Contribute to my investment strategy

[Luck_Club]

First of all thanks for helping...Below is the beginning of my written investment strategy for a primarily dividend producing portfolio. I have no interest in total market return type investments. Think of me like Cuba Gooding speaking to Jerry McGuire "show me the money". So this means individual bonds, treasuries/CD's, and dividend producing stocks, MLP's and REITS.

I've come to realize I'm fairly risk adverse or conservative in my investing philosophy. In theory I'm ok with the value going down, in practice, I 'd rather avoid large losses of principle. I feel more comfortable monitoring and analyzing balance sheets and ratios of individual companies verses blindly buying the total market or sector.

So if you can contribute to my what to look for and what to avoid list it would be greatly appreciated.

Investment strategy & Plan for portfolio Management​

1) At all times maintain a minimum of 10 investments and no more than 20
2) Ideally diversified across industrial sectors
3) Need to provide cash flow
4) No negative equity
5) Avoid total market investments

When to buy​

1) The company has a good dividend yield at least 2 times 10 year treasuries rate
2) The dividend payout ratio is under 50% of Total Cash Flow From Operating Activities (yahoo income statement)
3) Positive equity with a low PE and price to book

When to sell/reduce exposure​

1) Long term prospects diminish
2) Price appreciates 30% or more take that percentage off the table
3) Yield drops below 10 year treasuries hopefully from price appreciation
4) Tangible Equity becomes negative (goodwill backed out)

When to hold​

1) Dividend yield is between 2X and 1X 10 year Treasuries
2) Dividend payout ratio is still acceptable
3) No negative equity

 

[Sunset]

When to sell/reduce exposure

5) Before the CEO is charged with a crime, or before accounting fraud is detected.

Good luck..........

 

[OldShooter]

Wow. I'm not going to take all that on, but:

Ten positions isn't even close to being a diversified portfolio. Arguments for diversification start at maybe 60 stocks diversified across sectors and run beyond saying 100 stocks are required. If you're looking for home runs, then buy only a few stocks so a successful investment can have a meaningful impact on your numbers. If you're looking to diversify away individual stock risk ("risk adverse or conservative"), then quadruple your numbers at least.

You have a lot of rules. Where did they come from? Have you validated each one with careful back testing? Many mean academic lifetimes have been spent trying to find the right rules. The best AFIK that has come out is the Fama/French three factor model. You would do well to study that one a little bit.

The hitch here is that all of the information you are using for rules is also available to everyone else in the market. So why, when you buy or sell a stock wouldn't you expect that its prospects are already reflected in the price? There are literally tens of thousands of stock-pickers out there looking at exactly what you're looking at but with far better historical and market information that you will ever have. Are you smarter than they are? Why? See also: "Efficient Market Hypothesis," supplemented with a dose of behavioral economics. Eugene Fama and Richard Thaler respectively.

Repeated statistical and academic study has shown that professional stock pickers consistently fail to beat their benchmarks. Do you have some secret sauce that is not available to them?

Sorry to be negative, but there are mountains of data that say that this type of approach is unlikely to succeed.

 

[Red Badger]

Wow. I'm not going to take all that on, but:

Ten positions isn't even close to being a diversified portfolio. Arguments for diversification start at maybe 60 stocks diversified across sectors and run beyond saying 100 stocks are required. If you're looking for home runs, then buy only a few stocks so a successful investment can have a meaningful impact on your numbers. If you're looking to diversify away individual stock risk ("risk adverse or conservative"), then quadruple your numbers at least.

You have a lot of rules. Where did they come from? Have you validated each one with careful back testing? Many mean academic lifetimes have been spent trying to find the right rules. The best AFIK that has come out is the Fama/French three factor model. You would do well to study that one a little bit.

The hitch here is that all of the information you are using for rules is also available to everyone else in the market. So why, when you buy or sell a stock wouldn't you expect that its prospects are already reflected in the price? There are literally tens of thousands of stock-pickers out there looking at exactly what you're looking at but with far better historical and market information that you will ever have. Are you smarter than they are? Why? See also: "Efficient Market Hypothesis," supplemented with a dose of behavioral economics. Eugene Fama and Richard Thaler respectively.

Repeated statistical and academic study has shown that professional stock pickers consistently fail to beat their benchmarks. Do you have some secret sauce that is not available to them?

Sorry to be negative, but there are mountains of data that say that this type of approach is unlikely to succeed.

^^^^^This.

That is why many investors invest in low cost, broad/total market index funds and hold near forever. Most stock pickers and market timers get their clocks cleaned - most, not all.

I'll stick with Warren Buffet's proposed plan if his wife becomes a widow. It's covered in the above paragraph.... Broad based, low fee index fund.

