Last week I wrote about the importance of creating your investment planning document. I discussed the 4 sections you should include in your document which include your goals, buying rules, selling rules and portfolio management.
Today, I thought I’d give you an example. What follows is my personal dividend growth investment planning document. I use this document to help motivate me on my financial journey. I also use this document to help guide me in my investment decisions when it comes to which companies to purchase and if I ever need to make any sells.
My Personal Dividend Growth Investing Plan
My Dividend Growth Investing Goals
My dividend growth portfolio is a supplement to my retirement plan through my employer. I am fortunate enough to have a 401K with a decent match in which I use to invest for my retirement years. I also have a very good pension plan which should pay out a decent benefit when I reach the standard retirement age of 65.
My goal with my dividend growth portfolio is to supplement the income I earn from my pension and 401k.
Long Term Goal
I would like to create a portfolio that can pay out an extra $25,000 in income. I want this income to grow during my retirement years at least keeping pace with inflation. In order to receive $25,000 in income, I believe I will need to build a portfolio worth roughly $833,333 with an average dividend yield of 3%.
When I reach this goal, I will most likely stop reinvesting dividends and start using that extra $25k a year to enjoy life more. I’m hoping to reach this level before retirement. During retirement, the $25k will be icing on the cake to go along with my 401k and pension benefits.
Short Term Goals
My short term goal of my portfolio is to provide extra financial security and peace of mind for me and my family. I have the emergency fund saved up in an online savings account. I also have some money invested in a high yield bond mutual fund along with some U.S. Treasury Series I bonds. As the dividend growth portfolio continues to grow, it continues to provide even more financial security and peace of mind. I don’t plan on ever spending the money but I know it is there if desperate times arise.
My second short term goal is to reach the point where the annual dividend income could cover 1 months worth of living expenses. I would like my portfolio to throw out at least $3,000 in annual dividend income to meet this goal. I need to build my portfolio up to $100,000 with an average 3% dividend yield. This is just a stepping stone to my larger goal. I hope to reach this goal within 5 years.
Purchasing Dividend Growth Stocks
In this section I want to lay out my rules for buying dividend growth companies:
I will only invest in industry leading companies in which I have heard of and understand how they make their profits. If I am confused on what exactly the company does, then I can’t reasonably expect to identify when trends change and monitor the company for future trouble. Only invest in solid blue chip industry leading companies that I can understand. I will try to balance out my purchases so that I can keep my portfolio properly balanced for diversification purposes. See below in portfolio management for more info. Review my stock watch lists for companies that are either trading with lower P/E ratio compared to 10 year average or higher dividend yield compared to 10 year average. Stick with my 35 Top Dividend Growth Stocks as these are the companies I am using to build my portfolio. Review all financial metrics using my dividend growth stats database. Want 10 year and 5 year earnings per share growth over 7.5% compound annual average. Earnings per share must be consistently trending upward and not erratic. A down year here or there is not big deal. However an erratic trend is a no go for me. Want 10 year and 5 year net income growth over 7.5% compounded annually. Want 10 year and 5 year revenue growth over 7.5% compounded annually. Dividend growth streak must be minimum of 5 years. Dividend growth rate must be higher than 5% compounded annually over past 5 and 10 years (if applicable). Prefer current P/E ratio to be lower than 10 year historic average or at least fairly close. Will consider slightly higher depending on the company. The long term debt/net income ratio needs to be below 5. Prefer outstanding shares to be trending downward over past 5 to 10 years. Not a necessity but I like to see this. Dividend payout ratio must be below 80% in most cases. Want to make sure dividend is safe with room for future growth. Read through most recent annual report before investing. Scan through and read any relevant recent news on company before investing. Review articles on Seeking Alpha, Yahoo Finance and look over Value Line report. Make purchases with minimum of $1,000 to keep trading costs low.
Selling Dividend Growth Stocks
My aim is to purchase dividend growth stocks for the long term. When I invest in a company, I plan on owning that company forever and never selling. I plan on just collecting my portion of the profits in the form of dividends.
With that in mind, sometimes you are forced to sell for various reasons.
Here are my rules for when I may need to sell one of my companies:
If a company cuts its dividend rate I will immediately sell without hesitation. In my mind, a dividend cut is a sign of trouble. I want no part of it. There are plenty of other great companies in which I can invest in. If a company freezes its dividend rate. Rather than a cut, sometimes companies just fail to announce an increase. I will evaluate in this case what the situation is. Most likely I will hold unless I can find a different company that I prefer to own (taking costs of selling into consideration). If two full years pass without an increase, I will then sell and look for a better alternative. My income needs to continue to grow with inflation. I will monitor earnings trends. If growth becomes erratic or slows to an unacceptable rate without recovery, I will consider selling. If a company is extremely overvalued (P/E of 30 or higher) I will consider selling and locking in gains. The kinds of companies I invest in shouldn’t bring these kinds of valuations. I know I can lock in gains and with a little patience will be able to buy back in at much more reasonable valuations. If I absolutely need the money, I may need to sell. However, I have my emergency fund and bond investments to tap into first.
My ultimate plan is to own at least 35 different companies in a variety of industries. Currently I own 20 companies. My end goal is at least 35 companies with 2.85% give or take a percent in each company.
I will use my 35 Top Dividend Growth Stocks list to build my portfolio. These are the companies I have reviewed and decided I want to own. I will monitor in case a company needs to be dropped off this list. I will add new companies as necessary.
Also, if I find a great company at a great valuation that is too good to pass up, I won’t limit myself to owning just 35. I will own 36, 40, 45. However many great companies I find that are worth investing in.
When I make purchases, I will look for good values on new companies before considering current companies I already own. I will keep diversification and portfolio allocation in mind when making new buys.
I will collect dividend income as cash until I have $1,000 built up. At that point I will review my stock watch lists to make a decision about which company I believe is best to make a new buy at the current time.
Once I reach $25,000 in annual dividend income, I will make a decision on whether I want to keep reinvesting or start using that income to enjoy life a little bit more.
There you have it. This is my basic dividend growth investment planning document which I use to guide my investing decisions.
I review this plan frequently.
Whenever I am considering a new buy for my portfolio, I am reviewing this plan to make sure I am following my rules.
Whenever I am considering a sell for one reason or another I am reviewing this plan to make sure I am following my rules.
There have been a few times when I considered selling a company but decided to hold off based on a review of my rules. I am always happy when I follow my rules and I never regret it.
My plan is flexible.
I will change and adapt the plan as my investing philosophy changes. If I learn about a new metric that I want to take into consideration, I will add it to the plan. If I come up with a new reason to consider selling, I will add it to the plan.
As my goals evolve/change over time, I will update the plan as necessary.
It is important to create and follow a plan in order to give yourself the best chance for investing success. My plan helps me avoid mistakes and stay on track towards my goals.
Create your plan today. Use mine as a template if you like. But ultimately it has to be your plan taking into account your values and your own ideas. No plan is perfect. No plan will be the same.