If you've owned or managed a company of any size you've probably had to complete a management plan in addition to your financial statements. Chances are good you found the experience daunting and tedious. If your banker was involved, you probably also learned that a good plan keeps you focused and your banker happy.
Investing is no different. To stay the course when seas get rough, you need some idea of where you plan to be at the end of day. But I must make a true confession: Although I managed publishing businesses for several years, I had no plan for my retirement investing efforts until late last year.
It was something of an epiphany: Uh, say Ron, why don't you treat your investing like you treated your businesses? If you like gambling, fine; place your bets and have a beer. If it's a business of investing you're running here, you'd better get crackin' with goals, objectives, action steps, worksheets, timetables, analyses of the properties you own or intend to buy, portfolio analysis, year-over-year comparisons, operational ratios and anything else you used to do to keep your business on track and your career intact.
Self admonished, I got on it and within a few weeks I had this, completed in January of 2013:
Title: Dividend Investment Project Business Plan
Goal: Generate a steadily increasing income from dividends paid by companies with a track record of increasing or maintaining yields. Target is to equal or exceed the project's pre-established (2012) goal of 8% yield with a gain in portfolio value of 8%.
Strategies: For 2013, save up to $1,300 (2012 amount) in trading costs with a dividend-reinvestment policy designed to take advantage of dividend increases (which increases yield when basis remains static) and no-cost share acquisition. To provide some disposable cash, we will leave one or two income producers alone at their job. We will adjust our portfolio to consist of no more than 24 stocks and no fewer than 12, with position weighted toward maximum returns. We will begin to shift portfolio balance toward less-risky equities as evaluated by our evolving system of analysis metrics.
- Construct worksheets for the purpose of evaluating stocks according to metrics learned from research.
- Re-visit the dividend income strategy outlined by Seeking Alpha writer Monty Spivak. (You can read it here)
- Study, understand and adopt where appropriate the evaluative criteria used by Seeking Alpha writer D4L. (You can read him here)
- Develop a "hybrid" strategy. "Hybrid" will mean the combination of high yield with moderate risk plus introduction of dividend growth.
- Apply the above metrics to stocks in the portfolio as of January 1, 2013.
- Develop a "Watch List" of dividend-generating stocks and apply the metrics to them with the objective of identifying ones that should be added to the portfolio.
- Acquire shares of the stocks on the watch list when share prices appear attractive. If needed to raise available cash, sell shares of stocks when they are at attractive sell prices, such as 52-week highs.
- Quickly evaluate a company that lowers its dividend, and sell shares in accordance with the diminished return. Re-deploy the money to companies better meeting the evaluative criteria.
Why have a plan? Because so many situations come up during the year that can feed into the two major emotional drivers of investing: fear and greed. A plan helps keep both at bay.
If you're a retiree investor, as I am, and using a fair portion of your time for investment projects, I suggest that a written plan can help you stay the course. If you think it can help you, please feel free to borrow from mine to get started. I took advice and suggestions from another Seeking Alpha writer, Bob Wells, whom I follow. He offered his plan as a starter, and I took him up. I re-wrote it to suit my goals, but he deserves credit for helping me get started. Mine is shorter, but for the present it's doing the job. To be sure, I have several worksheets with the data and history I need to help with action steps.
The plan is especially important when the market is entering a stage of volatility, as I believe it is now. We've had a good first-quarter run up, but April has been less certain. Investors are jittery, and the market reflects its uncertainties. A plan helps me stay on task despite the volatility.
Portfolio expansion is one of the action steps mentioned in the plan. In the nearly four months since the plan was completed, I have expanded the portfolio to 14 holdings. Because of my interest in mitigating risk, I looked for less risky stocks.
In this effort, I borrowed from Seeking Alpha contributor D4L. The stated objective to expand the portfolio using quantitative metrics helped me focus on his very good method. I have used some of his metrics to help me find stocks fitting this objective.
To meet the goal of expansion, I have so far selected 7 stocks, three of which begin the risk-reduction process and the rest of which were selected to help me keep tracking toward 8% yield and 8% growth. I covered some of these in a previous post that you may read here. Because this is focused on writing a business plan, I'll discuss the one stock to which I was pointed by D4L's Premium website (it costs $7 a month, and, no, he isn't paying me to promote it), and two that came up through extensive reading elsewhere.
Orchids Paper Products Co. (TIS) - This company engages in the manufacture and sale of tissue products for the at-home market in the United States. Its products include bathroom tissue, paper towels and paper napkins. The company offers its products under various brand names, such as Colortex, My Size, Velvet, Big Mopper, Soft & Fluffy, Tackle, Nobel, and Linen Soft. It also sells parent rolls to other converters. The company markets its products directly, as well as through a network of independent brokers. It serves dollar stores, discount retailers, grocery stores, grocery wholesalers and cooperatives, and convenience stores.
