Our Retirement Portfolio Business Plan - Legacy Edition - Part Two

by: Bob Wells


A portfolio business plan can enhance your success as a self-directed investor.

Retirees need a legacy component as part of their plan.

In Part One the necessary elements of such a plan were discussed.

In Part Two a completed legacy edition of our plan is presented.


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 as a self directed investor.

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 something we need to take seriously, as it will directly affect our investment success now and into the future.

For retirees who are Self Directed Investors, I believe strongly that consideration needs to be given to what happens should the principal investor be unable to continue to provide portfolio management. In other words, it's important to have a portfolio legacy plan.

This addition of our updated plan is our second effort to have in place a document that can serve the function of a true legacy plan.

I trust that should something happen to me, my wife would first consider adapting the investing approach as outlined here before considering possible alternatives.

My goal within the next year is to assist family members in fully understanding our preferred approach to investing and how it might be maintained for future generations. Our current business plan as revised sets out the guidelines and process by which the plan is executed today.

A new section has been included entitled: LEGACY GUIDELINES. This represents my wishes as to how the portfolio should be maintained during my lifetime and that of my wife's.

In the comments section of our first article on drafting our legacy plan found here, many of you expressed your personal struggle with this same topic. Some have reluctantly considered ETF options, although they don't personally support such an approach. Like many of you, I too have considered ETFs as an option. My concerns in suggesting this approach are summarized by the following:

  • Inconsistent distributions.
  • Greater chance of reduction of income due to dividend cuts as a result of severe market pullbacks.
  • Most are cap weight not equal weight.
  • Lower yield requires selling stocks perhaps during down markets.
  • None mirrors our mix of large cap, REITs, MLPs and BDCs.
  • Increased costs and fees.

Instead I am recommending that should I be unable to continue active management of our portfolio, that our portfolio at the time be maintained in the "Buy and Monitor" manner described below in the section Legacy Guidelines.

I consider this is a serious subject. My aim is to include this plan and the instructions it contains as part of our larger estate plan.

Every time I have updated my plan and offered it for your consideration, you respond with literally hundreds of comments and suggestions for further definition and improvement. Your thoughtful comments have continued to prompt additional changes like the ones reflected in our revised plan, presented for the first time below.

Our revised plan is now again presented for your consideration and comment. Items in bold represents changes to the original plan.

Business Name: Wells Family Retirement Income Portfolio

Goal: Generate a steadily increasing stream of income paid solely from the growing dividends generated by high quality, low-risk companies with a track record of five or more years of providing safe and growing dividends.

Our 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 at the end of 2013.

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 year by year 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 1.5Xs 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 - reflected by investment grade credit of BBB or higher.

Stock Valuation

Buy only stocks with "Fair" or better valuations. Seek an overall portfolio P/E 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 (FastGraphs and Morningstar) 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" This requires yield plus Five year Dividend Growth Rate (DGR) to total 12% or more. In the case of utilities, MLPs and REITs, the total needs to be 8% or more. The chowder rule score is located in Column BX of The CCC spreadsheet.

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 minimum 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.

This edited list of all Dividend Champions, Contenders and Challengers shall be referred to as the Dividend Growth Income Index ((DGII)) and will also serve as an informal Index for the purpose of gauging our portfolio performance. Portfolios have been set up on the Seeking Alpha website under the Portfolio tab. Three have been established: DGII, Watch list, Current Portfolio.

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, helping insure 30% or more less volatility than the general market. This serves as a substitute for the use of 30% bonds often recommended to help manage reduction of principal during bear market conditions.

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 price 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 should 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 price. The portfolio will usually be 95% or more invested. Generating a steady and growing income stream from dividends remains job one.

Dividend Reinvestment:

Our goal is for retirement income to be supplied solely from dividends and dividend growth. As such dividend reinvestment will likely be rare. Our goal remains 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 capital gains will likely be the first step.
  • It underperforms an average of stocks in its sector in total returns (price + dividends) for two years running. Sector ETFs can be used to assist in making this determination.
  • 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 and clarity is not provided by the company with respect to the dividend.
  • 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 is 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 will either the Dow or the S&P 500 be used as a measure of the success of the portfolio. Serious underperformance 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. Run each of the holdings through Fast Graphs to determine if any are overvalued.

Measure final success in this manner by a quick 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.

Semi-Annual Portfolio Review - One Additional Hour

Check for any changes in credit ranking.

Check for changes in payout ratio.

Decreases in credit ranking and increase in payout ratio, can be early signals of problems that could lead to dividend freezes or cuts. Monitor more closely as the first step.