YMMV!

 

[CyclingInvestor]

MLPs and REITs will rarely meet some of your criteria due to the heavy impact of depreciation on their book values, and their need to pay out 90% of their net income to shareholders / unitholders.

Also, even the strongest MLPs / REITs / pipeline CCorps often have dividend yields above 2X the 10 year Treasury rate.

 

[Bamaman]

ETF's and Mutual Funds are already diversified in segments of the market.

I have no desire to deal with more than 5 accounts excluding cash accounts, etc. If I had so many, the chances are I would seldom sit down and go over each accounts' performance.

I try not to watch my specific portfolio but every 2-3 months. It's bad enough seeing the stock market results day by day on television right now.

 

[gstillson]

I don't have a strategy really, except I try to find real bargains and oversold stocks (good stocks that have sold off because of the general market selling off and not because of problems).

Worked in 2018 fairly well, 143% return.

So far in 2019 I have made about 7% return but that is pretty much just riding this rally from the end of year sell off.

 

[steelyman]

ETF's and Mutual Funds are already diversified in segments of the market.

I have no desire to deal with more than 5 accounts excluding cash accounts, etc. If I had so many, the chances are I would seldom sit down and go over each accounts' performance.

I try not to watch my specific portfolio but every 2-3 months. It's bad enough seeing the stock market results day by day on television right now.

Hear, hear. Or is it “read, read”? I have 4 retirement accounts at 3 firms, housed where they are for a reason. Traditional IRA and Roth 403(b) at Fidelity, Roth IRA at Vanguard, and 457 at T. Rowe Price.

I hope to whittle that down further over time, it’s much easier to track and allocate. In 2018 I consolidated a Roth IRA at Fidelity into the existing Vanguard one (for a fee but worth getting rid of the redundancy).

 

[ERD50]

Two options:

A) "what to avoid"? - Every single thing you posted.

B) Go for it! Count on your screen name for luck! Do not change your screen name to anything with the letters 'b" "o" or "h" in it.

Be sure to publish your trades in real time. You should have a 50-50 chance of beating the market.

-ERD50

 

[Luck_Club]

Basically trying to build a dividend portfolio, and need rules to remove emotion from re-balancing decisions. As mentioned in my opening statement. not a big fan of ETF's. Found this article which articulates the reasons why.

https://seekingalpha.com/article/41...f-manage-portfolio-individual-dividend-stocks

to summarize:
You buy the good with the bad
you achieve lower overall yield
your fee though low can be a significant portion of your return

 

[OldShooter]

Basically trying to build a dividend portfolio, and need rules to remove emotion from re-balancing decisions.

Re dividend investing, there have been many threads here debating the wisdom of this idea. Here is one of the true investment gurus discussing the subject: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

As mentioned in my opening statement. not a big fan of ETF's. Found this article which articulates the reasons why.

https://seekingalpha.com/article/41...f-manage-portfolio-individual-dividend-stocks

to summarize:
You buy the good with the bad
you achieve lower overall yield
your fee though low can be a significant portion of your return

@Luck_Club, in a minute or two you can probably find 10,000 articles saying same thing. This is an extremely popular argument from authors whose livelihoods are hurt by people who have figured out that passive investing is the winning strategy -- like the author of that piece you have linked to. If you do your search with a confirmation bias hat on, you will find even more of these. (https://en.wikipedia.org/wiki/Confirmation_bias)

The first point is correct but it ignores the fact that "good" and bad" can only be determined in the rear view mirror.

Second, lower overall yield, is statistically untrue. S&P publishes semiannual surveys ("S&P SPIVA reports) that always show the same thing: Over longer periods of time (5+years) only a tiny fraction of actively-managed mutual funds outperform their index benchmarks. They also publish a companion report on "Manager Persistence" that repeatedly shows that it is impossible to identify the winners ahead of time

Third, "significant" fees, is fading from the radar even among the critics of passive investing because competition has driven fees to near zero, not that they were ever very high.
​

(BTW, be very careful if you're reading Seeking Alpha. It is a "crowdsourced" site. They originate nothing. Authors can and do have ulterior motives and the quality of the pieces is very uneven. I don't bother to read it for that reason. The information is simply untrustworthy.)

(BTW #2, An ETF is just a mutual fund that trades in a different way and has a few negligible technical differences from a traditional mutual fund. It is a common misunderstanding that "ETF" is a synonym for "index fund" or "passive fund." There are many ETFs that are actively managed.)

