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The Constitution for the Dividend Portfolio
The original constitution for the Dividend Portfolio was written in 2008. It was slighlty modified in
2009 and again in 2010.
Here is the current version, as amended January 15, 2010. Click here to see the Dividend
Portfolio's results.
Goal:
The objective of the Dividend Portfolio is to generate a steadily increasing stream of
dividends paid by excellent, low-risk companies.
Broken down, the goal is to create and maintain a portfolio of dividend stocks:
• purchased at favorable prices;
• of companies with sound business models and solid financials;
• that consistently raise their dividends;
• that is reasonably diversified;
• that have a combined beginning yield of at least 3 percent;
• whose yield on cost steadily grows to 10 percent or more;
• whose dividends are regularly re-invested; and
• whose total return beats inflation over long periods of time.
Strategies to Attain the Goal:
• Use the current Top 40 Dividend Stocks as the Shopping List. The list may be modified
throughout the year by qualifying new stocks via the Easy-Rate™ system.
• Buy only stocks with “Fair” or better valuations, and use simple timing techniques to
improve the quality of buy/hold/sell decisions.
• All else equal, favor stocks whose most-recent dividend increases have been the
healthiest.
• Do not automatically re-invest dividends in the company that issued them. Rather, collect
the cash and re-invest when it accumulates to $1000. The best opportunity for re-investment
may be to purchase more of a stock already in the portfolio. But the best use may be to
purchase a totally new stock.
• Limit the number of stocks owned to about 10 to 15.
• Aim for well-roundedness in the portfolio. Diversify across sectors, industries,
geographies, and different ranges of yields and growth rates.
• Hold no more than 20 percent of the portfolio’s value in a single stock. If a position
exceeds 20 percent, sell the excess and re-deploy the proceeds. This helps not only to
increase the portfolio’s safety (fewer eggs in one basket), but it also often presents an
opportunity to re-invest the proceeds at a higher dividend yield or to increase the portfolio’s
diversity.
• Make opportunistic switches from one stock to another if such a swap will upgrade the
portfolio. The expected frequency of such exchanges is low. Reasons to make such swaps are
to improve (1) the portfolio’s yield, (2) its income growth potential, and/or (3) the security of its
income stream.
• Since the major focus is on dividends and not share prices, the portfolio will usually be
close to 100% invested in stocks. We won’t “sit out” bear markets so long as the dividend
stream is intact. Cash does not generate dividends.
• Be agnostic on position sizing. Investing an equal initial amount in each stock is fine.
Adjustments in proportion will occur as prices change and dividends are re-invested.
• Seriously consider selling any stock that underperforms the market in total returns (price
+ dividends) for three years running.
• Seriously consider selling any stock that cuts its dividend. It is hard to paint a dividend cut
as good news. A dividend cut often precedes other bad news.
• Conduct a thorough Portfolio Review twice per year.
• Investigate any holding immediately upon receiving news of significant changes impacting
the company, or if its dividend rises above 9 or 10 percent. (Example from 2008: I investigated
and then sold Bank of America when it purchased Merrill Lynch.)
• Review this constitution once per year and adjust it for changed circumstances, new
knowledge, and the like.
Don’t do the following:
• Use margin.
• Short stocks.
• Use options, futures, or other “derivative” investments.
• Invest in ETFs.
• Invest in tobacco companies. (This is personal to me—you may have your own ethical or
ideological boundaries).
• Use trailing sell-stops. Exception: If I have determined to sell a stock, and it is in a price
uptrend, I may use tight trailing sell-stops to “milk” any remaining capital gains out of the stock
before selling it.
The original constitution for the Dividend Portfolio was written in 2008. It was slighlty modified in
2009 and again in 2010.
Here is the current version, as amended January 15, 2010. Click here to see the Dividend
Portfolio's results.
Goal:
The objective of the Dividend Portfolio is to generate a steadily increasing stream of
dividends paid by excellent, low-risk companies.
Broken down, the goal is to create and maintain a portfolio of dividend stocks:
• purchased at favorable prices;
• of companies with sound business models and solid financials;
• that consistently raise their dividends;
• that is reasonably diversified;
• that have a combined beginning yield of at least 3 percent;
• whose yield on cost steadily grows to 10 percent or more;
• whose dividends are regularly re-invested; and
• whose total return beats inflation over long periods of time.
Strategies to Attain the Goal:
• Use the current Top 40 Dividend Stocks as the Shopping List. The list may be modified
throughout the year by qualifying new stocks via the Easy-Rate™ system.
• Buy only stocks with “Fair” or better valuations, and use simple timing techniques to
improve the quality of buy/hold/sell decisions.
• All else equal, favor stocks whose most-recent dividend increases have been the
healthiest.
• Do not automatically re-invest dividends in the company that issued them. Rather, collect
the cash and re-invest when it accumulates to $1000. The best opportunity for re-investment
may be to purchase more of a stock already in the portfolio. But the best use may be to
purchase a totally new stock.
• Limit the number of stocks owned to about 10 to 15.
• Aim for well-roundedness in the portfolio. Diversify across sectors, industries,
geographies, and different ranges of yields and growth rates.
• Hold no more than 20 percent of the portfolio’s value in a single stock. If a position
exceeds 20 percent, sell the excess and re-deploy the proceeds. This helps not only to
increase the portfolio’s safety (fewer eggs in one basket), but it also often presents an
opportunity to re-invest the proceeds at a higher dividend yield or to increase the portfolio’s
diversity.
• Make opportunistic switches from one stock to another if such a swap will upgrade the
portfolio. The expected frequency of such exchanges is low. Reasons to make such swaps are
to improve (1) the portfolio’s yield, (2) its income growth potential, and/or (3) the security of its
income stream.
• Since the major focus is on dividends and not share prices, the portfolio will usually be
close to 100% invested in stocks. We won’t “sit out” bear markets so long as the dividend
stream is intact. Cash does not generate dividends.
• Be agnostic on position sizing. Investing an equal initial amount in each stock is fine.
Adjustments in proportion will occur as prices change and dividends are re-invested.
• Seriously consider selling any stock that underperforms the market in total returns (price
+ dividends) for three years running.
• Seriously consider selling any stock that cuts its dividend. It is hard to paint a dividend cut
as good news. A dividend cut often precedes other bad news.
• Conduct a thorough Portfolio Review twice per year.
• Investigate any holding immediately upon receiving news of significant changes impacting
the company, or if its dividend rises above 9 or 10 percent. (Example from 2008: I investigated
and then sold Bank of America when it purchased Merrill Lynch.)
• Review this constitution once per year and adjust it for changed circumstances, new
knowledge, and the like.
Don’t do the following:
• Use margin.
• Short stocks.
• Use options, futures, or other “derivative” investments.
• Invest in ETFs.
• Invest in tobacco companies. (This is personal to me—you may have your own ethical or
ideological boundaries).
• Use trailing sell-stops. Exception: If I have determined to sell a stock, and it is in a price
uptrend, I may use tight trailing sell-stops to “milk” any remaining capital gains out of the stock
before selling it.
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