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Be Here Now
Be Here Now
Be Here Now
Be Here Now
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I am a retired investor with market experience going back to the 1960s. I was a software engineer for 42 years, and currently do some very part-time consulting, which lets me contribute to a Roth IRA. I am not an accountant and not a financial professional.
My wife and I have established a set of guiding principles for our investment life:
•Change is the only constant in life. Everything in this plan is subject to change.
•Never touch your principal. Wealth is built and maintained by not spending it. Wealth is the primary buffer between ourselves and blind chance.
•Exploit folly, do not participate in it (thank you, Chuck Carnevale). Do not follow the crowd, which is more often than
•A portfolio is like a bar of soap – the more you touch it, the smaller it becomes. Do not be a trader.
•Own assets, avoid liabilities. Assets generate income. Liabilities generate expenses.
Based on these principles, we have established two investing goals: 1) high current income, and 2) steady or increasing current income measured in our real terms.
Our primary investing goal is to generate high current income. We are retired and depend on investment income to meet a significant fraction of our living expenses.
As we age and get closer to the end, current income becomes ever more valuable, and future income becomes ever less valuable. This reality informs all of our investing decisions.
We categorize dividends and interest as income, and capital gains as return of capital, not income. Therefore, our primary goal is to be met from dividends and interest only.
Our second investing goal is to maintain or increase the purchasing power of our investment income. We want never to be in the position of having more living expense than income. This goal is also to be met from dividends and interest only.
A corollary to these goals is that we categorize pension and annuity income as fixed income, thus performing the role that bonds would perform in many others' investment plans. Therefore we do not anticipate owning bonds, with the exception of 2x Leveraged ETNs with monthly reset.
> Goal #1: High Current Income
The strategy chosen to reach the first investment goal is to invest in companies that together generate a total portfolio current yield of at least 5%; this total yield includes the lower yield from MY stocks discussed below. We expect to start or increase positions when current yield is at least 5% but recognize that some of the highest quality companies that we want to own and that have a high yield will occasionally be priced at a current yield as low as 3%.
Those whose current yield is in the range of 3% - 8% we categorize as ‘medium yield’ (MY). Those above 8% we categorize as ‘high yield’ (HY). We expect that some of the MY stocks will have dividend growth rates that keep pace with or exceed inflation, and these we categorize as ‘medium growth’ (MYMG). We expect that few if any of the HY companies will have any dividend growth, and may have dividend decreases. We categorize these as ‘low growth’ (HYLG). We do not want to own MYMG companies that decrease their dividends, and will sell any that do so. We are much more forgiving of HYLG companies that reduce their dividends, because we recognize that these are often actually variable dividend payers. We expect to monitor our HYLG investments closely.
We expect that a majority of our total portfolio will be dedicated to meeting the goal of high current income.
Anyone who has read to this point is likely struck by the fact that a mechanical stock screening algorithm could never derive a list of HYLG stocks that we would want to own. This is deliberate. We are learning every day about what we want to own and why. As we stated in our guiding principles, change is the only reality. If you want to fish in this part of the investment pond, you must work at it regularly, be prepared to make mistakes, and be open to new ideas.
> Goal #2: Reliable Income Growth
The strategy chosen to reach the second investment goal is to invest in companies whose initial yield is less than 8%, is not less than 3%, and whose dividend growth rate is greater than the rate of inflation plus a comfortable buffer. Within this group we are guided by the ‘chowder rule’, which has a financial strength component and a yield component. Companies that meet these requirements are categorized as either ‘medium yield high growth’ (MYHG) if their DGR is substantially greater than inflation, or 'medium yield medium growth' (MYMG) if their DGR exceeds inflation but not substantially so.
A company must have a credit rating of at least BBB+ with S&P or similar with Morningstar to have qualifying financial strength.
A company’s yield is scored according to the chowder rule. This score is the sum of its current yield and its 5 year dividend growth rate. A chowder score of at least 12 is required, except for companies that by their nature are not expected to have high dividend growth, such as utilities, telcos, BDCs, MLPs, and REITs, whose chowder score must be at least 8. We expect these companies to also meet or exceed the evaluation criteria described in "The Single Best Investment" by Lowell Miller.
In addition to 5 year dividend growth, we expect 1 year and 3 year dividend growth to be not substantially less than 5 year dividend growth. A declining dividend growth rate is likely to disqualify a company.
