Below is my business plan, to which I welcome critique. I am considering removing or reducing the speculative portion after making a large mistake in late 2012 by betting excessively on a biotech buyout.
Business Goal: Generate positive net returns each year, as well as increasing yearly income, by selecting high quality businesses in both the growth and income asset classes. Numerically, by delivering 10% more income and 10%+ total returns year over year with a low risk profile.
Business Model (Strategies): 75% Dividend Growth, 25% Growth
Stock Selection Min Requirements:
- Dividend Growth: Use the current Dividend Champions as the Shopping List. This list contains all US companies, including REITs, LPs and BDCs, which have 5+ straight years of dividend increases.
· Price at least $5 per share.
· Morningstar credit rating of BBB+ or higher (safety)
· Price less than historical trailing P/E or FFO (FastGraphs)
· Min current yield 2.5% (4% for utilities/telecom, 5% for REITs/MLPs)
· Payout ratio <70% and stable (<100% of FCF for utilities/telecom/REITs)
· Chowder ratio of at least 10% annually (5yr CAGR + yield), 8% for utilities/telecom
· Positive annual total returns in three of past five years (2008-2012) - FastGraphs
- Growth: Use a combination of sources including SeekingAlpha, FinViz, and CNBC. These companies have higher growth rates with lower yields.
· Price at least $5 per share.
· P/E less than 25 or 10yr trailing P/E - FastGraphs
· Growth rate for next 5yrs is 15%+, growth rate trending upward
· Management committed to dividend plan and expansion
· Leader in its niche in US market, expanding in foreign markets, particularly EM
- Speculative: subset of growth, 2 names max at 5% of portfolio. With spec names, there is an existence of a (1) catalyst to provide superior future growth [biopharma event], (2) product to fill a market void [Netflix] or (3) discounted from sell off [Ford post-auto bailout]
· Expected return of a "triple" within 2-3 years (300% increase in price)
· Ensure the "idea" is NOT priced in at time of purchase
- Allocation ranges: Dividend Growth 60-90%, Growth 10-30%, and Speculative 0 - 5%.
- Limit the # of stocks owned: Max 25 in "Dividend Growth" and Max 5 in "Growth".
- Limit the position size in the portfolio: Max 4% in "Dividend Growth" names @ purch and 7% @ mkt. Max 5% in "Growth" @ purch and 10% @ mkt. Max 2% in speculative stocks @ purch and 5% @ mkt.
- Aim for well-roundedness in the portfolio. Diversify across sectors, industries, and different ranges of yields and growth rates.
- Dividend Growth position sizes should be roughly equally weighted, while Growth name sizes may be based on price distance from target and growth potential.
- Make opportunistic switches from one stock to another if such a swap will upgrade the portfolio (one stock overvalued w/ decreasing yield, another undervalued with higher yield).
- Since 75% of the portfolio is Dividend stocks, the focus is on keeping that portion invested. Don't attempt to market time. Cash does not generate dividends and compounding is key.
- Reinvest qualified dividends in all industries except REITs, which should be reviewed. For overvalued companies, consider collecting the cash and reinvest when it accumulates to $1000, selecting the best candidate at that time.
1. Investigate and seriously consider selling any stock for these reasons:
Dividend Growth and Growth
· The dividend is cut, frozen or suspended
· The company bubbles or becomes well overvalued (yield drops below 2% or quick run-up in Px)
· A spinoff is announced (review both companies post spin-off, sell detractor)
· An acquisition or merger is announced (sell if Px spikes on news and yield decreases)
· Declining dividend growth (declining growth over 3yr periods, inc < 5%) - consider probationary periods
· It underperforms the market in total returns (price + dividends) for 3 years running
· Stock is overbought, regardless of future potential (RSI 75+)
· Competition in industry forces sales, margin, revenues down 2 quarters in a row
· Trim stocks on way up: 25% of position for each 25% gain
2. Conduct a thorough Portfolio Review quarterly. At these times, measure the Portfolio's overall progress toward the overall goal and consider selling or upgrading any stock for the reasons listed above.
1. Review Perf portfolio tab for performance monthly, quarterly and annually. Check to Road to $10k-Mo by 60 tab to ensure goals are on target vs. pro-forma.
· If Actual portfolio value moves climbs well above that of Expected value, consider increasing allocation to Dividend Growth names
· Income received targets are crucial to hitting $2.5M target. If these are missing the market, increase yearly bonus contributions to realign income return