Year 2009 Dividend Portfolio Goals

This is the first time I will be making my investing goals public. In addition, I also plan to provide quarterly reviews on how I am making progress. My dividend portfolio consists of two investments buckets. One bucket consists of dividend stocks, and the second bucket consists of dividend ETFs/CEFs. Since both of them provide dividend cash flow, I review both in combination (and not standalone). The standalone analysis is used during the asset allocation and/or diversification analysis.

In order to establish my goals for 2009, first I will present the current state of my dividend portfolio. It will form the baseline on which I will continue to build my portfolio. The table above shows my existing 2008 year end portfolio parameters. The portfolio has:

(1) $1358 per year as dividend cash flow;

(2) Yield on my original investments (YOC) is 5.17%;

(3) Lost 19% of the value (relative to loss of 38.61% in S&P500); and

(4) Personal rate of return (XIRR) as -9.0%

In the prevailing economic environment, companies are showing reduced earning, paring down growth plans and expenditure, and slashing and suspending dividends. Not only that many companies are not able to look forward and predict their own earning expectations. To me, not able to put an expectation is a sign that management is either not able to plan (clueless?) or not sharing the true state of their business. I do not see any economic drivers that, at least in first half of 2009, will make market go up. I anticipate that Year 2009 will continue to show pessimism with occasional burst of optimism. As dividend based investor, I can invest in some really good companies at bargain prices.

In first few initial years, my focus is on accumulation based on divided cash flow. Therefore, my dividend cash flow driven target is as follows:

(1) Generate dividend cash flow of $3000 per year (currently at $1358).

(2) YOC will get affected because it will be based on my initial buy price. One argument is markets would drag down the price, while the other argument is that demand-driven dividend companies would be at higher price. Additionally, I will need to balance initial yield vs. risk to dividends. With this contrasting perspective, I am anticipating my YOC will drop down below 5.0%. I will target it not to drop below 4.5%.

(3) XIRR and value is something that I keep track for relative comparison. My preference is to keep both parameters on the positive side and keep my portfolio value better than S&P500. Unfortunately, I do not have any direct control over it. I will invest in good companies and hope that Mr. Market will do the rest.

In addition to these tangible targets, I have few other intangible areas of portfolio management that I need to continue to work on. These are:

(1) Manage asset allocation and diversification from risk-to-dividend viewpoint; and

(2) Invest in international dividend paying companies.

For me, the challenge in these targets is to be able to provide sufficient funding and balancing dividend risk versus initial yield.

Dividend Tree Investment Process

The purpose of my starting this blog spot is to share my journey in achieving my investment goals. In the process, I expect to continue my learning process by discussing contrasting views, and hopefully make smaller mistakes. Continuing with my motto of keeping things simple, this page describes my seven step investment process in a broader context. I foresee that over a period of time, this page will act as index page for my complete investment process. continue reading rest of the article….

Reflecting on Investment Year 2008

Reflecting back on Year 2008, I think it will go down in history as a very significant turning point in the economy of United States. I also think that, due to events in Year 2008, other developed and emerging economics will evolve in different way. By different way I mean with reference to how it interacts with US economy. For the last few decades US economy was the engine of growth for world economy. Moving forward, this status will be challenged depending upon how US policy makers deal with the aftermath of events in 2008. While US business environment is still very much entrepreneurial, it remains to be seen how it will adapt to the new economic environment. History shows it has always adapted. Time will tell if it does this time also? By no means I am professing dooms day scenario, all I am saying is things will be different than what/how it used to be. How different, I do not know.

On the subject of investment performance, blogosphere is filled with differing opinions, views, solutions, rants, etc. Cribbing about economy and blaming financial community will not give me a good portfolio performance. We all make mistakes. The key is learning from our past mistakes and adapting. I believe what individual investors like me need to do is look at their own investment strategy and processes, put it in the context of current state of economy, evaluate against your goals, identify shortcomings, and adapt accordingly. Having said this, I spent some time measuring my dividend portfolio performance against my objective. Here I am discussing few important ones that I believe has significant impact on my dividend portfolio.

(1) Continuing to Stick with My Investing Process

Year 2008 was a very good test case to show me that my investing process works for me. It continues to suit my needs, my risk profile, and my long-term objectives. All of my performance metrics (such as dividend cash flow, yield on cost, annualized XIRR, and portfolio value) continue to do relatively better than my S&P500 benchmark. Year 2008 did show few kinks in my investment process which I am going to address in year 2009. The two significant issues were (1) lack of appropriate risk metrics; and (2) continued changes in market whacking my asset allocation.

(2) Risk Management should be tied to Objectives

The general off-the-shelf prescription of using diversification and asset allocation for portfolio risk management is becoming a cliché. Year 2008 showed that for individual investors perhaps none of them works. For my dividend portfolio, the primary objective is to generate increasing passive cash flow. With all the dividend freezes, suspension, and cuts, I realized the need for appropriate metrics for measuring risk for dividend cash flow. I am introducing the limit that dividends from a given company should not exceed 5% of the total portfolio dividends.

