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Dividend growth investing, portfolio strategy
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Three years ago, I began my journey as a self-directed investor as a swing-trader, starting with the remains of our life savings, a measly four-figure portfolio. A year and a half ago, after being directed to Seeking Alpha, I began to embrace a dividend-growth strategy and this year plunged right in. What a difference one year makes.

In my trading days, I typically held six stocks. I had a pretty disciplined, protective trading strategy. It was working, our portfolio was growing and I spent every spare moment researching, learning, thinking about, and hoping to rebuild the possibility of security in a pensionless retirement. I was keenly aware of how each trading decision affected our future and incessantly worried about the current market action. My family was supportive but unimpressed when my new hobby became an obsession as I began to exhibit a variety of stress symptoms.

GOAL

As my understanding of a dividend-growth strategy grew, and I read stories of investors living off the dividends from their investments, I could not believe that could ever apply to us. Now, I know that it will. My goal of investing is to be able to afford to retire at a typical age, able to live off the dividends and income from our investments without needing to spend down the principal. I am only trying to fund our retirement, not a lifestyle.

One of the big benefits of this corner of the forum is the focus on setting goals, making plans, and defining strategies - which makes all the difference. When the DGI plan is working, I can tolerate some volatility without concern. This makes it much easier to not panic and withstand corrections, and, on the opposite side of the spectrum, allow me to take an occasional calculated risk without the concern of jeopardizing the main goal of the portfolio.

PORTFOLIO

My current portfolio looks radically different from the one I had a year ago, and even quite different, from the one six months ago. I started the year with ten stocks, now I hold thirty. As my first mentor was a day trader, I learned about technical trading. As a swing trader, I did not care very much about the fundamentals of the companies I was trading. I stuck with mid to large cap stocks and as long as they were in no risk of going bankrupt, I did not usually care what they did or what their prospects were. As I transitioned I began to uncover the characteristics of DGI stocks.

In June, Eddie Herring posted an article describing his due diligence methods and it highlighted an area that was lacking for me. It was extremely helpful for me to follow his example. Soon, I standardized my own due diligence into a 12 step process, which takes 6-8 hours to fully complete. Often a stock is nixed and the process is not completed. In October, Chuck Carnevale posted an article describing his due diligence methods. In November, David Crosetti's article asked some critical questions to investors. The ability to carefully select companies based on my own specific criteria, instead of parroting someone else's ideas of what constitutes a good company, cannot be overemphasized. What a difference a year makes.

I focused on buying quality DGI stocks this year, and hopefully you will see that reflected in the names below, but in many ways I spent much of the year simply picking stocks. I have recently been in discussion with a retired, experienced, local investor-friend whose stage, approach, and outlook are quite different from my own. Once again it has been a stretching, challenging and defining experience. In considering his suggestions, I have begun to look at my portfolio in radically different ways. Also, now that I have a larger number of stocks, I am starting to acquire more of the positions I already have. I am no longer just buying stocks, I am building a portfolio. What a difference a year makes.

This chart is my favorite way to view my portfolio. It is organized by sector, and shows the percent of the portfolio invested in the name and the dividend information at time of purchase. I refer to it daily as I scroll through the stock charts looking for opportunities. As someone in rapid accumulation mode, with twenty years to retirement, I am continually on the hunt. Often a purchase decision comes down to a competition between names, and the timing of the ex-dividend date is often the tie-breaker, so I find it very helpful to have that information at my fingertips. The names with a grey background are my core holdings, which I have no intention of selling, regardless of market action. The others are much more closely monitored. The green names on the right are my watchlist, awaiting attractive valuations and appropriate timing.

