The Dugan Family Retirement Investment Plan

by: Dennis Dugan


Superior performance, in any endeavor, is best achieved by developing and executing a plan.

The core of a good plan is to have well-thought-out objectives (the what) and strategies (the how) to follow to achieve the objectives.

Both objectives and strategies are big picture and long term. Goals (what) and tactics (how) are little picture and short term, and are stepping stones to achieving objectives.


Like SA contributor Bob Wells, my wife and I are fans of planning before executing.

We are 67 and 68 respectively, have been semi-retired for a year and are fortunate to have nest eggs sufficient to allow us to live well mostly on the dividends from our portfolios. I use the word "semi" because, while I don't "work" anymore, I do maintain my 2 corporate board of directors positions and provide strategy and planning consulting services to a few corporate clients each year. That leaves me plenty of time to work on building my investing knowledge.

I've been a follower of SA for about 4 years and consider myself to be a seasoned, self-directed, value-oriented, DGI investor.

About 4 years ago we began writing a retirement investing plan and, as our knowledge has increased, have made many modifications since. Our plan provides a discipline in buying and selling that takes a lot of emotion out of play. This article is meant to share the plan and invite comments on how it may be improved.

From here on, this article is a cut and paste of our plan, including having cut and pasted within the plan from articles we have read in SA and other places. That said, the context to us makes sense, even if it seems slightly disjointed without our particular context.

Background, Framework and Objectives for investing plan

"The author and investor James O'Shaughnessy tells the story of a study done by Fidelity Investments. The company wanted to find out what group of its clients did the best. As it turns out, the most successful group of Fidelity investors wasn't men or women. It wasn't young or old. It wasn't big portfolios or small investors. No. It was people who had forgotten they had Fidelity accounts. That's even lazier than buy-and-hold! It's buy-and-forget-you-ever-bought. I can't say I'm surprised. The reason is simple. To be a good investor, you have to counter many of your natural inclinations, like getting rattled in a bear market or finding comfort in following the crowd. I'm sure the people who watched their accounts every day were far more inclined to buy and sell at the wrong times, while the blissfully ignorant stayed wisely quiet."

With "X" being the amount of money we want to withdraw from our accounts each year, Our investing objective is $0.8X per year from dividends, plus 0.2X per year from proceeds from selling stocks. 0.8X from dividends requires an average of about a 3% yield. Therefore, we should try to achieve an average yield north of 3%, with an individual bottom on any stock of low to mid 2%'s, because a high, long-term, dividend growth rate is a more valued characteristic than high yield to us. To wit, Donaldson Capital Management says:

"...research revealed some surprising results. Over any longer period, say five to ten years, the companies with the lowest dividend yields and the highest consistent dividend growth were the top performers."

Information garnered from reading hundreds (maybe thousands) of SA articles has led me to believe some investing principles are long-term rock solid (for our needs, anyway) in guiding our investing: high DGRs and low payout ratios trump the opposite, low beta stocks outperform high beta stocks for investors who aren't traders, dividend payers/raisers outperform non-dividend payers over the long term, be a value investor (never overpay), stocks with high yields and low dividend growth perform relatively better in falling interest rate periods, stocks with high dividend growth do best in rising rate environments (which is likely for at least the next 5 years).

I also believe low beta stocks can be a good substitute for bonds in a portfolio. It was fascinating when I found out that over the roughly 90 years before the great recession there were three roughly 30-year periods of solid interest rate trends: say from about 1920 to 1950, interest rates rose; from 1950 to 1980 they dropped and from 1980 to 2010 they rose again. What happens to bond prices in those environments? Prices fall when rates rise and rise when rates fall. Given that 90-year history and rates having a high probability of rising from here, bond prices are sure to fall. That expectation leaves no room for bonds in our portfolio. As I wouldn't buy a stock whose price I thought was going to steadily decline over the next 5 years and beyond, so also will I not buy a bond for the same reason. Therefore, a good bond substitute is lower beta stocks purchased at the right price and endowed with the right characteristics, as described above.

The value of buying stocks with those characteristics are proven, in our minds, by the following graphs, statements and information.

"Here's the latest proof: After slicing and dicing the data from 1972 through the second quarter of 2013, Ned Davis Research found that dividend growers return an average of 9.8% per year. That compares to a return of only 7.3% per year for straightforward dividend payers."

