A Young Investor's DGI Plan And Portfolio

by: Erik Sorensen

The one constant I have noticed when viewing articles and profiles from popular DGI contributors is the fact that most of these contributors are near, if not at, retirement. Provided their articles lay the framework for the premise in the Dividend Investing Primer, I always find myself trying to picture another twenty-something incorporating these strategies and trying to perfect them. While there are some brilliant younger DGI contributors, Tim McAleenan, Dividend Growth Machine and Eli Inkrot come to mind, there are few 'youngsters' out there who are sharing their strategies and results. With that, I am hoping to start a journey of not only educating younger investors about DGI, but also sharing results.

If you are even a casual browser of dividend growth investing articles, you have likely come across DGI business plans from some of the top DGI contributors. David Van Knapp presented the initial "treat-yourself-as-a-business" plan, found here, and Bob Wells did a magnificent job in adapting and constructing off DVK's using his own guidelines and personal strategies. I will attempt to do the same: laying the foundation for prudent and (hopeful) unemotional investing into the future.

Business Name: Erik's Dividend Growth Portfolio

Business Goal: Construct a steadily increasing stream of dividends paid by excellent, low-risk companies.

Business Model (Strategies)

Stock Selection:

  1. Majority of stocks will come from David Fish's Champions, Contenders, and Challengers list
  2. Additional stock selection may occur based on the following parameters:
    • Price at least $5 per share.
    • Minimum projected yield at least 1.5% (investment horizon is 30+ years).
    • Dividend growth rate over past 5 years at least 7% annually.
    • Positive annual total returns in three of past five years (2008-2012).
    • Increased dividend payout in each of past 5 years.
    • An understandable and sustainable business model with meaningful competitive advantages.
    • Strong fundamental business metrics.

Stock Valuation:

Purchase initial positions in stocks with "Fair" or better valuations. Valuation will be determined by Price-to-Earnings multiples based on 5-10 year averages, future estimates and industry comparison. Additional valuation tools will include F.A.S.T. Graphs, Analyst Recommendations, and other, respected Seeking Alpha contributors.

(A Dollar-Cost-Average and Dividend Reinvestment approach will be implemented so cost basis will fluctuate as additional purchases and reinvestment's are made.)

Portfolio Construction:

  1. Initial construction will allow for mutual funds/ETFs (based on current make up of the portfolio) and stocks with an emphasis on converting the entire portfolio to individual stocks.
  2. Diversify across sectors, industries, geographies, and different ranges of yields and growth rates.
  3. Limit the number of stocks owned to a maximum of 15. (Limit may increase as the strategies are implemented and better understood.)
  4. Equal portfolio weighting is the early goal. Adjustments in proportion will occur as prices change, dividends are reinvested, and perceptions of risk and reward develop.
  5. Hold no more than 15 percent of the portfolio's value in a single stock. If a position exceeds 15 percent, consider selling the excess and re-distributing the capital.
  6. The focus of the portfolio is on dividends and not share prices. The goal of the portfolio is to be 94-97% invested. A dollar-cost-average approach will be initially implemented. Cash reserves may appear over-weight early in the portfolio's life.
  7. The dollar-cost-average will occur in monthly increments until cash reserves are fairly weighted in the portfolio. (3-6%)

Dividend reinvestment:

  1. Dividends will be automatically reinvested for each stock owned. As this plan becomes better understood, a change to an "accumulate and redistribute" strategy may be adopted.

Selling Guidelines:

1. Investigate and seriously consider selling any stock for these reasons:

  • It cuts, freezes, or suspends its dividend.
  • It bubbles or becomes seriously overvalued.
  • Significant changes impacting the company or industry.
  • It is going to be acquired or merged.
  • It announces plans to split itself up or to spin off a separate company.
  • It underperforms the market in total returns (price + dividends) for three years running.

2. Conduct a thorough portfolio review at minimum, twice per year. Quarterly financial and management monitoring will be conducted with each subsequent 10-Q release.

Business Plan Discussion

If you had a chance to view DVK's or Bob Well's business plan, you will see a number of similarities, including much of the same verbiage. I did not feel it was necessary to reinvent the wheel and create a plan from scratch as DVK provided an excellent framework to build upon. However, everyone's investing business plan should have differences based upon your age and investment horizons; personal risk assessments; and the defining goal of your ''business''.

One other issue pertaining to your business plan is the review of the plan itself. As any prudent manager will tell you, plans and policies should not be set in stone and a periodic review must be conducted on the overall business direction. I will be reviewing my DGI business plan on an annual basis and making updates in accordance with my life changes. I will be getting married in late August and my future wife will have to be brought up to speed with my portfolio. Adjustments will have to be made in accordance with providing retirement income for two individuals through the wonder years.

I have included the initial structure of my current portfolio and the steps I've taken to align it with my business plan. While it will take some time (the backbone of DGI) to achieve proper portfolio alignment, my business plan has outlined the procedures and steps I need to take. Now I just have to implement them.

"The Portfolio"

For some slight background on the specifics of this portfolio, I have listed a number of frameworks defining the foundations of the portfolio itself:

  1. All positions in this portfolio are held in an after-tax Roth IRA.
  2. The portfolio is granted 100 commission-free trades, resetting on an annual basis. Automatic dividend re-investment is also provided free by my brokerage.
  3. I am slowly initiating positions and have not yet added $2,500 of my 2013 $5,500 contribution.
  4. Once I develop full positions in my Roth, I have two additional securities accounts each with 100 commission-free trades.

Erik's Dividend Growth Portfolio:




Curr. Yield

Mkt Value














Coca Cola












CSX Corp






Johnson & Johnson
























Wells Fargo






Total Stocks



TRP Equity Income






Total Mutual Funds



Total Cash



Portfolio Totals




If you compare my current portfolio with my DGI business plan, two distinct items should pop out from this portfolio. One, nearly 15% of my portfolio is held in a mutual fund. This was an initial purchase that I made when I first started my dividend-investing journey back in late 2011. I am looking at a number of companies on my watchlist to initiate a new position. In the meantime, I will reinvest the dividends as I do not prefer a 26% cash weighting (It took me over a full year to initiate a position in my first DGI company, Coca-Cola). The second discrepancy you've probably noticed is the one company not found on the current CCC list, WFC. These shares were rolled over from my Wells Fargo Roth 401K and I will describe my thoughts on WFC in a future article. (figures as of 8/20/13)

My business plan calls for increasing positions through dollar-cost-averaging and this has left me with an over-abundance of cash in my portfolio. The goal is to DCA until cash reserves are 3 to 6%. With my remaining 2013 IRA contribution of $2,500 not included yet in the portfolio, I might - with board approval of course (you, the Seeking Alpha readers) - spread some additional cash to my current positions and initiate a few more. This action looks even more appealing as Mr. Market has a few recent stock sales. I will also be looking to rid my portfolio of PRFDX as dividend growth has been inconsistent and I am paying additional fund fees.

The End of the Beginning

As I wrap up this article about the thoughts, procedures, and processes of my DGI portfolio, I find myself extremely excited for this multi-decade journey I'm about to embark on. As a 26-year old, I feel truly blessed to understand the basics of finance and the power of time and compounding. The Seeking Alpha community has provided me a basis for investing and I can only hope to do the same for others my age. Once again, I want to thank this amazing community for plotting this course toward retirement. While this may be the end of the beginning, I can't help but think - it's really the beginning of the end (retirement).

(For some anecdotal reading on how this young investor started in the world of investing, check out my introductory instablog.)

Disclosure: I am long AFL, CVX, KO, COP, CSX, JNJ, MCD, WMT, WAG, WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.