 

[target2019]

FYI, a bunch of resources for DGI are mentioned on this page. I have no affiliation with the blog, just mentioning it as starting point for further research on DGI.
https://dgiforthediy.com/resources/

 

[pb4uski]

What do you mean by negative equity?

A dividend yield of 2-10 times the 10 year treaury (which is 3.45%) means 7-35% so that doesn't make any sense at all.

High dividend yield generally means that the company doesn't have good opportunities to invest capital at a return that is higher than their cost of capital so they chose to return it to shareholders.... why would one want to invest in such companies?

10-20 tickers is way too low to be adequately diversified... you say you are conservative but you are taking on a boatload of diversification risk that far exceeds the benefits.

 

[pb4uski]

.... You buy the good with the bad ...

That point might make sense if one could consistently identify the good and the bad ahead of time.... but it is well proven that you can't... so buy everything and the history is that the good exceeds the bad in the long run.

 

[gstillson]

You might try looking at creating a covered call dividend portfolio in Robinhood. With no commissions, you could set up maybe 100 of these and have the diversity you seek plus the yield.

With covered calls you could increase the yield on a stock from the 3% to 7% range of the dividend to something like 15% to 25% depending on the strike and downside protection you seek.

It would take some work to set up but I could see it being attractive. I would set it up to make money even if the market drops 10% and have a max return of about 20% if the market stays flat or goes up. I wouldn't do this with all my money, but perhaps with 50% of my invested funds. 30% would be just in index funds in case the DOW goes to 40,000 and 20% would be in cash in case the DOW goes to 4,000.

edit: Thinking on it a bit more, you kind of need a rather large portfolio to do this, even in RobinHood. For a stock trading at $70, you need $7000 to just sell one covered call (a bit less if you subtract the call premium). I guess you would need $500,000 to set up 100 of these which is way more than I trust Robinhood.

 

[target2019]

Basically trying to build a dividend portfolio, and need rules to remove emotion from re-balancing decisions. As mentioned in my opening statement. not a big fan of ETF's. Found this article which articulates the reasons why.

https://seekingalpha.com/article/41...f-manage-portfolio-individual-dividend-stocks

to summarize:
You buy the good with the bad
you achieve lower overall yield
your fee though low can be a significant portion of your return

To summarize dividend stocks:
The good can go bad
The dividend can be trimmed or eliminated
Buying and selling costs are a drag.
You spend time analyzing and managing, and this has impact on your available time.

But I do get "it" and participate in the challenge with something like 12% of AA.

 

[gcgang]

Buy good stocks that are going to go up, then sell. If they're not going to go up, don't buy them.

 

[Luck_Club]

You might try looking at creating a covered call dividend portfolio in Robinhood. With no commissions, you could set up maybe 100 of these and have the diversity you seek plus the yield.

With covered calls you could increase the yield on a stock from the 3% to 7% range of the dividend to something like 15% to 25% depending on the strike and downside protection you seek.

It would take some work to set up but I could see it being attractive. I would set it up to make money even if the market drops 10% and have a max return of about 20% if the market stays flat or goes up. I wouldn't do this with all my money, but perhaps with 50% of my invested funds. 30% would be just in index funds in case the DOW goes to 40,000 and 20% would be in cash in case the DOW goes to 4,000.

edit: Thinking on it a bit more, you kind of need a rather large portfolio to do this, even in RobinHood. For a stock trading at $70, you need $7000 to just sell one covered call (a bit less if you subtract the call premium). I guess you would need $500,000 to set up 100 of these which is way more than I trust Robinhood.

I'm not comfortable with the covered call mechanics, but it is on my to do list to become familiar with it. I do use limit orders when I buy. Which I have learned usually gets me in at about 1% lower than a straight market buy. Stop losses on the other hand haven't worked out so well.

I do realize this investment strategy philosophy requires me to really understand the companies I'm buying. I don't mind doing the work, even though that may change with time.

I'm beginning to figure out what to buy at this point.

What to Buy
1) Large Cap companies 60% (thinking dividend aristocrats diversified among several sectors, and preferred shares)
2) Small Cap companies 10% (thinking mutual or ETF for this)
3) International 20% (definitely thinking mutual/ETF)
4) TBILLS/MM/Cash 10%

Most of my working career I plowed my savings into investment real estate, using IRA's as more of a way to avoid taxes. Now I'm trying to focus on the "marketable securities world", hence the guiding document. Been reading a bunch of books, blogs and this site.

 

[Luck_Club]

What do you mean by negative equity?

A dividend yield of 2-10 times the 10 year treaury (which is 3.45%) means 7-35% so that doesn't make any sense at all.

High dividend yield generally means that the company doesn't have good opportunities to invest capital at a return that is higher than their cost of capital so they chose to return it to shareholders.... why would one want to invest in such companies?