Source: Rising Dividends Fund, Oppenheimer, page 4

Our Strategies to Meet Our Objectives

For the 0.8X fraction of annual cash needs from dividends, those dividends should be from companies whose long-term history is raising dividends faster than inflation so purchasing power isn't lost. The balance, 0.2X, needed from stock sales, represents about 1% of portfolio value. Anticipating a 6% to 8%/yr average long-term increase in portfolio value, not counting dividends, I expect the portfolio value to increase and therefore provide a necessary cushion to achieving planning objectives. Over time the requirement for 0.2X from stock sales should diminish to $ zero as dividends grow to be > $X/year. Until that time, we keep 5 years of the $0.2X/yr needed in cash at all times. This luxury allows us to forget about stock price fluctuations and concentrate on continuously improving the quality of our portfolio. Keep cash in a separate account to foster discipline. Draw the cash component from this account. Replenish in the 80% of years when capital gains occur. Note: this may not work as well as planned, as IRA monies should be withdrawn last, saving but for RMD requirements.

Stock prices follow earnings in the long term. So, stock prices should increase at roughly the DGR and vice versa. Therefore, the primary filters to identify stocks to buy should be estimated 5- and 1-year EPS growth, followed by valuation (we use Graham from David Fish's CCC list (NYSE:CCC)), followed by 10-, 5-, 3- and 1-year DGR histories.

Be mostly a buyer of high-quality dividend stocks with solid competitive advantages. Our holding period is forever, as long as the dividend is at least maintained. But do a thorough review every quarter to see if some stocks can be replaced with higher quality without sacrificing yield. Quality in this case means higher: estimated 5-year EPS growth; better 10-, 5-, 3- and 1-year DGR histories; better Graham; or lower payout ratio.

Concentrate efforts on stocks that grow earnings and dividends at rates much greater than inflation over long periods and that have provided outstanding total returns over time. For the most part, this means confine choices to the CCC list, for security of dividends continuing and growing, and to limit downside swings in portfolio value. Pay attention to forward-looking allocation recommendations.

Don't buy illiquid stocks. Think Northeast Indiana Bancorp Inc. (OTCQB:NIDB).

Did I say don't buy illiquid stocks?

Buying Filters (using full CCC list) in this order (sort, filter and delete those which don't make the cut)

From Chuck Carnevale and FASTGraphs:

"In this Part 2, my focal point is on recognizing the difference between a company's market price at any moment in time, and its true worth or intrinsic value. I suggest that the success secret that all great value investors possess is that they understand the difference between intrinsic value and market price. But more importantly, they base their investment decisions on their calculations of intrinsic value. If the market offers a ridiculously high bid they will often sell, and if the market offers a ridiculously low bid they will not only refrain from selling, but will gleefully jump on the bargain price instead."

We continually run filters, using CCC, to identify potential buy targets. Sometimes we're guided by SA article recommendations. When we run filters on CCC, we sort by each category below, usually in the order presented, and delete companies that don't meet the minimum criteria. Of course, we sometimes change the minimum criteria for reasons we believe are appropriate for the time and circumstance.

  1. Est. 5-year growth > 8% minimum (in order to achieve a DGR at least 2xinflation and avg total returns > 8%/yr)
  2. Graham < 80
  3. NY growth > 8%
  4. 5-yr DGR > 8 %
  5. 1-yr DGR > 8%
  6. Look at 10-, 5-, 3-, and 1-yr histories for no non-performing periods (insert column after 5-yr and sum 1-, 3- and 5-yr totals and delete all less than 25)
  7. D/E < 1.0 (but compare to sector)
  8. Payout ratio < 80% (but compare to sector)
  9. Min yield 2.2%
  10. Reduce risk by using a min of 7 years, and/or a lower Graham
  11. Maybe filter by market cap
  12. All of these filters reduce the list from well over 700 to 15 to 25 potential companies
  13. Check FAST Graphs to verify both valuation, future expected earnings growth, number of analysts, etc.

