I realized today that this marks the 3-month anniversary since my first post on Seeking Alpha. The Sand in Shoes IRA portfolio has certainly undergone some major changes (which were desired by yours truly) in just three short months. I've written quite a few articles because there have been some big changes both in the composition of the portfolio and in my goals as things have changed.
Well, I had a few beers with one of my buddies the other day, and he had a bunch of questions for me which made me realize I needed to clarify some of my methods, goals, and expectations. I have not done a spectacular job of keeping everyone up to date on exactly how I am managing the portfolio or my goals. While I think somewhere in my past eleven or twelve articles I do mention all of these things, I think it is a good idea to put all the cards on the table both for you and for me. It will just help clarify things, which is certainly a good idea.
The regularity of writing these articles has sincerely helped me keep my head screwed on right and instilled some more discipline into my investing style. One of the things I might very well have done in the past was immediately take my recent proceeds from the August 7th sale of Southern Copper Corp. (NYSE:SCCO) and buy Exxon Mobil (NYSE:XOM). After all, XOM went ex-dividend on August 10th, and I was sorely tempted to hurry up and grab that dividend. The old me would probably would have done that, but I owed it to my readers and myself to do my homework before acting, and that is what I did. Time will tell if I made a stupid or smart decision, but at least I feel good today that I made an informed and more disciplined one.
First things first: If you are worried about my family’s well-being when we enter retirement, please do not be. The assets you see in this and my previous articles are not - I repeat not - the only assets my family has saved for our retirement. My wife is a very bright and capable and hardworking woman, and she has also been professionally employed since graduating from college. The value of this account is a small portion of our overall assets. I don’t want to say how small because I would like some privacy, but suffice it to say it is quite a bit less than half of our net worth.
The fetching Mrs. Soule and I are also savers at heart. We have both been saving our pennies (literally) since we were pre-teens (again, literally). So it should come as no surprise that when we were presented with the opportunity to open a 401(k) or participate in an Employee Stock Purchase Plan or fund a Roth IRA or SEP IRA, we were plowing money into these plans with much glee. We have a smattering of all of these accounts, some much larger than others, and even several taxable accounts and other investments not worth mentioning here. But please do not be worried for my family’s financial future.
No New Capital
I am not adding new capital to the account. Any cash that builds up in this account only has a few ways of getting here.
- I will at times sell a security that I deem no longer fits with the goals of the portfolio. This could happen because the story has changed, like coffee consumption suddenly being linked to scurvy might make me, if I owned any shares of course, sell Starbucks (NASDAQ:SBUX). It could also happen because of a change in management, like Jeff Bezos leaving his post at Amazon (NASDAQ:AMZN) to explore the Arctic Circle. And finally, it could happen because I think the stock has just gotten too expensive, like if Home Depot’s P/E ratio runs up to 40 from its current 23.
- I will receive dividends, hopefully more and more, as I continue to invest and the companies I purchase continue to raise their dividends, and these will be added to my cash.
- I will receive cash from my fixed-income investments, and in fact, I have already started to receive them.
- The only possible exception of new capital being added to the portfolio is if the place of my employment changes in the next 10 years. If that is to happen, I will roll my present 401(k) over to this account.
What you see in the table below is the sum total of the funds I will be using to achieve my goal of $10,000 per year in dividends. If I end up rolling another 401(k) over to this IRA, I will update my goals at that time.
My Updated Goals
Speaking of that goal... in a recent article I spoke of rolling over the funds from an old 401(k) plan. When I did that, I had to drastically increase the goal I had set for myself. My new goal is $10,000 per year in dividends paid, which I aim to achieve by 2026.
This $10k per year will come from the “individual stocks” portion of my portfolio only. I have already received two separate cash distributions from the fixed-income portion of my portfolio, and they have been added to my cash balance. They do not count when speaking about the $10k per year goal. They might help, as in, I will certainly use the cash they just generated to purchase more assets, which will produce more cash, but I will not consider them part of my $10,000 per year goal.
