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Portfolio Inception

|Includes: Qualcomm Inc. (QCOM)

Welcome to the Blog

Here I will share with you my low maintenance dividend focused stock picking and portfolio management strategy. I will not spend much time talking about investment strategies, techniques, tips, encouragement, etc. I will focus on conveying how I pick stocks in which to invest and how I manage those investments. I will then provide change notices and performance updates. If over time someone becomes interested in the topics discussed here I am sure they will do further research and learning on their own. Comments to this post are welcome.

I plan to post once a month. I will provide monthly, quarterly and yearly updates.

Background Information

My strategy is a form of mechanical investing. I sort and eliminate dividend paying stocks based on various criteria and then put the remaining universe of stocks into the finviz.com screener and filter on another set of criteria to arrive at a list of stocks of which I invest in the top 10. Dividends are reinvested in their respective stocks on a quarterly basis. This is a long-term strategy in that all stocks are kept for at least 1 year. The only exception is that losers are sold at the end of the current calendar year to take the tax write off. If the stock that is sold in December is still identified as a buy by the stock screen at the end of November, it will be sold at the beginning of December. This allows us to repurchase the stock at the beginning of January if it is again identified as a buy without running afoul of the wash-sale rule. If the stock sold in December is not identified as a buy by the stock screen at the end of November, It will be sold at the end of December or on some day that month that is a down more than usual.

This is a tax efficient strategy and I will be demonstrating it in a taxable portfolio that accounts for taxes and all investment fees. The tax rules will be based on the Paul Ryan tax plan from 2016 which is expected to be passed in 2017. The other investment fees will be based off of the fee structure at the brokerage Interactive Brokers.

There will be two portfolios demonstrated. Both are margin accounts and margin interest will be accounted for. In the first account margin will be used only to facilitate the buying of whole shares and time transposition of quarterly tax payments. At the end of each yearlong period the margin balance will be approximately 0. In the second account half of the securities will be purchased with margin funds. Margin will also be used to facilitate the buying of whole shares and time transposition of quarterly tax payments.

Stock Selection

Now let's talk about stock selection. I take the U.S. Dividend Champions spreadsheet and select the "All CCC" tab and then:

1. Sort by No. Yrs column (large to small) and remove all companies that have less than 7 years of increasing dividends

2. Sort by EPS% Payout (small to large) and remove all companies with 62% or higher payout rates

3. Sort by Div. Yield column (large to small) and remove all companies with a dividend yield less than 2.88

Next we go to finviz and use the screener there to filter the companies that remain on the following criteria:

P/E "Under 20"

Forward P/E "Under 20"

EPS growth past 5 years "Positive"

EPS growth next 5 years "Positive"

Sales growth past 5 years "Positive"

Return on Equity "Over +5%" (This is probably an unnecessary filter but I include it anyway)

Here is a screenshot of screener with the appropriate settings

Note the box labeled "Tickers." That is where you paste the list of stocks that were left in the spreadsheet. Once you click the > button to the left of that line the stock screen will be applied to our universe of stocks.

You of course may want to choose different values. You may only want to include companies with more than 10 years of dividend growth. Or you may choose a different payout rate. These are the values that have worked for me. The P/E number under 20 criteria is the one I most expect to change. I'm basically trailing the S&P 500 P/E in 5 point (20%) increments. If the S&P 500 P/E reaches 30 I will increase the P/E requirement to 25. I don't let value judgments concerning the relative price level of the market influence my decision. I just follow the formula.

The Portfolios

Applying the preceding selection criteria and then taking the top 10 stocks sorted by trade volume using the 161230 spreadsheet produces the following selections.

WMT, QCOM, GPS, AMGN, TGT, VFC, IVZ, CMS, ETN, ORI

The retailers such as The Gap, Wal-Mart, and Target feel like they may be near the end of a good run on their stock price. But I don't worry about that because they are solid companies, they pay dividends, and it is impossible to predict the future.

I have set up two demonstration portfolios. They have the following features.