Shares we bought in March and April average $22.77; at this writing it trades at $22.92, At our cost, it will yield at 5.2%. We liked TIS, and like it still, because it has been around a while (1975), buys raw products, adds value and sells them at a profit to both retail and wholesale customers, has a history of increasing dividends, and boasts benchmark metrics suggesting dividend sustainability: Its debt to equity ratio is low (17%) and it is paying out at a level that's a little high, but not alarmingly so (75%). I also like it because it's in the consumer goods sector, which I want represented in my portfolio.
Since beginning dividends in 2011, it has tripled its dividend - the annual dividend now is $1.20 per share. We have elected to re-invest dividends for the reason that no-cost share acquisition makes sense and is consistent with plan. We can't know what shares will cost when the next dividend is paid about the first of June, but we do know we won't be paying a commission to acquire them.
We're in good company, too: Analysts like the company; it holds a 1.3 rating, according to Yahoo, with 1 being "strong buy."
Yield, at more than 5%, is attractive but compared with more risky dividend payers we hold, it's perhaps a little safer. Plan calls for average yield of 8%, so this will drag a bit. With dividend increases, however, it may be a foundation stock in our portfolio.
This stock fails D4L's test for lengthy dividend history; he prefers companies with 10 years or more of dividends without a decrease. While that requirement is perfect for a conservative dividend growth investor, I believe it's too restrictive for me.
Let's look at a company he likes.
Senior Housing Properties Trust (SNH): A real estate investment trust (REIT), SNH primarily invests in senior housing properties in the United States. The trust invests in hospitals, nursing homes, senior apartments, independent living properties, and assisted living properties. It owns about 200 properties, including 85 assisted living facilities, 61 skilled nursing facilities, 36 independent living communities, and 2 hospitals. As a REIT, it would not be subject to federal income tax, if it distributes at least 90% of its REIT taxable income to its shareholders.
We bought SNH early in February at $24.60 a share; it's at $27.40 at this writing. At our cost it will yield 6.3%. We bought in because we like the business it's in, and the baby-boom demographic coupled with expanded healthcare benefits promise to keep the pipeline filled with customers and revenue for a good while. The market is liking it more than analysts; it has a 3.2 Yahoo rating (hold). The ambivalence may have something to do with politics; lots of folks would like to see Obamacare go away and others think obstructionist tactics can decimate it. I don't think so, in either case.
As far as financial strength, SNH carries a reasonable debt load, 41%, and is paying out a manageable 83% of its available cash in dividends. Its risk rating by D4L is in the medium range. It meets the test of a long-term dividend payer without a decrease, 11 years. Nevertheless, we will need to watch dividend performance. If it follows past practice, we may see another annual dividend increase this summer.
If it does, we can safely say that it meets nicely the goals and objectives in our plan, and may also inch toward our 8% goal.
Now let's look at another stock we stumbled upon and then added, American Realty Capital Properties (ARCP).
American Realty Capital Properties, Inc. owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. The company principally invests in retail and office properties. As of June 20, 2012, its portfolio consisted of 118 properties. It's a new company founded in 2010 and is based in New York, New York. And it's been a hot item, occasionally mentioned on popular investment shows.
We bought ARCP early in March at $13.33 a share. At this writing, it is trading at $16.35. At our cost it will yield 7.2%, so it, too will drag on our goal.
It's way too young to meet the history test of D4L, and in that sense that makes it a risky dividend growth stock. Since its founding, however, it has paid 19 dividends without a decrease. Fourteen of those were 7 cents a share, but the last five have been at 8 cents (it pays monthly). Viewed that way, ARCP has increased its dividend by 14% in less than eighteen months.
There is a caveat however: It's an aggressive company and often makes the news. It recently was in an acquisition battle with Cole Credit Property Trust. A recent column by Seeking Alpha contributor Brad Thomas admirably discusses some of its troubling aspects, especially sustainability of dividends.
Our own sustainability analysis at the time of purchase was more promising, but I bears a close watch. It's an example that planning is good, but execution always is the key to success. In fact, if the price continues to push upward in the near term, I intend to take the profit and re-deploy.
If I do that, I will be abandoning my own plan of buying, holding and re-investing dividends. Still, if I believe I've barked up the wrong tree, I will sell. Brad Thomas' points are causing me to re-assess.
So here's the other aspect of a good plan: You might want to deviate once in a while. I write this only partly with tongue in cheek: While I wrote the plan to help me stay on task, I'm still the owner of "the company" and can do whatever I want.
Summary: If you're a retired investor and serious about sophisticating your efforts, writing a plan and supporting it with detailed analysis is an essential step. It will keep you focused, and help you navigate through periods of market volatility. Expect the plan to help; you stay focused. But don't expect it to relieve you of due diligence or to restrain you from making a move when you feel enlightened.
Additional disclosure: Please note that the information presented here is not the work of licensed financial adviser or experienced investment professional. Information provided should never be construed as investment advice. It is for educational and informational purposes only, and constitutes the elements of a personal learning project.