The treatment of cash
Which leads me to this: I am not reinvesting my dividends directly via a Dividend Re-Investment Plan, or DRIP. What I mean by that is, when Hormel Foods (NYSE:HRL) pays me the $8.50 dividend on August 15th, I am not going to be purchasing 0.26 shares of HRL on that same day. That's not what I’m doing. I am collecting the cash dividends (or cash payouts from my fixed income and other investments) and picking and choosing which stocks will receive new capital or which asset classes will receive additional capital.
Assuming the percentage of each of my assets classes remain very close to my target percentage, and as of right now they are very close, I will do two things each month.
- I will liquidate $2,000 of the S&P ETF I currently own.
- I will take whatever cash has been generated over the previous month, along with the $2,000 mentioned above, and select a new dividend growth stock or add to an existing position.
This should give me well over $2,000 each month to invest in new opportunities. But what if my asset allocation is out of whack?
If one or more than one of my asset classes gets too out of whack, I may take some of that cash and do my best to bring the percentage of whatever is lagging back up to close to my target percentage. For example, currently I have $12,000 in small-cap stocks. If this particular segment of the market gets abused for a couple of months, for whatever reason, and in November everything else is worth roughly the same except my small-caps are only worth $11,000, and instead of 5% of my portfolio they only comprise 4.5%, I would probably take $1,000 of my cash and purchase some more small-caps.
If maybe large-cap equities have been beaten up for a couple of months, maybe I don't liquidate any of the S&P 500 Index ETF - I just use whatever cash I have collected and either add to my the individual stock portion of my portfolio, or maybe I add to the S&P 500 ETF. Or maybe the bond market has crashed, in which case maybe I’d buy some more fixed-income investments rather than a dividend growth stock. There are, I am sure, dozens of different scenarios that will play out over the next decade that I will have to deal with. While I will look at this every month in my update, I don't expect I'll have to worry about it more than once a quarter or so.
All of this is called rebalancing your portfolio. There are several reasons for doing this, but the main reason is to maintain a certain level of risk - whatever level of risk you were comfortable with when you originally set your asset allocation goals.
The other reason for doing this is you are taking assets out of an asset class that has done well and purchasing assets that have been beaten up. Hopefully you are buying equities as they are at or near a bottom, or you are buying bonds after they have sold off and maybe the sell-off was overdone and you scoop up some bonds on the cheap. But that is a side benefit - the primary reason to rebalance is to maintain a desired level of risk that you are comfortable with.
My Basic Strategy for Large-Cap Equities
If you read my first article, you might remember that I laid out the many reasons I have grown to prefer dividend growth stocks. I won’t restate all of the reasons here, but I will reiterate two of them. First, the stocks pay you to own them. This is important because every penny that they pay me will be used to purchase more stocks that also pay me, and so on. Second, when a company whose stock I own raises its dividend it, is just like I’m getting a raise. This is important because in order for me to reach my goals I am going to need to purchase a lot more dividend-paying assets, and I’m going to need the assets I have now to pay me ever-increasing streams of cash.
While I don’t have a goal for the value of my individual stocks, my guess is I will need around $300,000 to generate my goal of $10,000 per year in dividends (3.3% yield on the portfolio). What I expect will happen is for many of the stocks I choose the yield will remain nearly the same, and as the dividend is raised the share price will also trend upwards. I’m quite certain that will not be the case for all of my stocks, but let’s look at a couple of examples and see if I’m in the ballpark.
The first stock is one that I’ve been itching to get into my portfolio is a Dividend Champion and (not coincidentally) has a yield very near 3.3%. Kimberly-Clark (NYSE:KMB) has raised its dividend for 45 consecutive years, and it has done so at a very respectable growth rate of 7% over the last ten years.
(Side note: If you ever wondered why some people like dividend growth stocks, take a look and see how closely correlated that orange line and blue line are.)
