Portfolio Business Plan: You Really Need This - Part 2 - Further Revisions

by: Bob Wells

Since July of 2012 I have repeatedly written about the importance of having a portfolio business management plan in place which addresses the specifics that direct your buying and selling decisions. I believe such a plan needs to be personally crafted to order to reflect your income goals and risk tolerance. I last updated my plan and offered it for your consideration less than two weeks ago. And consider it you did … providing more than two hundred and fifty comments and suggestions. On behalf of my entire family, we want to personally thank everyone who commented on this important topic. Your thoughtful comments have prompted additional changes which are reflected in our revised plan, presented for the first time below.

Your suggestions have proven particularly important since our plan now serves a dual purpose: First to better direct our investment decisions and, just as important, it will help to shape the investment decisions made by those inheriting this portfolio in the future.

I believe that while most retired investors have an estate plan in place, few have the detailed portfolio management plan required by their survivors. This is all something we need to take seriously, as it will help to directly effect our investment success now and into the future. Thanks to your efforts we now have such a plan.

Many of you in your comments expressed that the plan's goals were perhaps not as clear as I would like for them to be. As a direct result of your suggestions changes have been made that I believe will add this clarity. Others commented that additional instruction on monitoring the portfolio would prove helpful. I have tried to add such instruction in the additions to the plan which follow including a new section of the plan - Research Resources.

Our revised plan is now again presented for your consideration and comment. All changes are in bold:

Business Name: Wells Family Retirement Income Portfolio

Goal: Generate a steadily increasing stream of income paid solely from the growing dividends generated by low-risk companies with a track record of five or more years of providing safe and growing dividends. Target is an increase in income from dividends and dividend growth at least twice the rate of inflation, while continuing to grow portfolio capital. Target dividend growth for 2014 will be 6%, resulting in a 6% increase in retirement income generated by the portfolio.

Business Model Strategies:

Stock Selection:

Use the current Champion, Challengers and Contender (CCC) Lists as principal shopping list when considering new equity purchases.

Alternative: Select stocks from Safe Dividend Stock document generated from back testing of Dividend stocks from 2002 to 2011.

Give priority to stocks that meet both standards.

Require the following from any stock selected:

  • Price at least $5 per share. Minimum projected yield of 1.5X's that of the S&P 500 Index at the time of purchase.
  • Positive annual total returns in four of past five years.
  • Increased dividend payout in each of past five years.
  • An understandable and sustainable business model with meaningful competitive advantages, also called a "moat."
  • Good fundamental business metrics. Low debt. Low payout ratio, or one below average for that sector. Strong credit rating.

Stock Valuation

Buy only stocks with "Fair" or better valuations. Seek an overall portfolio PE of 15 or below. Be cautious of buying a new stock position at a point where it is at or around its 52 week high.

Consider multiple sources of value assessment when seeking to determine value (I will expand upon this later on). Buy stocks with a current payout ratio of under 70% or one in line with its peers.

Buy stocks that meet the Total Dividend Return (TDR) rule a/k/a the "chowder rule," requiring yield plus Five year Dividend Growth Rate (DGR) to total12% or more. In the case of utilities, MLPs and REITs, the total is 8% or more.

To help insure capital preservation, est.. five-year growth figures will be examined and compared for all stocks under consideration. As a minimum standard, only stocks with growth equal to inflation will be considered. Ideally stocks with Estimated five year Earnings Growth twice that of inflation will be selected.

A watch list of stocks of Dividend Champions, Contenders and Challengers with a minimum yield of 2.7% that meet the Total Dividend Return (TDR) rule standard a/k/a chowder rule shall be maintained at all times and revised quarterly. The chowder rule score is located in Column BX of The CCC spreadsheet. This edited list of Dividend Champions, Contenders and Challengers a/k/a Dividend Growth Income Index will also serve as an Index for the purpose of gauging portfolio performance. Portfolios have been set up on the Seeking Alpha website under the Portfolio tab. Three have been established: CCC Index, CCC MLP covering stocks part of the Dividend Growth Income Index as well as on reflective of our Current Portfolios.

