In Sept of 2014 I presented my Keep It Simple, Stupid (K.I.S.S.) dividend growth investing (D.G.I.) portfolio business plan. This is something that I think should be revisited at least once a year, and it's been over two and half years for me. So I figured I would review it, revise it, and present the updated version. So in this article I present my updated KISS business plan.
I have been a dedicated dividend growth investor for over four years now, and in that time I have experienced a change in my outlook on investing from confused and scared to confident and self-assured. I have learned from David Van Knapp (D.V.K.), Bob Wells, Chowder, Chuck Carnevale, Mike Nadel, Dave Crosetti, and many others here on Seeking Alpha the concepts involved with dividend growth investing. And I will be forever grateful to them for their help.
As I've read their articles and comments, I have adapted their techniques to fit my own personality, my own goals, and my own situation. And I have come up with my own system based on simplicity. I've found that by using the hard work that many other people have put into the evaluation and analysis of stocks, I could save myself a lot of time. So by coming up with my own straightforward and clear cut criteria for buying, selling and reinvesting, and by using the finished products available on other websites, I have been able to streamline and simplify my investing process.
I've been using my Keep It Simple Stupid (K.I.S.S.) plan for over 4 years now, and have written about my criteria in many of my previous articles, but I haven't updated my official business plan since 2014. DVK and Bob are right: You need to set it out in writing to focus your mind on what you want to do and to keep on course. It helps you to keep your emotions out of the process and know beforehand what you are going to do in any situation.
With that in mind, in this article, I would like to lay out my updated business plan for my portfolio. I hope it can help some people see how the investing process can be planned and carried out. Bob Wells was kind enough to let me use his business plan layout as my template for creating my own. Thank you, Bob.
First I will give a summary of the changes I made to my plan since I originally published it, and then I will present the full plan.
- 1. I changed the yield criteria, changing it from a minimum of 3.0% to 2.0%, but the lower yielding stocks must also have a higher dividend growth rate in order to make the cut. I did this to try to get access to some stocks with higher dividend growth.
- For financial strength I changed the criteria from having a S&P Quality Ranking of A- or better, to a S&P Credit Rating of BBB or better. I did this because this information is easily found on the F.A.S.T. Graphs page and saves a step in the process.
- I separated out a High Yield section of my portfolio for high yielding, non-DGI stocks. These are meant to provide income, not necessarily for their growth.
- I simplified my reasons for selling. No longer will I sell because a position becomes relatively large or over valued. I will only sell if there is a dividend cut, or if there is a spin off. I did this for simplification.
Business Name: The Part-Time Investor's KISS Income-Producing Machine
Goal: To generate a dividend income stream that increases year after year, and that eventually is sufficient to completely fund my retirement without having to sell any of my stocks.
Business Model Strategies:
Initial Stock Selection:
The screening begins with the current Champions, Challengers and Contenders (C.C.C.) list, as maintained by David Fish. Only stocks that are found on the CCC list will be considered for new purchases in the portfolio.
Definition of the two Stock Categories:
- "High Yield Stocks" refers to REITs, MLPs, BDCs and Utilities.
- "Regular Stocks" refers to all other stocks.
Requirements for a Regular Stock to be selected:
- Dividend yield of 2.0% or greater, but with qualifications. This is explained below in the part about the Chowder Number. This used to be a cut off of 3.0%, but I decided to allow lower yielding stocks to be considered, as long as they have higher dividend growth rates.
- Payout Ratio of 60% or less.
- A Chowder number (5 year dividend growth rate (D.G.R.) plus the dividend yield) of:
- 12 or greater if the stocks yield is > 3.0% OR
- 14 or greater if the stock's yield is between 2.5% and 3.0% OR
- 16 is the stock's yield is between 2.0% and 2.5%.
- So the minimum Chowder number I am willing to accept increases as the stock's yield decreases.
Requirements for a High Yield Stock to be selected:
- Dividend yield of 4.0% or greater.
- A DGR plus yield (The Chowder Number) of 8% or greater
- A DGR across all time periods shown in the CCC list (1yr, 3yr, 5yr and 10yr) of at least 3.5%, but also consistent over all the time periods.
The stocks that meet the above criteria will have their F.A.S.T. Graphs reviewed. To continue to be considered for purchase, the stocks must meet the following criteria:
For " Regular Stocks":
- F.A.S.T. Graphs must show a general uptrend in earnings for at least the past 5-10 years. A one-year decrease in earnings within that time frame may be acceptable if the earnings quickly recover the following year.
- The present price of the stock must be at or below the F.A.S.T. Graphs fair value line based on the earnings.
For " High Yield Stocks":
- F.A.S.T. Graphs must show a general uptrend in free cash flow for the past 5-10 years. A one-year decrease in free cash flow may be acceptable, especially if the free cash flow quickly recovers in the following year.
- The present price of the stock must be at or below the F.A.S.T. Graphs fair value line based on the free cash flow.
To show that the company in question has the financial strength to continue to increase its dividend the company must have a BBB credit rating from the S&P. The credit rating for most stocks is reported on F.A.S.T. Graphs. I used to use the Quality Ranking from S&P, but this could not be found on F.A.S.T. Graphs and had to be looked up on another website. Since simplicity is one of my goals I decided to change to the credit rating, since it is already right there on the F.A.S.T. Graphs.