As you can see, with the exception of early 2009, when the broader market was crashing and burning, KMB's dividend yield doesn't often get above 4% or much below 3%. However, even though the dividend yield is about the same as it was 10 years ago, the price has gone from around $60 per share (very roughly) to more than twice that. Not coincidentally, the dividend has roughly doubled as well, from around $0.50 per quarter in 2007 to just under $1.00 per quarter today. So, if you had $10,000 invested in KMB in 2007, you'd be getting about $85 per quarter in dividends. Today we can assume your KMB stock would be worth around $20,000 and you'd be getting about $170 per quarter in dividends.
In this portfolio, I have about $100,000 invested in large-cap stocks today. Let's pretend I find a stock that over the next 10 years performs just like KMB did this previous decade. I would have $850 per quarter in dividends today, and in 10 years I'd be making $1,700 per quarter in dividends. That's $6,800 per year in dividends 10 years from now. That is a little bit below my 10-year goal, but I would have that $850 per quarter the first year, and then when the company raised the dividend, I'd have the roughly $930 per quarter the second year, etc. to invest in more stocks that would hopefully also pay me a larger and larger stream of money just like my KMB-esque stock was paying me. Let's see if we can find any other stocks that would do the same.
Ten years ago, PepsiCo (NASDAQ:PEP), which is another name I would love to add to this portfolio when the opportunity presents, was trading around $55 per share. And like KMB, it has just about doubled in price since 2007. The yield, with some exceptions, doesn't get much above 3% or much below 2.5% just looking at this chart, even though the dividend has roughly doubled from about $0.40 to $0.805 per share. Doing the same math, if you invested $100,000 in a stock that performs in the next decade about the same as PEP performed in the last decade, given the slightly lower yield you would have about $6,000 in dividends in 2027. So hopefully you can see that it is entirely possible to construct a portfolio of dividend growth stocks that will generate the kind of cash I'm looking for. The trick is to find the stocks that will perform like KMB or PEP in the next decade. I am, obviously, hoping that stocks like Amgen (NASDAQ:AMGN) and Home Depot (NYSE:HD) will do the trick. And I'm hoping that together we can continue to find stocks that will double in price and double what they pay us (or better) in ten years.
But it would be quite silly, or reckless, to invest all $100,000 in a single stock, which is why one of the goals is to diversify my portfolio across eleven sectors of the economy. Those sectors are: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Tech, Materials, REITs, Telecoms, and Utilities.
I probably want to eventually have at least two positions for each sector, perhaps as many as three or four. Let’s call it 25-30 stocks as an intermediate goal. I think I could probably keep up with that many, since I'm already following far more than that. I’m sure ultimately I will want to have three or four stocks in at least a couple of the sectors, because I am constantly finding stocks I would be interested in owning. So that would be 33-44 stocks in the Sand in Shoes portfolio, which is 2.3-3.3% of my overall "individual stocks" portfolio for any given stock. This is long-term goals we're talking about, and I am way overweight in some stocks and sectors and completely missing stocks for other sectors. So it will take some time to arrange my portfolio in this manner, but it is good to get these thoughts on paper.
- I have no plan to add new capital. All of my goals will be accomplished with what is currently in the portfolio.
- My new goal is $10,000 in dividend income in ten years strictly from the individual stocks I currently own and the stocks I will be buying.
- I am not directly reinvesting my dividends. Instead, I am accumulating cash and selecting securities to purchase or add to each month.
- I will rebalance the portfolio as needed, hopefully no more often than once per quarter, though I will track the asset allocation on a monthly basis in my updates.
I hope, if you had questions like my friend had, this answers or clarifies at least some of them. Some of these jokes were probably a little bit funnier if you had an IPA while reading this. I look forward to seeing what the future brings and how I adjust to it. Thank you as always for reading!
Disclosure: I am/we are long AMGN, HD, HRL. 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.