@bee, david - starting this here so as not to detract from VintageFreaks' thread.
I started my DG portfolio in order to generate a growing income stream to supplement my social security income in retirement. I was dismayed by the paltry income available from all of the dividend income ETF's and OEF's out there and thought that I could do better on my own and even avoid the expense fees they where charging. Just looking at the top-25 holdings in most of those funds it was easy to see that the income they were generating was more, often way more, than they were paying out to their shareholders by way of returns. I would increase my income even if I mimicked their portfolios and I saw little need for anything much beyond their top-25 picks. Call it the Buffett influence.
To be clear, all I'm concerned with is the growing income stream from my holdings. I don't compare my returns to the S&P 500 or any other benchmark other than my bank deposits year over year. OK, I kid a little. Every once and awhile I do peak at the returns of the dividend related funds that are out there and compare them to my own returns and I see that I am just fine without them with the added bonus of a bigger reserve bank roll. I posted my returns in an earlier this year MFO thread.
@bee - you asked about challenges. The biggest challenge was not so much in security selection but rather in having the patience and wherewithal to buy the securities only when they were on sale or at fair value. I don't have all of the background and knowledge to tell anyone what the fair value of any particular company is but there is plenty of info out there that can lend me a hand at getting close to a number. I'm not finding a lot of stocks today that fit in that mold today which is why I spend a lot of time sitting on my hands with excess cash I'd rather have working for me. I do however DRIP a number of my holdings.
Diversification amongst sectors is another issue. I'm diversified but I wouldn't call myself a model citizen. I hold more in Energy and REIT's than other sectors. I hold no Financial stocks at all which is more a reflection of the low dividends they provide along with their willingness to cut or eliminate a dividend at any time. That constitutes a cardinal sin in my DG church and that goes for any stock in any sector.
My last challenge was teaching myself to avoid the temptations of those sexy highest yields. They were tempting at first, BDC's (business development companies) and ETN's (exchange traded notes) chief among them, but too flighty and prone to dramatic swings both in returns and capital appreciation valuation. In addition I was never quite certain of their business model so I figured I should just stay away. If nothing else I wanted as much consistency as I could find rather than the biggest pile of cash. I do occasionally trade them but not very often.
Let me know if you have other questions.
Comments
Thanks for the lengthy response and creating a new thread. Hopefully other will add their thoughts on the topic.
AAII offers a nice newsletter and online membership that, as I recall, provide some guidance with regard to stock, Fund, and ETF valuations.
aaii.com/
Do you have any favorite primers for the newbie (like myself)? You previously mentioned contributors at The Motely Fool.
When you mention DRIP investing, do you accomplish this directly with the stock company or do you do this elsewhere?
After a quick search, I came across these resources for DRIP investing:
dripinvesting.org/default.htm
Article on Topic from Fool's School:
fool.com/School/DRIPs.htm
Cool; thanks.
You might want sometime to look at good old Barnes Group, B, never a huge payer but very steady, since forever.
ESPN (DIS) also worth a Bristol minute.
AAII is a very fine resource and organization which I have subscribed to off and on for a number of years. I have taken advantage of their stock evaluation course. Another valuable resource was the Dividend Investor newsletter (MDI) offered by M* and previously written/edited by Josh Peters. In a word 'fantastic' as it related to my purpose and intent at the birth of my selection and portfolio construction process. If you have access to a library with issues from inception I highly recommend it. However note: Mr. Peters has left M* and this newsletter has lost it's way. The prevailing theory is that M* was seeking to avoid the attention of being seen as advocating for an investment that may or may not have been in the best interests of an investor i.e. the whole fiduciary business. Thus what was a fine original thought newsletter became a regurgitation of their stock analysts babble which one could obtain without subscribing to the newsletter. Anyway these two resources were my primary birthing parents.
Honestly, if I was pressed to offer up the easiest, most understandable thought process I would advise the early editions of that M* newsletter, or tracing back David Van Knapp's dividend growth portfolio construction process *(at SeekingAlpha not Motley Fool) and finally picking up a copy of Miller Howards's "The Single Best Investment." I'll try to provide links when I have more time.