Selling Rules:

  1. By y/e 2015, reduce stock positions to 50, from y/e 2012 number of about 95, and 85 as of 7-13-2013, and 59 as of 7-27-2015.
  2. Do an in-depth quarterly review for valuations, eps forecasts and DGR histories (to be presented in a future SA article if readers would like)
  3. Sell if valuation is 20% over-valued by CCC and FastGraphs.
  4. If current yield in less than 2.5%, think about selling and replacing with stocks that are higher quality and/or undervalued.
  5. If stock underperforms its sector in total returns for 2 years (price plus dividend %), sell.
  6. If it cuts, freezes or suspends its dividend, sell.
  7. Consider tax implications of selling in non-IRA accounts.
  8. To shore up downside risk, use the "trailing stop strategy" for all stocks. "One simple form of the trailing stop strategy is a 25% rule. Sell any and all positions at 25% off their highs. For example, if you buy a stock at $50, and it rises to $100, when do you sell it? If it closes below $75 -- no matter what." Use 15% for IRAs and 25% for taxable accounts.

What's so magical about the 25% number? Nothing in particular -- it's the discipline that matters. Many professional traders actually use much tighter stops -- the Investor's Business Daily newspaper, for example, recommends an 8% stop. Ultimately, the point is, you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it.

By using the trailing stop strategy, chances are you'll never be in this position again. The thing is PLACING ACTUAL STOP ORDERS IS A BAD IDEA. We do not recommend placing stop orders at all. The dirty NYSE traders will pile up all the stop orders, and then execute them all at a horrible price. Interestingly, stocks often close higher the very same day, after the NYSE traders make a mint executing stop orders. DON'T put a stop order in the market. Simply sell the day after you hit your stop." Use the quarterly review to execute this strategy.

Other helpful selling (and buying) tips from "The 8 Rules of Dividend Investing"

"Rules 6 & 7: When to Sell

Rule # 6 - The Overpriced Rule

Common Sense Idea: If you are offered $500,000 for a $250,000 house, you take the money. It is the same with a stock. If you can sell a stock for much more than it is worth, you should. Take the money and reinvest it into businesses that pay higher dividends.

Financial Rule: Sell when the normalized P/E ratio is over 40.

Evidence: The lowest decile of P/E stocks outperformed the highest decile by 9.02% per year from 1975 to 2010.

Rule # 7 - The Survival of the Fittest Rule

"When the facts change, I change my mind. What do you do, sir?" - John Maynard Keynes

Common Sense Idea: If a stock you own reduces its dividend, it is paying you less over time instead of more. This is the opposite of what should happen. You must admit the business has lost its competitive advantage and reinvest the proceeds of the sale into a more stable business.

Financial Rule: Sell when the dividend payment is reduced or eliminated.

Evidence: Stocks that reduced or eliminated their dividends had a 0% return from 1972 through 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4. Source: The Case for Value by Brandes Investment Partners, Page 2"

Source: Rising Dividends Fund, Oppenheimer, page 4

Rules of Thumb for Retirement Investing Plan:

  1. High yield (>3%), low payout stocks (< 60%) outperform over time.
  2. High yield, high DGR (greater than 11% (which is avg for CCC)) stocks outperform over time.
  3. Don't buy MLPs or REITS with yields less than 4%.
  4. Don't put MLPs in IRAs as distributions are often considered non-taxable returns of capital.
  5. Assets paying interest (bonds and preferred stock) should be held in IRAs since the interest is always taxed as ordinary interest anyway).
  6. REIT dividends are non-qualified and are usually treated as ordinary income, therefore shield the dividends in an IRA.
  7. High growth stocks where cap gains will be greatest are better off in a taxable account.
  8. Utility dividends are qualified and therefore tax is lower than ordinary income. They should be in a taxable account.


In my strategy and planning consulting practice, one of the more valuable sayings is "Any road will get you there if you don't know where you're going." The value of the saying is that great performance, in whatever endeavor, is founded on first, knowing where you want to go (and why), and second, how best to get from here to there. That's the essence of planning. And planning is the essence of great performance.

The processes outlined in the plan above are not implied to be the best ever invented. We have found that they simply are the good for us, for now. It is our hope that they may also prove beneficial, in whole or part, to SA readers.

It is also our hope to receive comments and constructive criticism to further improve our quest for a truly effective retirement investing plan.

Disclosure: I am/we are long NIDB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.