(click to enlarge)

THE GOOD

Currently, my portfolio is showing a whopping 82% increase over December 31, 2012's balance. Wait! Before you get too excited, it is valuable to break this down a little. My dividends this year represent 4.4% of my original portfolio amount, which is hardly a fair comparison as there was so much in contributions added to the portfolio. It's also not fair to say that the dividends represent only 2.5% of final balance of the portfolio, as more recent contributions (about 7% of the portfolio in December) have not had a chance to earn a single dividend payment yet. The dividend is 3.2% of the median portfolio balance and this seems like a much more reasonable assessment. I am aiming for 4%, but since this has been a transition year, how can I complain? Most quarters have seen dividend growth of 30% over the previous quarter and this quarter's dividends alone are more than all the previous years combined. Year over year the dividends have tripled. I am definitely heading in the right direction. Subtracting the dividends and contributions, what remains is the growth, which this year is 17%. The rest of the growth is contributions.

What does all this mean? This means that I am a great saver and am effectively using the strategies at my disposal, such as contributing to registered retirement accounts to trigger a nice tax refund to invest in dividend-growth stocks. This made up for the fact that for half of the year there were no contributions at all to the portfolio due to a car accident and the choice to replace the lost vehicle with a much better one.

You may not think that a 17% total return is particularly interesting this year, especially in comparison to the S&P. That is perfectly fine with me. In order to retire, (see goals above) I have set specific targets. I am only concerned about meeting my own specific goals in contributions, dividends and growth giving me a target total portfolio value, which I beat by 27%. (Insert happy dance here!) Additionally, if I were to choose an index to benchmark against, it would not be the S&P, but as a Canadian, it would be the TSX 60 Composite, which has a YTD return of 7.77% according to Morningstar. The XIU has a YTD performance of 8.37% according to Google Finance.

I also understand that the year is not quite over and anything can happen in the remaining trading days. I simply have time to putter with the numbers now. Even if my performance changes +or- 10%, it will not make any difference in how I view that performance, it will just change the numbers, so forgive me for not waiting until the final results are in.

THE BAD

My two largest positions (more than double an average holding each) have been poor performers this year. McDonald's (NYSE:MCD) and Inter Pipeline (OTCPK:IPPLF) have been essentially flat this year since purchases. Oh well, better luck next year. I do not plan on making any changes to their allocations as I expect the portfolio to continue to grow around them as contributions continue. My current plan is to contribute 25% of the portfolio in the first 4 months of 2014, and another 25% during the rest of the year.

THE UGLY

As the following stocks are not technically part of my dividend growth portfolio, it would be reasonable to not mention them. However, they have dramatically affected my return this year and are included in the numbers above. These companies are the leftovers of my trading days and I keep holding them due to their low price to book, and that their main problem lies within their sectors, not the companies.

Legacy Oil Plus Gas (OTCPK:LEGPF) is down 42%. Ouch. If it was to get back to even it would be my largest position and currently sits at 3.71% of my portfolio.

Painted Pony Petroleum (OTCPK:PDPYF) is down 37%. It currently sits at 1.69% of my portfolio.

You may have never heard of these smaller, Canadian companies, so I will move on to the last one:

Goldcorp (NYSE:GG) or is down 34%. Goldcorp has been a very successful trading stock for me in the past. I bought in at $33 when it reached a technically confirmed bottom and did not sell when it fell through the floor. Oops. I was told this has no place in a DGI portfolio, did not listen, and am paying the price for my hubris.

Why have I stayed in this company and what should be done about this now? I am sure this is a question common to many investors.

Goldcorp is one of the largest Canadian Gold mining companies, second only to Barrick (NYSE:ABX). Goldcorp's assets are focused in North America in 'safe' countries compared to other companies where political issues and civil unrest can significantly impact results without warning. Goldcorp is also known as a low cost producer and despite the low price of bullion, is still earning money. None of the current projects are on hold, and production has not been cut.

It is often said that retail investors suffer from poor judgment and buy high and sell low. In this case I have bought low, but am I in danger of selling even lower? The sentiment around the gold stocks is dismal. Almost all but the perma-bulls say to cut my losses and move on to something that is working now. But is this the best strategy? So far I have decided to hold on.

