A few weeks ago we completed our 9-part series titled "Building A Do-It-Yourself Dividend Portfolio" in which we highlighted our top-rated dividend stocks within each sector. Our goal was to provide fellow DIY investors with a diversified pool of high-quality dividend stocks that we feel have the potential to be a core holding in your DIY Dividend Portfolio.
While the response to this series was extremely positive (and we thank all readers for their thoughtful feedback), we received many comments and questions asking us to provide additional details about the actual "plan" that governs the DIY Dividend Portfolio. To be completely honest, this was music to our ears. We believe that planning is the most important part of the investing process, yet most investors spend the least amount of time on it (if any time at all).
That said, last week we began a new 4-part series that has highlighted our four key principles (in order of importance) to building a successful DIY Dividend Portfolio (see links below for previous articles):
- Asset Allocation/Position Sizing (i.e., how much should you buy of each dividend stock?)
- Exit Strategy/Risk Management (i.e., when should you exit a stock or hedge your dividend portfolio?)
- Stock Selection (i.e., which dividend stocks should you choose for your portfolio?)
- Entry Strategy (i.e., when should you buy a specific dividend stock?)
Most investors fail to succeed because they either do not have a plan or they do not have the discipline to stick to their plan. Plain and simple. We passionately believe that if you make these four key principles the heart of your investment plan, you WILL achieve long-term success. In addition, we strongly encourage investors to physically write down their rules of investing. This will increase the odds that you will actually follow your rules, which ultimately will increase your odds of success.
Part 4: Entry Strategy
In part three of this series, we discussed our strategy for deciding which dividend stocks to buy for our DIY Dividend Portfolio. In this part, we will discuss WHEN to buy a specific dividend stock.
We believe that patience is a virtue. Just because a stock has a high Parsimony composite rating, it doesn't necessarily mean that you should run out and purchase it that day. We scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results.
In other words, we use fundamentals to decide WHICH stocks to buy and we use technicals to decide WHEN to buy those stocks.
If you are a new dividend investor and are building your DIY Dividend Portfolio from scratch, don't feel pressured to have a fully diversified portfolio on day one. Dividend investing is a marathon, not a sprint. It's extremely important to be patient when building a long-term portfolio...we can't stress that enough.
The "Buy Zone"
As we highlighted above, once we have decided that we want to purchase a particular stock, we look for a low-risk entry point to open the position. We call these entry points our "Buy Zones" and they are points at which long-term dividend investors should feel comfortable starting to build a position in the respective stocks.
Below are some examples of stocks that are currently in (or close to) their respective "Buy Zones."
Cummins (CMI) is one of our favorite stocks in the industrial sector. Although it is also one of the most volatile, with a beta close to 2.0. The stock has a 90+ rating in 3 of our 5 sub-rating categories (Financial Stability, Dividend History and Dividend Potential). This stock offers investors a great combination of dividend yield, dividend growth and capital appreciation potential. That said, given CMI's historical volatility, it's extremely important for investors to wait for a low-risk entry point (like the one we are seeing right now!). The stock is down over 25% from its recent peak and we think that it is now safe for investors to start accumulating shares.
Enterprise Products Partners (EPD) has delivered shareholders an impressive 5-year total return of over 110% and the stock has a current dividend yield of 5.0%. The stock recently got support from its 200-day moving average and we think that was a very positive sign for the stock. The stock could get a little resistance at the 50-day moving average and we would be a buyer and any pullback from this level.
Intel Corp (INTC) is now down about 10% from its recent peak and the stock is starting to look attractive at current levels. The 40-week moving average held as support last week and we think that the stock could bounce higher from here. With a current yield over 3%, it's a nice addition to a DIY Dividend Portfolio.
Kinder Morgan Energy Partners (KMP) is one of our favorite MLPs. The company currently pays a juicy dividend yield of 6.2% and we have been patiently waiting for the stock to enter our "Buy Zone" for a few months now. KMP is now down about 15% from its recent peak of $90.60, which is the high-end of our target correction range. We believe that this is a low-risk entry point for the stock.
McDonald's Corp. (MCD) is one of the few stocks that currently holds the coveted "99" composite rating (which is the highest rating in our system) due in part to the company's long and stable dividend history. The stock is down over 12% from the January 2012 peak of $102.22, which is a relatively healthy pullback for MCD based on past corrections. We have been targeting a 10%-15% pullback for the stock and it is currently in the middle of that range.
Patience. Patience. Patience.
We passionately believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. Dividend investing is a marathon, not a sprint!
Note to readers: Our next series will highlight conservative option strategies that DIY Dividend Investors can use to enhance their income, so please make sure to "follow" us.