The Perfect Portfolio: Let's Not Forget Who Brought Us To The Dance

by: David Crosetti


Investors are often times very quick to move from one investment to another, often for no apparent reason.

Understanding your own goals and objectives helps you to stay focused on the end game.

It is very easy to lose sight of your own investment metrics and begin to take short cuts.

This is a warning to everyone, including myself, to take the necessary time and effort to focus on making good decisions.

Create your own rules of investing, and if they are working for you, maintain the discipline to use those metrics before putting money at risk.


I have to tell you that I am really having fun with my new series about The Perfect Portfolio and our discussion of companies that we want to own in our portfolio! The comment sections have been very interesting and there has been a lot of great advice from everyone who has participated. Great stuff!

I want to clear up a few things for everyone, as it appears that there are a lot of people coming to the series for the first time and many of those folks are not familiar with The Perfect Portfolio and have said that they really don't like the name of the portfolio because "there is no such thing as a perfect portfolio."

Those folks are 100% correct with that line of thinking. My portfolio is not "perfect" for anyone other than me and my own goals. In much the same way, your portfolio probably isn't "perfect" for anyone other than yourself and your own set of goals. But if we are being open and honest with one another, we can learn from one another and share those things that are working for us and those things which are not.

Some Background:

This particular portfolio was set up with one purpose in mind. It was created to generate income for my mom and to replace the income that she had been receiving from her laddered CDs, as interest rates began to fall in 2009. So we decided to take each CD as it matured and put that money into dividend growth stocks in an attempt to make up for the declining interest income from her laddered CDs.

The portfolio accomplished exactly what we set out to do and that is why it's called The Perfect Portfolio. The name has nothing to do with anything other than meeting the goals that we had and doing it "perfectly" for us.

Now after my mother passed away, I inherited this portfolio. For the last couple of years, I've been using the dividend income to supplement my income from my job. Now that I've retired, the dividend income is a supplement to my Social Security benefit, and since this portfolio has always been a taxable portfolio, the dividends are subject to income taxes.

So, our goals for the companies in this portfolio have not changed dramatically, with my retirement, but instead have become more focused and we are looking at ways to increase our income stream with new companies and perhaps buy more shares of existing companies already in the portfolio.

So, Where Are We Right Now?

In our first article, we shared with you that we had two limit orders that were executed. The limit orders were filled on 2/8/2016 for 200 shares of Cisco Systems (NASDAQ:CSCO) and the second on 2/11/2016 for JPMorgan Chase (NYSE:JPM) for 100 shares.

In addition to that, we also presented a current look at the original companies in the portfolio as a refresher.

In our second article, we presented a target list of companies that we wanted to consider and that list consisted of 7 stocks that we had put on a "watchlist." Here is the list of our 7 stock selections that were presented in that second article:

In our third article, we shared with you a new stock selection, International Business Machines (NYSE:IBM), which was a totally new idea for this portfolio. The reasons that IBM became attractive to us was in the relationship between the historic dividend yield and the current dividend yield, which would seem to indicate value in the company's stock.

In this same article, we discussed two additional companies that we were going to purchase. Those two companies were Emerson Electric (NYSE:EMR) and Qualcomm Inc. (NASDAQ:QCOM).

At this point in time, we have not purchased the remaining stocks from our original list of 7, and those that are still in "limbo" are: Southern Company (NYSE:SO), CenterPoint Energy (NYSE:CNP), Philip Morris (NYSE:PM), Pfizer (NYSE:PFE), and Verizon (NYSE:VZ).

In keeping with the spirit of this series, we will not be initiating positions in those remaining companies without informing you beforehand.

Our Latest Purchases:

As part of our series, we have made the determination to share with you the activity notices from my brokerage, showing the purchases that we have made and the price at which we had those orders filled.

Here are the trade confirmations for EMR, IBM, and QCOM from our brokerage account.

A Snapshot of Our Recent Investments:

Since beginning this exercise, we have purchase five (5) new companies for our portfolio. Our new companies are shown here:

So, we have invested $27,244.00 and have created an additional estimated income of $1,004.00 over the next 12 months which represents a 3.68% yield.