A full year by year performance back test for each stock will be conducted going back to 2002 or in the case of Challengers the earliest date possible prior to purchase. Results will be maintained and used when considering new holdings or adding to existing holdings.

Portfolio Construction:

Aim for a well rounded portfolio. Diversify across sectors, industries, geographies, and different ranges of yields and growth rates.

50 will be the minimum number of stocks owned at any time.

The portfolio should maintain an overall beta of less than 0 .7.

Be alert to position sizing. Investing an equal initial amount in each stock is the norm. Stocks yielding 5% or more shall be purchased initially in an amount not to exceed 1% of the value of the portfolio. Adjustments may be considered as prices change, yields decline and perceptions of risk and reward change.

Hold no more than 3% of the portfolio's value in a single stock, with 2% or less being the norm. No single stock position yielding 6% or more share represent more than 1.5% of the value of the portfolio. When any position exceeds 3%, sell the excess and re-deploy the proceeds.

Make opportunistic switches from one stock to another if such a swap will upgrade the portfolio. The expected frequency of such exchanges is low.

The major focus is total dividend return - dividends and dividend growth not share prices. The portfolio will usually be 95% or more invested. Generating a steady and growing income stream from dividends remains job one.

Dividend Reinvestment:

Since retirement income is supplied solely from dividends and dividend growth, dividend reinvestment will likely be rare. Our goal as retirees is to enjoy our dividend income while we preserve capital for future generations.

When reinvesting dividends, consider new positions designed to improve the portfolio in one or more of the following dimensions: yield, dividend growth, or diversification.

Selling Guidelines:

Investigate and seriously consider selling a stock for these reasons:

  • It cuts, freezes, or suspends its dividend.
  • It becomes seriously overvalued as determined by a current dividend of under 2% or an evaluation by Fast Graphs. Re-capturing and re-investment of gains will likely be the first step.
  • It underperforms stocks in its sector in total returns (price + dividends) for two years running.
  • It incurs a price loss in excess of 10% and maintains such a loss for a quarter, and where such a percentage represents a loss significantly greater than similar stocks in that sector or industry. If losses increase into the next quarter, suitable replacements will be carefully evaluated. A stock can continue on "probation" as long as it is showing a price improvement.
  • Plans are announced to split or divide the company.
  • Acquisition announcements are made.
  • Announcements of an investigative inquiry.

Portfolio Review:

Monthly Review - Estimated Time - 30 minutes to 1 hour

The first of each month download a new copy of Dividend Champions, Contenders and Challengers using this link. Next clip on Changes Tab at the bottom. Check for any stocks which cut or froze its dividend or was acquired that month. Consider possible replacement for stocks cutting dividend from the Dividend Growth Income Index. In the case of a freeze consider a period of probation as the first step where yield in 5% or more. Conduct a performance review the next quarter.

Quarterly Portfolio Review - Estimated Time - 3 to 6 hours

Measure the Portfolio's overall progress toward the overall goal of maintaining stable growing income and capital preservation.

Record monthly dividend income for the portfolio. Note dividend increases for each quarter.

Measure performance for any stock "on probation".

No longer use either the Dow or the S&P 500 as a measure of the success of the portfolio. Instead use performance of the Dividend Growth Income Index. Serious under performance will be closely examined to see if an exchange for other DG equities within the Index have the potential to further strengthen income stream and capital preservation. Portfolios are set up on Seeking Alpha website under the Portfolio tab. Three have been established: CCC Index, CCC MLP and Current Portfolios.

Run each of the holdings through Fast Graphs to determine if any are overvalued.

Measure final success against the "Chowder Index." Check to see if this quarter's income from dividends exceeds that of the same quarter last year. If it does, celebrate with a cold one or two. If it doesn't, make appropriate adjustments based on stated guidelines and portfolio objectives.

Research Resources


Year by Year Performance Back test - Just go to the Morningstar site. Put in a ticker. Go next to the Performance Tab on the Grey bar. After you click on Performance click on the Expanded View - Light Blue Tab. You now have a ten year performance on your stock year by year.