Portfolio 1

Initial Investment Commission Rate Margin Rate Margin Type
$1,000,000 $.005/share 2.16% Portfolio margin (TIMS)

Portfolio 2

Initial Investment Commission Rate Margin Rate Margin Type
$1,000,000* $.005/share 1.66%** Portfolio margin (TIMS)

* $500,000 initial cash and $500,000 margin loan

** 2.16% for first $100,000 and 1.66% from $100,000 to $1,000,000

Margin Notes

1. The first $100,000 in margin will cost $6/day, the next approximately $400,000 will cost $18.44/day

2. The per day margin cost for $1 at the 2.16% level is $.00006

3. The per day margin cost for $1 at the 1.66% level is $.000046

4. Margin interest expenses are tax deductible meaning you will recoup about 10% to 15% of your interest expenses. Also note that all sales proceeds go towards margin until the loan is paid off.

Tax Notes

As previously mentioned tax will be accounted for using the expected tax changes in 2017. After extensive research my understanding of the Paul Ryan tax plan is for 50% of all investment income to be taxed at the individuals tax rate. I have seen some indication that the short term gains may be taxed 100% at the individual tax rate. For now I will proceed under the assumption that all investment income will be taxed at 50% of the individuals tax rate. As things become clearer I will adjust how I account for taxes.

Tax brackets

Rate Single Filers Married Filers
12% $0 - $37,650 $0 - $75,300
25% $37,650 - $190,150 $75,300 - $231,450
33% $190,150 and up $231,450 and up

The standard deduction is $12,000 for single filers and $24,000 for married filers.

I will demonstrate both portfolios as if run by a single filer, which will result in higher taxes.

Tax Calculation Example

Within the tax year a single filer derives $150,000 in capital gains. Fifty percent of $150,000 is $75,000. Now take the standard deduction leaving $63,000. The final tax bill will be $10,855.5 which is about 7.2% of the gain. A married filer would pay $6,120.

Quarterly tax payments will be made on the following schedule.

Tax Payment Dates

For the Period Due Date
1/1 - 3/31 4/15
4/1 - 5/31 6/15
6/1 - 8/31 9/15
9/1 - 12/31 1/15

Portfolio Holdings

TICKER SHARES PRICE COMMISSION DATE
WMT 1464 68.32 7.32 1/3/2017
QCOM 1537 65.05 7.69 1/3/2017
GPS 4375 22.86 21.88 1/3/2017
AMGN 665 150.31 3.33 1/3/2017
TGT 1383 72.29 6.92 1/3/2017
VFC 1873 53.39 9.37 1/3/2017
IVZ 3257 30.71 16.29 1/3/2017
CMS 2406 41.56 12.03 1/3/2017
ETN 1470 68.02 7.35 1/3/2017
OTI 5254 19.02 26.27 1/3/2017

Here is a screenshot of the portfolio from January 11 2016.

Portfolio Start Status Portfolio 1

Portfolio 1
Portfolio Holdings Value 999881.55
Cash 0.00
YTD Total Dividends 0.00
YTD Margin Interest na
Margin Balance 2.28
Margin Maintenance Req. 249,984.62
Portfolio Equity 999,936.20
Taxes na
Gain na
Gain % na
Estimated CAGR na

Portfolio 2

Portfolio 2
Portfolio Holdings Value 999881.55
Cash 0.00
YTD Total Dividends 0.00
YTD Margin Interest na
Margin Balance 500002.28
Margin Maintenance Req. 249,984.62
Portfolio Equity 499,936.20
Taxes na
Gain na
Gain % na
Estimated CAGR na

Comments:

These values are from day 0 of the portfolios. More interesting info will arrive monthly, quarterly and yearly

Check back at the end of January to see how the portfolio progresses

Important Links

The DRiP Investing Resource Center - DRiP Information, Tools, and Forms
Finviz Stock Screener
Interactive Brokers Portfolio Margin Requirements
Interactive Brokers Portfolio Margin Buying Power

My Website