Last updated: January 8, 2021
Primary Goal of the Dividend Growth Portfolio
Build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement.
Secondary Goal
Deliver total returns that are competitive with the general stock market as measured by the S&P 500 with dividends reinvested.
Portfolio Inception
The portfolio was begun on June 1, 2008 with a starting value of $46,783 funded by the author.
Additional New Money
No new outside money has been or will be added to the original amount.
That simplifies the calculation of returns, because all dividend amounts and growth are generated organically within the portfolio, from (1) the original investment and (2) monies generated by the original investment.
Dividend dollars, of course, enter the portfolio as they are paid by the companies. While these become dollars to reinvest within the portfolio, they are not “new outside money,” because the portfolio generates them on its own.
Dividend History
This is the portfolio’s dividend history through December 31,2020:
The portfolio’s income increased at a compound annual growth rate of 10.6% per year from 2009 – 2020. (2008 is ignored in the calculation, because 2008 was a partial year.)
Selecting Stocks
- To select stocks, I use the analytical methodology described in DGI Lesson 14 on grading dividend growth stocks. Practical applications and illustrations of the approach can be seen in the Dividend Growth Stock of the Month series and in my eBook, Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing.
- I purchase stocks with “Fair” or better valuations using the methodology described in DGI Lesson 11 and applied in the Dividend Growth Stock of the Month and High Quality Dividend Growth Stock of the Month series.
- It is possible that a dividend-oriented ETF (exchange-traded fund) or CEF (closed-end fund) may be added to the portfolio. Thus far, no such funds have been added.
Reinvesting Dividends
- Dividends are not dripped. Rather, they are reinvested selectively. (See DGI Lesson 10.)
- I normally reinvest the dividend cash that has accumulated once per month. The amounts invested each time will vary depending on how much dividend cash has been received over the previous month.
- For each reinvestment, I will select the best candidate at that time to buy. It could be a new stock or fund, or more shares to add to an existing position. With each purchase, I try to improve the portfolio along one or more dimensions, such as yield, company quality, dividend growth rate, dividend safety, diversification, and the like.
- Since the major focus is on income and not share prices, the portfolio will usually be 100% invested, except for dividends awaiting reinvestment. Cash beyond that which is accumulating for reinvestment will not be held in efforts to time the market or for any other purpose.
Portfolio Characteristics
- The portfolio will normally contain 25-35 stocks or funds.
- The portfolio will be well-rounded. It is diversified across economic sectors and industries. It is also diversified across a variety of yields and dividend growth rates.
- The portfolio is meant to be a straightforward illustration of all-purpose dividend growth investing. It will not be unduly tilted either toward fast dividend growth or high yield stocks. The DGP’s yield will usually be in the vicinity of 3.5%. Its annual dividend growth rate is expected to be in the 9% range per year, including the impact of reinvesting dividends.
- The portfolio will normally hold no more than 8% of its total value in a single stock.
- Other than the 8% ceiling, the portfolio is agnostic on position sizing. There is no minimum size requirement. The weights of holdings will self-adjust as prices change and dividends are reinvested. Small positions may be built up through repeated reinvestments in the same stock.
- The portfolio is not rebalanced on any set schedule. However, occasionally a large position may be trimmed, with the money used to initiate or build up other positions.
Selling Guidelines
- This portfolio is expected to have a low turnover rate. Unless there is a strong reason to sell or trim a position, the default action is to hold. The underlying strategy is to buy, collect, and hold good dividend growth stocks for long periods of time.
- However, selling or trimming will be seriously considered if any stock or fund:
(a) Cuts, freezes, or suspends its dividend.
(b) Bubbles or becomes seriously overvalued.
(c) Is impacted by significant fundamental changes.
(d) Is going to be acquired.
(e) Announces plans to split itself into 2 companies or spin off a significant portion of its operations into a separate company.
(f) Sees its current yield rise above 9% or drop below 2%.
(g) Grows to where it is beyond 8% of the portfolio.
Strategic Reviews
- The portfolio is reviewed from a strategic level once or twice per year.
- This business plan is reviewed and amended as appropriate.
Strategies and Practices Not Used
- Margin.
- Shorting.
- Options, futures, or other derivative investments.
Summary of Changes to the Business Plan in January, 2021
- Monthly reinvestment of dividends (formerly waited until there was $1000 to reinvest)
- Number of positions increased to 25-35 (formerly 20-30)
- Maximum position size reduced to 8% of portfolio (formerly 10%)
- Graph of annual dividends was updated, and language was changed for clarity in several places.