While we never met, Keith and I share many things in common. First, we both love to travel. I just came back from a 12 months RV trip in Central America. Second, we are both dividend growth investors. Third, I just joined the internet entrepreneur group. After working 13 years for the same employer, I’ve finally decided to quit my job upon my return from my trip and work full time on my websites. Since I contributed to a defined pension plan for 10 years, my employer will be sending me a check of $108,000 to invest in a locked-in pension account. As I am currently in the process of transferring this money, I thought of sharing my investment plan as I will select only dividend growth paying stocks for my pension account. This article could help anybody who has money on the side or is about to invest a lump sum.
Step #1 Forget the Noise & Build a Core Holding
I’ve made the decision to invest all my money in equities and to do it as soon as I receive my cheque. As the Chinese proverb goes; “The best time to plant a tree was 20 years ago. The second best time is now.” History has proven there is no more powerful concept than compounding interest. As I am 36, I will wait over 20 years before I touch this money. If one is worried about investing right before a market crash, here’s what looks the biggest market crash in the history, not even a decade after:
I’ve used the S&P 500 total return along with 2 dividends paying ETFs that existed prior to the 2008 crash. Once you look at a decade of pricing history, the 2008 disaster is merely a speed bump nowadays. Would I’d be happy if the market crash in August & September so I can buy stocks at 25% rebate in October? Sure thing! The problem is that no crystal ball is telling us if the crash will happen next month, next year, or in three years from now.
For this reason, I’ve decided to build a solid core holding that will correspond to about 60%-70% of my portfolio. These companies must be solid dividend grower and be at least part of the Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.
I want to make sure I pick companies with a strong dividend growth history and a solid business model that will ensure future dividend growth. Diversified companies like 3M Co (MMM), Johnson & Johnson (JNJ), Genuine Parts (GPC), Colgate-Palmolive (CL) and BlackRock (BLK) are some good candidates. The idea is to build a core portfolio that will not move too fast in reaction to the Mr. Market mood swings. But most importantly, the core holding must provide steady and increasing dividend payments.
Step #2 Focus on Dividend Growth
Since I will not touch this money for at least 20 years (most probably 30!), I can afford to pick lower yielding companies as long as the growth rate is there. In other words, I don’t mind buying a few 1.50% yield stock as long as management can strongly boost their payouts over time. Over the years, many investors told me they ignored my purchases as some of my picks weren’t “generous” enough. Companies like Apple (AAPL), Disney (DIS) and Canadian National Railway (CNI) are often ignored by income seeking investors. However, I can tell you that only a few years after their purchase, those three companies now show a yield on cost (YOC) of 4%, 2.79% and 2.11% respectively. I can only imagine what their YOC will be in 20 years from now!
In order to find strong dividend growers, I must focus on the Dividend Triangle. Companies with strong revenues, earnings and dividend payment over the past 5 years are most likely to continue their way to the top. I will also look at both companies’ payout and cash payout ratios. The idea is to make sure the company has enough cash and doesn’t only publish nice accounting numbers (EPS calculation has its flaws).
I aim, rather, at the high single digit to double digit dividend growers as time is on my side on this one. Imagine a company paying $1 in dividend per year and increasing their payout by 7% annually over the next 30 years. At retirement, that one dollar distribution will become $7.61 per share. This is the kind of money I’m looking for to retire!
One last note on dividend growth for older investors; even if you are 60 today, chances you will pass away after the age of 85. Therefore, you have a good 20 years in front of you to invest in lower yielding stocks, too!
Step #3 Add some Growth Potential
With a solid core portfolio, I will also try to add some growth potential to my holdings. I will not go all crazy with techno stocks like Facebook (FB) or Netflix (NFLX). I want to keep my portfolio 100% dividend paying stocks. I find these kinds of companies more reliable and easier to analyse! However, from time to time, there is an interesting catch with some additional risks.
Over the years, I bought companies like AAPL (before the split, in the $300), Seagate Technology (STX) (right after the flood) or Union Pacific (UNP) and CNI while the railroads were having problems a couple of years ago. These companies did not always stay in my portfolio for several years but brought some growth to my overall portfolio. At the moment, companies like Helmerich & Payne (HP) and Qualcomm (QCOM) could be interesting candidates. I also looked at Target (TG) but I think Amazon (AMZN) will destroy their business model.
Adding this growth aspect to my portfolio also means adding more volatility. This is why this can’t represent too much of my portfolio. It all comes down to one’s risk tolerance at this point.
Example of my Asset Allocation
I haven’t completed my buy list yet. Since I will receive the money somewhere between September and October, I still have plenty of time to determine which company will be part of my new portfolio. Since I’m Canadian, I will also include a few Canadian holdings, but I really think there are more opportunities on the U.S. market at the moment. I will use the Dividend Stocks Rock portfolio models to build my asset allocation. Here’s an example of what it looks like:
The DSR 100K Growth portfolio shows a total return of 61.56% since inception (October 1st, 2013) and beat its benchmark (the Vanguard Dividend Appreciation ETF – VIG) by 19.16% during this period. You can read more about my investment return in my portfolio section.
In the upcoming weeks, I will gradually build my watch list in order to be ready to invest when the time comes. As I am building my list, I’d be interested in knowing your favorite pick for 2017?
Disclaimer: I hold MMM, JNJ, GPC, CL, BLK, AAPL, DIS, CNI, UNP, HP, QCOM, AMZN in my Dividend Stocks Rock portfolios.