Not all stocks have a credit rating from S&P. For those that don't, a safety rating of either 1 or 2 from Valueline is also acceptable, as is a Quality Ranking of A- or better from S&P.
Cash: In my opinion having a significant amount of cash sitting idle in the portfolio equates into money that is not producing income. The purpose of my portfolio is to maximize dividend income and growth (while maintaining quality and safety). Therefore, once each quarterly evaluation is complete and my purchases and reinvestments have been completed, the portfolio will be 100% invested in stocks. Cash will never be held in the portfolio just for the sake of holding some cash, or to wait for a better buying opportunity.
Diversification: The more stocks in the portfolio, the less damage a dividend cut will do to the income stream. So the portfolio will hold as many stocks as possible, without compromising quality and manageability -- 60-70 is a reasonable number.
Position Size: No attempt will be made to keep the size, in terms of market value, of each position relatively equal. I will not rebalance my portfolio just because some positions grow to a relatively large size, or fall to a smaller size. I may choose to add to positions that are relatively small, and bring them up closer to a "full position," but this will be more based on buying due to the compelling value of the small position, rather than just to increase the size of the position.
Any new stock will be purchased as a full position. No half or partial positions will be initiated.
Non-DGI Components: A certain, although undefined, part of the portfolio will be held in high yielding, but not dividend growth, stocks. These are meant to bring in a reliable amount of dividend income that can be used to reinvest in other stocks, not necessarily to have that income grow over time.
Due to multiple retirement accounts from past jobs, the portfolio is divided into different accounts. All stocks held in the accounts that allow for Dividend Reinvestment Plans (DRIPs) will have their dividends DRIPed back into the stocks that paid them.
Dividends received in the accounts that do not offer DRIPs will be reinvested on a quarterly basis. All dividends will be collected and held in a money market fund until that time. At the beginning of each quarter, the accumulated dividends, and all other funds added to the portfolio, (i.e., 401k contributions from work and Roth IRA deposits) will be invested as follows:
- The above buying screen will be carried out and if there are enough funds to open a new full position, then the top ranked stock will be purchased. Now that I have over 65 positions in my portfolio I do not feel it is necessary to always add new positions. I will only do so if the valuation and dividend metrics of the new stock(s) are compelling enough that I can't ignore it. If more than one stock passes the screen, and would be a new position in the portfolio, priority would be given to the stock or stocks with the best combination of value/dividend growth/yield.
- Any funds remaining after the purchase of a new position (or if no new position is bought) will be reinvested into the 10 stocks that appear to have the best value. This value will be based upon each stock's PAAY, as defined in the next section.
- If any stock ranked in the top ten based on its PAAY is already an over sized position (based on market value), then it will be skipped and the next stock in the rankings will be selected.
PAAY - Percentage Above Average Yield
All stocks in the portfolio will be tracked on a weekly basis as to their price, dividend, and yield, and the Percentage Above the Average Yield (PAAY) will be calculated. It can be assumed that stocks whose present yield is above its usual yield may be considered to be undervalued. Those whose PAAY is the highest compared to the other stocks in the portfolio can be considered to be the most undervalued. These are the stocks that will receive reinvested dividends. For more information on PAAY, you may refer to this article, and to how well it has worked for me so far.
Keep it Simple, right? Therefore a stock will be sold for one of only two reasons:
- It cuts its dividend. In this case I will evaluate the new yield. If I am still satisfied with the yield (ie. it is still what I would consider to be a high yield stock) possibly keep it. This stock will then be considered to be in my High Yield Non-DGI portion of my portfolio. But most often the result of the dividend cut is that I will sell it immediately.
- If a stock has a spin off, and that spin off company does not have, or does not announce, a dividend philosophy consistent with the KISS portfolio, it will be sold. The parent company will still be held as long as its dividend does not get cut.
- No stock will be sold simply because it no longer meets the purchase criteria. Once they are in my portfolio they simply need to continue to raise or at least maintain their dividend to remain in the portfolio.
- I will not rebalance my portfolio. I will not trim a position that has grown relatively large just to buy more of a smaller position. I will let my winner run. I may add more shares to a position that is relatively small (due to other positions growing larger), but only if the valuation is compelling. This is where my PAAY system comes into play.
As time goes on and I get closer to retirement, the portfolio will transition from having a priority on dividend growth to a priority on higher yield. This will be accomplished in the following way:
- The criteria for new purchases will increase from a yield of 2.0% up to 3.0%, 3.5% and eventually 4.0%.
- Stocks that fall below a certain present yield may be sold. What that yield will be is yet to be determined. My portfolio is completely in tax deferred accounts so paying capital gains taxes is not a concern.
- After retirement, reinvestment of dividends will stop and the dividends will be used as retirement income.
- This transition will most likely start when I'm closer to 60 years old (I'm presently 52).
- At my retirement I will make an evaluation of my living expenses as compared to what my dividend income will provide. If necessary, if my dividend income does not cover all my expenses, I may choose to re-configure the portfolio to increase the yield.
And that is it. My KISS system. It takes me about 1-2 hours at the beginning of each quarter, and 5 minutes each week to update the PAAY data, to carry out this plan. But even though it is very simple, I also think it will be very effective. This has turned out to be true for the past four years, as my most recent portfolio update shows, but only time will tell if it continues to be effective.
Thank you for reading my business plan. If you have any suggestions, questions or comments, I welcome them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.