Retired Investors - Treat Your Income Generating Portfolio Like A Business

by: Bob Wells

I was born in 1946, my wife in 1947. That makes us Boomers. Like a lot of other Boomers we share at least some level of distrust in the market. For us the period from 2007 to the present has been particularly challenging. We retired at the end of 2008. It wasn't long before we realized that if we kept our portfolio in cash invested in cash as it had been since 2007 it was not going to support the 4% withdraw rule and provide a stable stream of monthly retirement income for 25 or more years. Our advisor discussed mutual funds, index funds and bonds. With interest rates so low there seemed to be a lot of risk in having 60% invested in bonds. Annuities were considered but didn't seem right for us. We hated the idea of leaving nothing to our kids and grandkids. We also liked the idea of a portfolio that could provide for any unforeseen costs we might incur in 30 or more years moving forward.

Our friends suggested we invest in dividend stocks and use the dividends to provide our necessary monthly income. Finally when our cash only portfolio was generating less than 3%, we start to transition. We started with my 401K in February of 2011. I think we can all agree looking back on it that 2011 was a tough year to begin managing your own investments. We were more traders than investors the first 8 or 9 months. I started to realize we were not happy with high beta stocks so we started to move more into utilities and consumer staples that summer. I started looking specifically for those dividend stocks that performed the best during periods of highest volatility like 2002 and 2008.

At the end of 2011, I read my first article by David Van Camp on Dividend Growth Investing. If you are new to this concept I invite you to start reading some of Dave's articles. One of the one's that affected my thinking the most was one that suggested that you treat your portfolio like a business and that to do so you needed a business plan. Dave's original article is here.

Please stop before reading any further and read Dave's article if you haven't already. Dave gives you


plan. Each plan needs to be written by you to reflect your goals, investment preferences and concerns.

Welcome back. I trust that by now you have read the article and found it as challenging as I did.

What follows is a draft for the business plan in support of our portfolio. I hope it generates thinking and comment but most of all I hope it generates action. If you're a few years out or all ready retired no matter what investment vehicle or mix of vehicles you choose, whether you are a self-directed investor or work with an advisor take the time to develop your plan.

I want to encourage each of you to continue to share your insights from reflection, particularly those who of you retired and those yet to comment. It was from my comments and questions that I learned so much from those generous enough to share their experiences.

Business Name: Wells Family Income Stream Portfolio

Goal: Generate a steadily increasing stream of income paid solely from the growing dividends generated by low-risk companies with a track record of providing safe and growing dividends. Target is to deliver a 4.5% percent plus yield during 2012 with no loss in overall portfolio capital.

Business Model (Strategies):

Stock Selection:

Use the current Champion, Challengers and Contender (CCC) Lists as my principal shopping list when considering new equity purchases.

Alternative: Select stocks from Safe Dividend Stock document generated from my back testing of Dividend stocks from 2002-2011.

Give priority to stocks that meet both standards

Require the following from any stock selected:

  • Price at least $5 per share. Minimum projected yield 3.0% at time of purchase.
  • Total Portfolio Dividend growth rate (DGR) over past 5 years at least 7% annually.
  • Positive annual total returns in four of past five years (2007-2011).
  • Annualized average total return of at least 5% over past five years.
  • Increased dividend payout in each of past 5 years.
  • An understandable and sustainable business model with meaningful competitive advantages, also called a "Moat".
  • Good fundamental business metrics. Low debt. Low payout ratio or one below average for that sector. Strong credit rating.

Stock Valuation:

Buy only stocks with "Fair" or better valuations as determined by average PE for past five years. Seek an overall portfolio PE of 15 or under. Be cautious of buying a stock at a point where it is at its 52 Week High.

Consider multiple sources of value assessment when seeking to determine value. Sources include but are not limited to the following:

Merrill Lynch


Fast Graphs

Select SA Contributors

Portfolio Construction:

  • Aim for well-roundedness in the portfolio. Diversify across sectors, industries, geographies, and different ranges of yields and growth rates.
  • Limit the number of stocks owned to a maximum of 50.
  • Be alert to position sizing. Investing an equal initial amount in each stock is the norm. Adjustments may be considered as prices change, yields decline and perceptions of risk and reward change.
  • Hold no more than 5 percent of the portfolio's value in a single stock. If a position exceeds 5 percent, sell the excess and re-deploy the proceeds.
  • Make opportunistic switches from one stock to another if such a swap will upgrade the portfolio. The expected frequency of such exchanges is low.
  • The major focus is dividends and not share prices, the portfolio will usually be 90% or more invested. Generating a steady and growing income stream from dividends remains job one.

Dividend reinvestment:

  • Reinvest dividends in excess of the 5% required for income.
  • When reinvesting dividends, try to improve the portfolio in one or more of the following dimensions: yield, dividend growth, or diversification.

Selling Guidelines:

  • Investigate and seriously consider selling any stock for these reasons:
    • It cuts, freezes, or suspends its dividend.
    • It becomes seriously overvalued. Profit taking and re-investment will likely be the first step.
    • It underperforms stocks in its sector in total returns (price + dividends) for two years running.
    • It incurs a loss in excess of 10% and such a percent represents a loss significantly greater than similar stocks in that sector or industry.

Portfolio Review:

  • Conduct a thorough quarterly Portfolio Review.
  • As part of each review, measure the Portfolio's overall progress toward the overall goal of maintain stable growing income and capital preservation.
  • Review performance by sector or group. No longer use either the Dow or the S&P 500 as a measure of the success of the portfolio. Instead use performance of appropriate sector etfs such as XLU as gauge. For example : How was the average performance of portfolio utilities vs. the performance of the XLU that quarter. Serious under performance will be closely examined to see if an exchange for other DG equities within that sector has the potential to further strengthen income stream and capital preservation.
  • Measure success against the "Chowder Index". Check to see if this quarter's income from dividends exceeds that of the same quarter last year. If it does celebrate with a cold one or two. If it doesn't make appropriate adjustments based on stated guidelines and portfolio objectives.

Well there it is. We're proud of it but would sure like to hear from you about how we might improve it.

Disclaimer: I am not a professional investment advisor or financial analyst. You need to do your own research and due diligence before you decide to trade any securities or other products.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.