Research Resources


Year by Year Performance Back test - Just go to the Morningstar website. 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. If you purchase a stock at a yield higher than its 10 yr. average you create yet another layer of safety. While conducting your ten-year history, average out the yield recorded for each year. If the current yield is higher than its 10 yr. average that is yet another indicator that it is a fair or better value.

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.

Suggested Buy Price - Place stock ticker in Grey Quote Box. After you click, next click on "Industry Peers" tab on the new page that surfaces. You will now find the Fair Value Estimate under the "Industry Peers" tab.


Portfolio - click on portfolio tab to access current family portfolios

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


Information on stock value and so much more (sign in required). Paid service. Billed at $9.95 per month.

There are three basic sections that need to be fully reviewed:

  • Fast Facts

P/E- Is it at or below Normal P/E

Dividend Yield- Needs to be 1.5Xs that of S&P 500 Index or higher

Normal P/E Ratio

S&P Credit Rankings - Should be BBB or better

Debt Cap - Lower the better

  • Performance Results

Dividend Growth- Look for steadiness and current figures twice inflation

Dividend Payout Ratio - Under 70% a good indicator of room for dividend to grow·

  • Estimated Earnings and Return Calculator

Projects a stock's earnings growth - and therefore its increase in fair value - forward for 5 years, using consensus earnings growth forecasts.

· Gold Lines represent the range - High and Low of "Fair Value"

· Upper Blue Lines represent the range of "Over Valued"

· Lower Blue Lines represent the range of "Under Valued"

Make certain to never over pay. Purchase only when stock is fair value or under.

Consider reducing position size and taking profits for any stock in the top range of over-valued.

Dividend Champions, Contenders and Challenges (CCC LIST)

Access through link provided above

Dividend cuts and freezes - click on Summary tab at bottom of the spreadsheet. Review any Deletions as this means a dividend has been cut or frozen.

Dividend Growth Rates - Columns - AL-AP on spreadsheet

Look for steadiness. Trending up - good

5 Yr. Estimated Earnings Growth Rates - Column PG

Look for a rate twice inflation

Payout Ratios - Columns S and T

Dividend Yield - Column I

Beta - Column CG

Chowder rule- a/k/a total dividend return rule - Column CB


Robert Wells will be responsible for the day-to-day management of the portfolio. Should he be unable to perform those duties management responsibility will fall to his wife who will be assisted by their oldest daughter.

Should this occur, The family portfolio as designed should be maintained and modified according to the following instructions in order that it continue to produce a growing stream of income to support my wife during her life time and serve the family for generations to come. I would ask that the instructions as outlined be honored during the lifetimes of myself and my wife.

The first modification instruction is to sell the 5% of the portfolio currently invested in "low conviction" stocks. These funds are to then be re-invested in the five existing portfolio holdings offering the best combination of current value and dividend yield. Priority should be given to those with the distinction of being Dividend Champions. A list is attached of trusted Dividend Growth investors whose counsel can be sought to assist with decision making should you feel it necessary.

A simple review of each month's list of Dividend Champions, Contenders and Challengers should be done the first week of each month to determine if any stocks have been removed as the result in a cut in the dividend. Should that occur, the stock should be sold a few weeks later and the dollars redeployed into either existing holdings or those on the current watch list. Again consider those holdings offering the best combination of current value and dividend yield. Priority should be given to those with the distinction of being Dividend Champions.

A review should be conducted each quarter.

  • Record quarterly dividend income for the portfolio.
  • Note dividend increases for the quarter and whether they are on track to meet or excess annual goal
  • Measure performance for any stock "on probation." Place any stock with loss totally 10% or more on probation and check for change in performance the next review. Further action if necessary should be in accordance with the plan

You know my commitment to helping insure you each have a stronger education in proper investing than I enjoyed until my 60's. We have established of each Grandchild a college investment savings account. I hope to have talks with each as they grow about the account and how it works to help support their future.

I know that each of you have employer supported 401K investment plans. Some are resisted to mutual funds. Others offer a range of options including stock and bond ETFs. I strongly encourage each of you to contribute to your company plan in the manner that insures you receive the complete company match to those funds.

I have established three investments accounts, each embracing a unique approach to investing. This has been done to foster discussion and provide a stronger foundation for your further investment decisions. I encourage you to establish your own accounts on Motif in order to further test ideas and approaches.

Most of all I hope that you each embrace as I do the importance of establishing for your own families a personal portfolio business plan that helps to guide your future investment decisions. Our current portfolio business plan is available for your review and modification.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.