Yes, I am aware that we will likely not receive any dividend income from these purchases until the 2nd quarter, but again, we are focused on "being close", and we will address the actual dividend income that we received in 2016 with these 5 companies and any others that we might add to our portfolio when we do the 2016 recap article.

What You Should Know:

In the past, I've written a couple of articles about stock selection from the perspective of a Dividend Growth Investor. When I stick to those particular metrics that I've written about, generally speaking, things seem to go well.

When I deviate from those metrics, things do not seem to go very well for my investments. I will be the first to admit that I have been a little impatient with adding positions to my portfolio. A commenter in my last article pointed that out to me when he/she said:

I will tell you a little secret: 3 years ago someone wrote a wonderful series of articles, "Portfolio For Do It Yourselfers", basically a guide to follow as a DG investor.

There was a segment about "strategy moving forward" with a few pointers. One of them was the following:

3. We use fundamental analysis to determine our stock picks. No matter what we are looking at, increasing revenues and increasing earnings are important to us. We do not favor companies that are "saving" their way to earnings growth. That's ok for a short-term fix, but it is not something that a company can do indefinitely.

This was a great advice back then, it is even more prevalent today than it was 3 years ago and many DG investor should use it.

Let's Review What Got Us To The Dance:

Not only is the comment spot on, but I've noticed that I'm not the only DGI who has gotten caught up in irrational exuberance at times and may have strayed away from my core principles. Here are some of the thoughts that I've shared in the past.

Valuations absolutely matter:

It makes little or no sense to me to invest in a company only because I have capital to invest. The company is either priced at a value or it is not. In the happenstance that a particular stock is overvalued, find something else to invest in. Sometimes, "doing nothing" is the best decision you could make.

Fundamentals Matter:

When I look at a company, I want to see revenue growth and earnings growth. Now a company can have earnings growth by cutting expenses. That only gets the company so far. Sooner or later, revenues have to be increasing and that should translate into increased earnings. I can consider a company with a higher P/E Ratio if the revenues and earnings are growing.

Dividends Matter:

When I invest, I like to invest in companies that pay a dividend. In the past, I've focused on companies that have a long history of paying and increasing dividends. Now? Some of the newer dividend payers might very well become the Dividend Champions of tomorrow. Give them a look. Keep an open mind.

Dividend Growth Matters:

Even companies that have a recent dividend history can and should be considered in relationship to their dividend growth history regardless of the length of time that they've been paying dividend. Look at the short-term history and consider the possibility of what the increased dividends can be and how that will affect your investment.

Create a "Buy Zone":

If we arrive at a company being a value, then it would follow that fundamentals would be in a relative relationship with that value. A stock is not value at $80 a share and not value at $82 a share. Determine the "buy zone" and make a purchase. Some people use puts rather than a limit order. That's not a bad way to go. I don't, but, I'm fine with it now that I've looked into it.

Have An Objective:

Why are you investing in the stock market? What do you hope to accomplish by putting your money at risk? What is the end game? Do you have an exit strategy in place? What would cause you to sell a particular stock? Is that rule hard and fast or flexible.

A while back, we invested in Safeway (NYSE:SWY) at $16.50 a share. We liked the dividend, but liked the value more. We have sold our position in SWY today at $32 a share which was a 93% gain in less than 12 months.

Trust Your Instincts:

After doing all of your due diligence, there comes a time where you have to make a decision one way or the other as to making a purchase or not. You can find just as many articles that say a particular stock is a buy as you can find articles that say the same stock is a sell. Reading all those opinions is probably a prudent thing to do, but in my opinion it leads to indecision. Indecision costs you money.

Summary and Conclusion:

You can create your own Perfect Portfolio. It is up to you. But you have to determine what your objectives are, how you plan to get there (strategy), and you have to stay the course.

Most important of all, don't lose sight of the end game. We don't have to buy into a company every day, every week, or every month. Life is too short not to have fun. Focus on those things that make you happy, enjoy them, and make sure that you keep investing in its proper perspective.

Disclosure: I am/we are long CSCO JPM EMR IBM QCOM.

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.