You mentioned Motley Fool above. I've looked at them but not for this purpose. I've never been happy with all the ad's and so forth on their website so I tend to avoid them actually. Nothing personal, just me.
DRIP's - I do this through my brokerage account at Fidelity. It's very, very easy to turn them on or off with a few clicks of the mouse. Some DG investors never drip but rather let the dividend/distribution cash accumulate up to some set amount which they then use to add to their most undervalued or intriguing prospect at the time. Others drip everything. It's highly variable but as mentioned very easy to do.
Edited to correct the name of the M* newsletter.
But just between you and me I do take a flyer at one low yield company around the first of every year if I think the numbers will work.
Similar to Mark, I find Seeking Alpha to be a good resource once you learn what to ignore and who to pay attention to.
But my biggest concern over DGI investing is similar to that for bonds: we've had a great couple of decades for dividend stocks, with low inflation and falling interest rates, but what happens if we get back to an era of high inflation? I'm not predicting that, but it seems to me that overweighting dividend stocks is betting on a certain macroeconomic scenario. I understand, btw, that your priority isn't beating the market but achieving a steady and growing income stream, so don't take this as a criticism, I'm just putting it out there for debate.
Rather than trying to trace David Van Knapp's (DVK) dividend growth portfolio back to the start in order to illustrate my reasons/reasoning for going down this road I located a more recent article where he follows a similar path in creation of a dividend growth ETF. You may find it here:
What Stocks Should I Put Into My Dividend Growth ETF?
http://seekingalpha.com/article/4026418-stocks-put-dividend-growth-etf?uprof=46&isDirectRoadblock=false
While the methodology is not as finely tuned as that used in creating the DG portfolio it's close enough for government work as they say. You will see that the ETF is not as keenly tuned to a 'growing' dividend stream and will also take advantage of capital appreciation where it might likely be available. In any case it's food for thought.
Another DVK article - "Dividend Newbies: 5 Tips For Avoiding Common Mistakes". The title says it all.
http://seekingalpha.com/article/3960581-dividend-newbies-5-tips-avoiding-common-mistakes?isDirectRoadblock=false&uprof=46
Lastly another DVK article on resources and tools - "My 10 Favorite Resources For Dividend Growth Investing". These should keep you busy for a while.
http://seekingalpha.com/article/3980171-10-favorite-resources-dividend-growth-investing?isDirectRoadblock=false&uprof=46
@expatsp - actually I did not do backtesting when creating my DG portfolio for a few reasons. One, I would not be looking to include as many holdings in mine as the available funds out there and I would also be cherry-picking my holdings. Two, I had a higher current dividend hurdle (min of 3%, self-imposed) to clear than the available funds (apparently any ol' % will do) are willing to include. Lastly, I figured ahead of time that I would probably not be as well diversified as the funds were. It just seemed like an apples to oranges comparison. Recall that capital appreciation is not my driving focus, rather it's a consistent and growing income stream.
To answer your second question with respect to the possibility of higher inflation down the road all I can say with any certainty is that my current "average" portfolio yield has been between 6-7.5% with a compound annual growth rate running between 8-12%. If inflation picks up to 2-3% I still have room to run. It beats the heck out of sticking my funds into CD's for now. As always I am willing to adjust as the facts and circumstance change.
Q1. Are you reinvesting dividends and if so, other than DRIP transactions (which I think would be free), do reinvestment transactions become problematic from a expense standpoint? I can imagine trading fees being a much larger (%) and more frequent cost (4X...12x a year) than the initial stock purchase.
Q2. Do you have any words of wisdom for "loss harvesting" for tax purposes? I am considering this strategy for a taxable account.
Q3. For the small investor, who's resources will be added to the strategy in "fits and starts",
what might be the best approach? How does one diversify this type of personal DG portfolio day one? One stock at a time (at 100 shares) or remain in cash until 10 or more stocks can be purchased on a single day?