Why? It is not because I do not think it will go lower. I actually fully expect it to. Goldcorp sits currently at 1.69% of my portfolio (yes, it is the same as Painted Pony). However, it's important to keep your losses in perspective and not panic. I have an unrealized loss of 34%. That sounds terrible. Actually, that amounts to losing 0.8% of my portfolio, which is not enough to worry about. As a trader, I would risk only 1% of my portfolio on any trade. I am not there yet and it is certainly not time to panic.

A second reason to continue to hold, it is now tax-loss-selling season. A quick look at almost any gold and silver stock compared to an S&P 500 chart and you easily understand why people who have the opportunity to book a loss would make that choice. There is a lot of capital gain out there and few losses to offset it. No wonder the gold stocks have been hammered. My Goldcorp shares are in a tax sheltered retirement account so tax loss selling is not helpful. Otherwise I would be too.

I expect a pop in January as those who have sold re-enter their positions. Depending on the size of the pop and the outlook from there, I might consider selling. I still think it will be a rough year for the precious metals sector, but gold obviously has a mind of its own that I do not pretend to understand. I am not being scared out of the stock and if I decide to sell at a loss on a rally, I will be watching for the next entry point on the next leg down. I am also not opposed to continuing to hold, then doubling down once a bottom has been established further on in the year.

Another factor in this mix is that I bought Goldcorp as a trading stock. My thought was to ride it back up from $33 and sell at $42 if it could not break through the $45 resistance. Obviously, that is not at all what happened. Though my expected time frame for the trade was 3-6 months, my investing horizon is 20+ years. With that in mind is it wrong to be patient and wait for a trade to work out?

Goldcorp is a company that I have only traded in the past, but it is also an investable company, though it is not the kind of stock I usually invest in. Those who focus only on the price charts are likely to shake their heads and walk away, but it is entering into value investing territory with a price to book of 0.8. Meanwhile, the previously paltry monthly dividend is starting to look attractive. With a yield of 2.9% and a payout ratio of only 25%, that is certainly not inspiring me to sell either. Of the 15 analysts who cover this company, eight consider it a buy, and three a strong buy. Even the professionals are urging me to double up!

Lastly, let's look at the FASTGraph. Chuck Carnevale encourages us to buy when companies are undervalued, below the orange line and sell when overvalued, above the orange line. Now is definitely not time to sell.

(click to enlarge)

Despite a fantastic year, I have chosen to discuss a problem stock that I do not usually even include in my DGI portfolio as I allow myself a portion of money in a separate account with which to trade. I am sure I am not the only one holding a problem stock. If I knew what would happen, would I have bought in? Of course not. I bought it as a trade, and it has gone south and now I need to make wise, not reactive decisions. I think we can learn more about ourselves and our abilities as investors as we cope with losses than we do highlighting our successes.

SUMMARY

I hope you have enjoyed my portfolio update, with the good, the bad, and the ugly. After all that discussion about Goldcorp, do not forget the good part - 82%! Whoo-hoo! I did not think I would get that close to doubling the portfolio again in one year.

I used to endlessly worry about my portfolio and retirement, believing it was not likely possible to even be 'okay' when we retire. Our situation has not changed, other than I have (mostly) given up trading and embraced DGI. I am no longer reliant on the next trade doing well. I sleep well at night again and enjoy spending my free time analyzing companies, pondering the constituents of my portfolio and how to improve it. I enjoy the thrill of counting dividends and am now building a portfolio, not just buying stocks. I am looking forward to implementing the plans I have for the coming year and seeing whether my market sentiment is correct. There is still ample work to do on my portfolio and I am not yet meeting all my goals. Whether there is a massive market correction and I am able to buy everything on my watchlist at amazing prices, or the portfolio appreciates steadily, I am excited to see what changes this next year will bring. My skills have grown and my horizons have broadened immensely. I appreciate the patient tutelage of Seeking Alpha contributors. What a difference a year makes!

Source: What A Difference A Year Makes