Our categories are summarized as follows:
•HYLG: current yield >= 8%
•MYHG: current yield >= 3% and < 8%, chowder score >= 12, BBB+ or better
•MYMG: current yield >= 3% and < 8%, chowder score >= 8, BBB+ or better
> HY categories
* 2x leveraged ETNs with monthly reset from UBS: BDCL, CEFL, DVHL, MORL, MLPL
* mortgage REITs
* Business Development Companies (BDCs): NMFC, others
* Upstream MLPs
> MY categories
* 2x leveraged ETNs with monthly reset from UBS: DVYL, SDYL
* Unleveraged ETNs: BDCS, DVHI
* Business Development Companies (BDCs): HTGC, others
* equity REITs
* midstream MLPs
> How I got to this point:
During much of my working years I used technical analysis (TA) to invest in individual stocks (I was an early fan of Joseph Granville and I bought an Apple II in 1980 because Granville brought out OBV software for the Apple at that time), and I speculated with short selling and commodity trading. Later I invested in stock mutual funds and ETFs for total return, with inconsistent results. Being a software engineer in a lead position left little time or energy for serious investing skills development. In 2005 I had pretty much given up on getting market beating results, and felt that I was getting too old and too close to retirement to continue swinging for the fences, so I decided to buy a variable annuity that guaranteed a minimum return of 6% per year, compounded, with the upside limited only by the performance of the mutual funds offered for investment. I decided to let the insurance company bear the market risk for me. I also had a 401k plan at work to which I contributed the maximum and got the company match. A year or so before 2008 I used a retirement investing projection tool provided by Fidelity, which said the worst returns I could expect in retirement were positive but not spectacular, and the best were hard to believe. At that time I was invested in mutual funds and ETFs through my 401k and the variable annuity and had not directly owned stocks since shortly before the start of the great bull market in 1982 (Granville famously missed the whole thing). I thought, with a bit of scepticism but not much, that I was set. We all know what happened in 2008-09. That experience put me off Monte Carlo simulations and MPT for life.
When I retired I converted my 401k to a rollover IRA brokerage account and invested in ETFs. I thought I was being appropriately conservative but ahead of the curve by investing in VIG and VCSH.
Then I found Seeking Alpha, and then - thank my lucky stars - David Van Knapp, and the DGI light went on. I had spent most of my adult life thinking I was smarter than most people by relying on TA, and then later letting the insurance company assume market risk. I remember learning about the 200 DMA when I was in my 20s, which is a long time ago, and thinking how revolutionary this idea was and how I should be able to use it to my advantage. Fortunately for me and my family, I also was pretty good at software engineering, so I had a reasonable retirement nest egg accumulated when the time came. With the concepts and methodology of dividend growth investing, I now have sleep well at night investments that just keep on churning out increasing income, something that could never be said about using TA.
I started with DGI too late in life to commit to LYHG stocks, so I concentrate mostly on HYLG stocks, as described above. I don't think it is smart to put all my dividend growth eggs in one basket, either the dividend growth rate basket or the market sector basket, so I also have some MYHG and MYMG stocks.
> Tools and Teachers
Tools I use include the CCC list, F.A.S.T. Graphs, Morningstar Premium, StockRover, BigCharts, the EDGAR web site, longrundata.com, and Excel via my brain. I get ideas from the many informative articles by (among others) the following: Chuck Carnevale, Brad Thomas, Ron Hiram, David Van Knapp, David Fish, Robert Allan Schwartz, Dividend Growth Investor, Dividends4Life, Five Plus Investor, David Crosetti, Tim McAleenan Jr., Reel Ken, Bret Jensen, Alan Brochstein, chowder, Dane Bowler, Philip Trinder, Bob Wells, BDC Buzz, Factoids, Scott Kennedy, Bill Maurer, Darren McCammon, Richard Shaw. Favorite commentators who are not yet authors include Elliot Miller, Paul Leibowitz, Sumflow, mbkelly75, surfgeezer.
Useful shortcuts to dividend stock valuation are the Tweed Factor and the chowder rule. Like F.A.S.T. Graphs, 'a tool to think with', these are 'rules to think with'.
Tweed Factor: fair P/E = yield + 5 year dividend growth rate
chowder rule: current yield + 5 year DGR >= 12%; 8% for utilities, MLPs, REITs
The best investment advice outside of Seeking Alpha has been 'The Intelligent Investor' and 'The Single Best Investment'.
> Some historical portfolio stuff
My DGI portfolio was started on 2011/4/20 with CTL, which I have since sold. I was a real DGI neophyte when I bought it and was seduced by the yield.
Target portfolio yield on cost: 10% within 7 years of inception. (This target is an artifact of my early understanding of the usefulness of YOC. Thanks to the comments of many SA contributors, I no longer think this is useful, and is certainly not actionable. Another problem with YOC is that I will shortly start taking RMDs from my IRA, which may at some point force me to start selling stock. I am retaining it here to see if the future surprises me.)
>Some ongoing portfolio stuff
Target dividend growth rate: 5%. I need to keep ahead of inflation, and this seems like a reasonable number to choose. At first glance, this target appears be difficult to measure as time goes by because of required minimum distributions from my IRA which will reduce invested capital. However, thanks to ideas gleaned from SA contributors, I learned how to calculate the weighted average dividend growth rate for my portfolio. SA is a wonderful resource!
Portfolio yield on cost as of:
Portfolio current yield as of:
Portfolio 1 year weighted average dividend growth rate as of:
Current portfolio with target allocation percentage in parentheses:
mortgage REIT (10%): AGNC, CMO, CYS, DX, MORL, TWO
equity REIT (20%): CSG, DLR, HTA, LXP, O, OHI, STAG, VTR, WPC
MLP (30%): BBEP, EPD, KMI, KMR, LINE, LNCO, MLPL, QRE, VNR
Tobacco (20%): MO, PM
Consumer (5%): GIS, MCD, PG
financial (11%): ARCC, BDCL, HTGC, MAIN, NMFC, TCPC, WU
health (4%): none
2x leveraged ETN: CEFL, DVHL
Health: BAX, JNJ
consumer: DPS, KO, PEP
Dividend stock ideas & income, Energy stocks, REITs, Stocks - long
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