we are all investing on imperfect information. The best we can do is to reduce the risk of downside loss by investing in high quality (sometimes boring) companies which raised their dividends over a long period of time (>8-10 +years) when they are well 'valued'. The gains will come over many years (decades) so patience is a virtue.

Lastly, the market will go up and down. 
When the market is up, care is needed to not buy the hype. 
When the market is down significantly, remember to keep calm and keep on earning the dividends. Continue to invest since there will be lots of bargains. 

Div4Son


2 comments:

  1. Looks like you've made a lot of transactions since August. Good job! Keep up the good work and keep on earning dividends. :)

    ReplyDelete
  2. Tawcan,
    Thank you for your encouragements. I like the "keep on earning dividends" phrase - I might print some t-shirts :)

    ReplyDelete