10-20 tickers is way too low to be adequately diversified... you say you are conservative but you are taking on a boatload of diversification risk that far exceeds the benefits.

Good point. 7 is hard to find given my other criteria. Maybe I should use a % above the 10 year treasury instead. ie 2% points higher than a 10 year treasury, 5.45% or higher.

I agree high dividends do not reflect growth, but stable earnings, which is what I am looking for in an investment opportunity for most of my money.

 

[OldShooter]

@Luck_Club, did you post simply looking for confirmation that your scheme made sense? IMO you are not getting that. I just scrolled back through the responses and don't see a single one that is encouraging. If you're not interested in anything but support for your effort-intensive, unlikely-to-work (the consensus of posts, I think) scheme please just say so and we won't waste any more time on this thread.

 

[Luck_Club]

@Luck_Club, did you post simply looking for confirmation that your scheme made sense? IMO you are not getting that. I just scrolled back through the responses and don't see a single one that is encouraging. If you're not interested in anything but support for your effort-intensive, unlikely-to-work (the consensus of posts, I think) scheme please just say so and we won't waste any more time on this thread.

Actually no I wasn't looking for support of my strategy, I wasn't looking to be sold on buy the market either.
Those who subscribe to that investment philosophy usual dominate the discussions whenever questions like this arise. It's not that passive investing isn't a great way to invest, it is just a strategy, that for my own reasons, I don't want to follow. I also don't want to invest in physical gold, commodity futures, antique art, or collectible cars though some day I may change my mind.

What I was looking for were suggestions from other investors who use an individual stock and or dividend investing strategy on how I could improve my written plan. Which key ratios should be monitored to A) separate the wheat from the chafe so to speak. B) Are my criteria way off base for what I'm trying to accomplish (as pointed out by PB4uski).

 

[aja8888]

What I was looking for were suggestions from other investors who use an individual stock and or dividend investing strategy on how I could improve my written plan. Which key ratios should be monitored to A) separate the wheat from the chafe so to speak. B) Are my criteria way off base for what I'm trying to accomplish (as pointed out by PB4uski).

You could buy select preferred stocks if you want to pocket some dividends that will beat most common shares. There is a thread run by Mulligan here that has quite a lot of information on how to do this somewhat successfully.

 

[target2019]

What I was looking for were suggestions from other investors who use an individual stock and or dividend investing strategy on how I could improve my written plan. Which key ratios should be monitored to A) separate the wheat from the chafe so to speak. B) Are my criteria way off base for what I'm trying to accomplish (as pointed out by PB4uski).

Some framework can be found here:
https://www.cfainstitute.org/-/medi...FjABegQIBBAB&usg=AOvVaw2FpjQEXtGBJ1M_eKALLxxi

I use VWELX as a benchmark for results.

 

[Luck_Club]

You could buy select preferred stocks if you want to pocket some dividends that will beat most common shares. There is a thread run by Mulligan here that has quite a lot of information on how to do this somewhat successfully.

Thanks. I've read through some of mulligans thread, and have even bought a couple of small position preferred shares. they are more difficult to find. I had started looking hear then flip to other sites to research further.

https://www.dividendinvestor.com/preferred-stocks/

Many of them pass the yield test but fail other criteria. Still preferred shares will be a part of the portfolio.

MLP's, LP's and REITS also will be a part, just not sure how much since they need to clear a 9% higher yield than qualified dividends to make sense from a tax perspective.

 

[VanWinkle]

You might try looking at creating a covered call dividend portfolio in Robinhood. With no commissions, you could set up maybe 100 of these and have the diversity you seek plus the yield.

With covered calls you could increase the yield on a stock from the 3% to 7% range of the dividend to something like 15% to 25% depending on the strike and downside protection you seek.

It would take some work to set up but I could see it being attractive. I would set it up to make money even if the market drops 10% and have a max return of about 20% if the market stays flat or goes up. I wouldn't do this with all my money, but perhaps with 50% of my invested funds. 30% would be just in index funds in case the DOW goes to 40,000 and 20% would be in cash in case the DOW goes to 4,000.

edit: Thinking on it a bit more, you kind of need a rather large portfolio to do this, even in RobinHood. For a stock trading at $70, you need $7000 to just sell one covered call (a bit less if you subtract the call premium). I guess you would need $500,000 to set up 100 of these which is way more than I trust Robinhood.

If I was knocking down 143% in 2018 like you, I wouldn't share my "secrets" with just anybody on the internet. I would be selling my own investment letter and getting the Internet folks to send me money in case I didn't hit the 143% next year.

Best,

VW