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Zalach's Dividend Investing Constitution

(Huge tip of the hat to the knowledgeable cadre of DGI authors here: Chuck, Dave, Dave, Chowder, PTI, Bob... etc... etc... I've put this together for myself based on your volunteered information, thank you guys!!!)

The Constitution for My Dividend Growth Portfolio


The goal of the Dividend Growth Portfolio is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies. The numerical target is for the portfolio to deliver 10 percent yield on cost within 10 years of inception. I am more interested in the ability of this portfolio to produce income than its sheer size.

In purchasing any kind of business, the first question isn't how much, it's how safe.

Once you determine the business is safe and profitable, then you negotiate a price.

Once you pay that price, you aren't asking business brokers every week if the value of your business is rising or falling, you focus on whether your business is succeeding or not.

General Rule:

The entire stock market's real return has come during months when annualized inflation has been between 0% and 5.1%.

The rest of the time, the stock market has been a net loser.

Translation - Stay in cash and do not add money to the market if we are in a deflationary, or highly inflationary ( > 5% ) environment.

Buy Rules:

• Start with current CCC Dividend Growth Stocks as my shopping list.

• Payout ratio < 50%

• Historical Price-to-Earnings Ratio (P/E) within historical norms for the particular company

• 7 out of the last 10 years with increased earnings

• Adherence to the Chowder Rule (10 stocks / 7 utilities)

(5 year DGR (Div Growth Rate) + Current Yield = [ 10 | 7 ]

example: KO has an 8% 5 year dividend growth rate and a current yield of 3.2% which is > 11.2 which meets the requirement

• Buy only stocks with "Fair" or better valuations (FAST graph valuation model).

• S&P Credit Rating > BBB

• Try and buy stocks at or below the halfway point between the 52 week high and 52 week low. (This one is a "nice to have".)

• Use Jefferson for earnings quality, operating efficiency and balance sheet ratings. These should be strong.

Buy Strategies (New as of 2015)

  • If purchasing a lot of 100 shares, take advantage of the options market by selling cash secured Puts at my target price to open/expand the position.
  • If purchasing odd amounts of shares (e.g. not 100), stick to the tried and true GTC limit orders.


• Reinvest dividends, but not automatically in the company that issued them. Rather, reinvest when the incoming cash accumulates and the commission cost is 1% of the purchase.

Select the best candidate at that time using the Buy Rules listed above.


• Aim for well-roundedness in the portfolio. Diversify across sectors, industries, geographies, and different ranges of yields and growth rates. This is just something to keep in mind.

Portfolio weighting

• Hold no more than 10 percent of the portfolio's value in a single stock.

EXCEPTION: Inherited stocks are exempt from this rule, these are: GE, PNC, and WMT. Let's pass them on to our kids in another 50 years at even further ridiculous valuations!!!

EXCEPTION: A stock must meet the Sell Rules listed below regardless of portfolio weighting.

Frequency of review

• Conduct a thorough Portfolio Review twice per year for material changes in each company.

• Review this constitution at least twice per year and adjust it for changed circumstances, new knowledge, and the like.

Sell Rules

These are just as important as buy rules.

• Investigate and seriously consider selling any stock for these reasons:

(1) It cuts, freezes, or suspends its dividend.

(2) The Stock becomes over valued, 2 years ahead of where the price should be based on its consensus earnings and normalized PE ratio, as per FAST Graphs.

(3) You receive news of significant changes impacting the company.

(4) It is going to be acquired.

Strategies and Practices Not Used:

• Margin.

• Shorting.

• Currency trading, futures, or other derivative investments.

• Mutual funds

• Trailing sell-stops.

EXCEPTION: If I have determined to sell a stock and it is in a price up-trend, I may use a tight trailing sell-stop to milk capital gains out of the stock before selling it.