I can imagine the initial cost of an individual DG Portfolio being many thousands of dollars:
(shares price x shares) X (trading fees) = AUM of Personal DG portfolio,
where, a mutual fund investor of a DG mutual fund, would be a factional owner of shares based on initial minimum purchase which could be as low as $250. Any thoughts?
Sorry if the links you provided hold the answer to these questions, I haven't read them yet.
Thanks again for your time.
If this is a subtle hint to only discuss mutual funds then please note that this thread is clearly listed as Off-topic and you are free to choose not to read it.
If your question was innocent then I would say that my pseudo-fund style is more about a growing income/dividend stream rather than a mere dividend fund. That stated I did find 2 articles relatively quickly regarding your specific question. The second reference also contains a T. Rowe Price offering.
1. http://www.investopedia.com/articles/investing/032216/vdigx-vs-veipx-comparing-two-vanguard-dividend-funds.asp
2. http://www.investopedia.com/articles/investing/031616/5-mutual-funds-dividend-investors-morningstar-vdigx-prdgx.asp
If you don't mind including dividend ETF's in your search try googling "comparing dividend ETF funds". I saw a quite extensive list doing just that.
And no, I don't invest in ETFs.
Regards,
Ted
A1. I DRIP some positions but not all. At first I did them all because I was trying to build up a stake. These days it's become more of a balancing act. I'll try to explain.
At any given time I hold roughly 25-30 positions in what I consider my core portfolio. I try to to maintain position size such that no one position becomes greater than 5% of the total. I am however willing to let winners run before I trim them back a bit. Not sell, trim. Those that are at the higher end of their 52-wk or historical highs are not likely to get dripped. Those that are at the lower end of their range are. I also hold some positions that reinvest their dividends at a reduced cost. Instant 1-5% discount or employer contribution if you like or maybe that should be employee contribution because these stocks are working for me. Anyway, these I also generally reinvest.
However, as you mentioned there are those pesky buy/sell transaction fees. None with DRIP of course but present with new or add-on positions. I try to buy in round lots of at least 100 shares at a time to minimize their effect. I've amazed myself at finding the patience to allow a cash stake to build up large enough for a purchase along those lines. Choosing to DRIP or not seems highly personal and the range runs from everything to nothing. I've never asked but when I see people buying 6 or 11 or 19 shares of something I have to wonder if their accounts let them trade for free. I don't have anywhere near Junkster's or Ted's money so that benefit doesn't apply to me.
A2. No I'm afraid I have no wisdom to impart other than losses are inevitable. I don't trade my positions all that often. Rarely if ever. I like to buy with the Buffett view of holding forever but I will step away if my original investment thesis changes. I try not to let the tax tail wag the dog or cloud my decisions for better or worse. Sorry I'm not much help here.
A3. Funny you should ask about the beginning or small investor with possible limited resources. I almost hate to keep referring you to DVK articles but he does such a fine job of writing and explaining that I don't think I can improve upon. One that might be of interest involves using SCHD (the ETF) as a proxy for a self made DG portfolio. He started this experiment primarily because his wife wasn't/isn't all that interested in managing investments and he's planning for the future when she may be ultimately responsible. That is here:
http://seekingalpha.com/article/3973227-first-year-schd-dividend-growth-investment?isDirectRoadblock=false&uprof=46
I don't know for sure but one may be able to trade this ETF at Schwab for free since it is a Schwab fund. I might even move my Scottrade accounts over to Schwab once I see how the TD Ameritrade buyout is going to affect them.
If you ultimately decide to employ this plan for your hard earned money don't feel like you need to do it in one big dump. I built mine up slowly over time by getting rid of 20 of 25 mutual funds that I could never seem to generate much in the way of consistent returns from. In retirement I felt that I would want something more dependable and stable. Yes, the total value of the portfolio will go down in a crash or correction or recession and so on BUT the dividends should continue to roll on in as the stocks regain their mojo. Time and time again that's what happens. I guess you have to buy into that and that's where security selection and dividend paying history become so important.