I'm just completing my first quarterly portfolio review since formally signing on as a dividend growth investor. I'm now in my second year of managing my own investments since retiring.
I started in February of 2011. I had an account that allowed 30 trades per month and that first year I used them all. I made a point at the beginning of 2012 to go back and record positions that I had held and then sold in 2011. Back in 2011, I made a habit of selling just about any stock as soon as it lost 4 or 5%. I know what you're thinking but be kind. I was new to investing, I was learning and 2011 was a tough year to cut your teeth. From the beginning I was sold on the idea that dividends were important so in the beginning I looked for stocks with high dividend yields. I guess you could say I chased yield.
I learned quite a bit that first rocky year including the need as a new investor to fully understand your tolerance for risk. I discovered that first year that I have little tolerance for high beta stocks. I panicked a lot that first year. In my case I was lucky because that panic drove me to a number of low beta stocks that I later discovered were among the Dividend Champions, Contenders and Challengers (CCCs)
It was the beginning of this year before I became fully aware of the underlying principles of Dividend Growth Investing and its direct connection to the stocks that make up the CCCs. Current lists of these stocks are available for download here.
By the middle of this year, I had made the decision to set up an income stream that would fund our retirement based on the Dividend Growth Investing model. I sought to invest in a portfolio made up primarily of stocks from the CCCs, The CCCs are a select group of dividend stocks with long histories of both maintaining and growing the dividends they produce. As part of that decision I prepared a business plan for my portfolio that included objectives and specific guidelines for buying and selling. My final plan is available here.
My plan calls for a portfolio review every three months. During my first portfolio review I looked again at some of the stocks I had bought and sold that first year. I wanted to see how they had performed since I sold them. The first thing I noticed when I fully examined them for the first time was that the majority were not members of the CCCs. Two of the 10 stocks below, Inergy LP (NRGY) and RR Donnelly (RRD), were CCC's at the time of purchase but are no longer part of this select group because of cuts to their dividend.
What follows are my top ten losers from that first learning year and their one year returns. I was lucky I guess you could say because I sold each after each lost no more than 4 or 5%.
What's really frightening is that many of these same stocks are being recommended today by the likes of Merrill, S&P and Morningstar. I feel strongly that retirees new to managing their own investments should avoid stocks like the above unless they plan to do a lot of trading and unless they have a strong tolerance for risk. The results of putting stocks like these into a "Buy and Hold" style portfolio as you can see from their one year returns could be devastating.
First Niagara Fin.
Am I saying all high yielding dividend stocks should be avoided? Absolutely not. What I am suggesting is that risk adverse investors particularly those like myself who are disinterested in "playing options" should build portfolios that can more safely yield between 4 and 5% without the risks associated with the above stocks.
As a general rule, I recommend that we each start by considering the Dividend Champions, Contenders and Challengers described above. Next it is important to do a year by year performance history for each stock under consideration for the 10 year period 2002 -2011. Look for stocks with strong performance histories during this period. Personally, I only buy stocks with no more than three down years during this 10 year period. Stocks that fail to regularly be in the green are often candidates for continued poor performance and dividend cuts. I request that you each run year by year histories on each of the 10 stocks above using this link.
Well that's it for now and please do your homework. I'd love to hear from you with your impressions.