Stock Credit Rating - Link provided here

Stock Value Rating - Two star suggests the stock is overvalued. Three star suggests the stock is fairly valued. Four stars suggests the stock is undervalued.

Seeking Alpha

Portfolio- click on portfolio tab to access current family portfolios

Dividend Increase information - click on Market Currents tab. Next click on Dividends.

Fast Graphs - Information on stock value and so much more (sign in required)

Dividend Champions, Contenders and Challenges

Access through link provided above

Dividend cuts and freezes - chowder rule- a/k/a total dividend return rule - click on CHANGES tab at bottom of the spreadsheet

Dividend Growth Rates - Columns - AL-AP on spreadsheet

5Yr. Estimated Earning Growth Rates - Column PG

Payout Ratios - Columns S and T

Dividend Increases - Column BG

Dividend Yield - Column I

Beta - Column CG

Whether you're a few years out or already retired, no matter what investment vehicle or mix of vehicles you choose, whether you are a self-directed investor or work with an adviser; take the time to develop your plan. Believe me when I say, you'll be happy you did.

So by now you should have your estate plan in place and be working on your portfolio management plan. But wait, there is a third plan to consider if you're retired or will be soon. The third plan you might consider is your Retirement Life Plan. Seeking Alpha is about so much more than just growing investments; it's also about growing the lives they ultimately help to support.

Our retirement began in 2008 with a move to Chattanooga, an area closer to where two of our three children were residing. Note I said were, as one has since moved to Colorado. Oh well.

I started 2009 working part-time as a training consultant. As the economy got weaker so did opportunities as a trainer, since the first cuts made to organizational budgets are often to training. Oh well.

For my wife and I, the transition into retirement meant taking control of our investments. It also meant updating our will and estate plan. We began to take steps to help insure that we each had the skills to function independently should such a need later arise. For me it meant becoming more comfortable in the kitchen. For my wife it meant learning the ends and outs of internet banking and bill paying. The first few years were filled with travel to locations we had dreamed of for so long. Still there were challenges as we each made the transition to a life where what happens every hour is pretty much up to you. After a few years we both had the similar feeling that we needed somehow to work a little harder at this.

Earlier this year, friends who are also retired talked about a process they underwent with their then financial planner to create their retirement life plan. They have since left the planner while the retirement life plan they develops remains in place.

Retirement Life Plan, sounded like a great idea! Having a business plan for our investments has paid off. Clearly we needed just such a plan. After all what good is growing your investments if their not helping support what's really important to you and your family.

We embarked on this new journey, each of us better defining our personal vision of retirement. After a few internet searches we found numerous resources to assist. We fully explored broad areas like health, family/relationships and leisure and travel. Next, we further streamlined our budget to better identify the amount of discretionary income available to financially support what would become our final plan objectives.

We each performed this soul searching exercise independently; ultimately arriving at our top ten ranked retirement life style objectives and how we believed our discretionary retirement income could best support those objectives. My wife and I each spent hours before finally arriving at our personal top ten objectives.

Next we each presented our lists orally to the other, elaborating on each item beginning with the 10th ranked item, moving one by one to the item we felt to be the most important.

During our presentations we found areas of agreement and areas where we disagreed particularly, as to how a specific objective should be ranked in importance.

Next we examined the other's list and ranking them again from one to ten, this time from our perspective. With each step we grew closer to our shared vision of retirement and how our portfolio could best financially support that vision.

We have defined our 2013 Retirement Life Plan Priorities and are in the second quarter of implementing our objectives. Like our portfolio business plan we plan to continue to review our progress on a quarterly basis, making adjustments to our goals and corresponding budget when required.

There should be more to your investments than Seeking Alpha. It's up to us as investors to ensure that are investments enrich and protect those we love. The best way I know to do that is to have three plans in place at retirement: An Estate Plan, A Portfolio Management Plan and finally A Retirement Life Plan. Now it's your turn to share your thoughts and experiences in seeking and obtaining the best retirement life possible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.