(3) Asset Allocation will be Effective only with Rebalancing

Establishing the risk management metrics for the portfolio is only a first step. It is necessary to also identify the execution method. So far my approach was to stop investing in a given stock after I reached limits of my allocation metrics. However, 2008 showed me that it is important to sell partial positions to rebalance rather than stopping investments. Sell the partial position and use the money to invest in other opportunity on waiting list. However, this is contrary to long term philosophy of buy and hold. I am still pondering what is appropriate for my dividend portfolio. Please leave your views or suggestions in comments section as to how it should be managed for dividend-based portfolio.

(4) Remove an Apple Gone Bad from the Basket

I should be willing to sell a stock if it does not meet my buying objective or when its fundamental position has changed. Like a rotten apple spoils the whole basket, one stock could be a drag on your portfolio performance. Buy and hold should apply only until the stock is meeting its objective in the portfolio. I sold Citigroup – dividend cuts, worsening position, new management, and management appears clueless. I removed Bank of America from dividend portfolio (dividend cuts) and moved to value portfolio (continuity in management team, positioning for long-term growth, and management taking steps).

(5) Continue to Watch CNBC (and Mad Money)

Watching CNBC has a great entertainment value. It is really fun to watch analyst after analyst coming and creating sky-is-falling scenarios (and offering solutions). Additionally, if interpreted with a sane mind, it tells you exactly what not to do. Do not panic, they are paid to create these scenarios.

The above points are the ones which I believe has/will impact my portfolio management process. These learning are for my process and may not be same for others or may not be applicable to others. If you have any other unique learning or what changes you made to you process, please send me via comments section or email at

My Investment Buckets – An Overview

My investing style is very much objective driven and I tend to follow the systemic approach. Whenever I think about my investments, I tend to look at from the full portfolio investments perspective. I believe in continuous evolution, and hence I make changes as I learn more about any aspects of investing.

I follow combination of active and passive investment process. All of my retirement investments use active investments, in the sense that they use mutual funds and bonds as investment vehicles. Although I am not a fan of mutual funds, I do not have any control on the choice of the funds in the 401(K) plan. It runs on auto-pilot and hence, I do not plan to discuss this aspect of my investment on this blog spot. Outside of my retirement investments, I have three investment portfolios which are described below:

Portfolio 1: Index-Based Exchange Traded Funds (30%)

The objective of this first portfolio is to replicate the market performance. I am currently invested in three

Index ETFs viz. SPY, EEM, and EPI. My target percentage allocation for Index ETFs is 30% of my portfolio investments. I also use S&P500 as the benchmark for all of my investments.

Portfolio 2: Opportunity Portfolio (20%)

This second portfolio is sub-divided into two groups.

  • Value-focused stocks (10%): The objective here is to invest in companies which I believe are undergoing short-term difficulties but are worthy of long term investment. Limiting myself to 10% helps me reduce the risk of over exposure in risky stocks.
  • Asset Allocation ETFs (10%): The investment is this sub groups gives me room for investing in areas which I am not familiar with and hence capture the full domain. Here, it is not necessary to look for dividend based opportunities. It helps in diversifying across one particular category without attempting the look for a unique opportunity.

Portfolio 3: Dividend-Focused Portfolio (50%)

The third portfolio is allocated to income producing dividend-based investments. The objective of this portfolio is to generate increasing passive cash flow and long-term capital appreciation. The total target allocation is 50% of my portfolio investments. It is sub-divided into two groups.

  • Dividend-focused stocks (35%): The objective in this sub-group is to invest in individual stocks/companies that provide consistently growing dividends.
  • Dividend ETFs/CEFs (15%): The objective for this sub-group is to capture the diversification benefits of dividend-based stocks.

Majority of the discussion on this blog spot will be on my dividend-focused portfolio. Depending upon the relevance of a given topic or investment vehicle, occasionally, I may also discuss about my other two portfolio investments.

Market Collision affecting Dividend Investors – Concluding Part

The third theme in the El-Erian’s market collision commentary is the money flow due to sovereign wealth funds. As per an article on Wikipedia, the top 20 sovereign wealth funds have a total of approximately 2.7 trillion dollars (and up to 3.3 trillions including all SWFs). A major portion of this money, if not all, is invested in safest and most liquid US government treasuries. This is a very large amount of capital and depending upon how it is deployed it can create disruption in world markets. As per author, investors need to understand and watch where this SWF money is flowing. In their quest for higher returns, it is likely that (1) the money will flow in emerging economies; and/or (2) money may be deployed in well know companies with strong footholds in the multiple markets. Unfortunately, this theme does not have a direct bearing on dividend focused investing. This again brings us to the same observation that revenue growth is most likely going to come from emerging markets. Being a long term dividend investors, we will need to figure out how to position ourselves to harvest this dividend for next 25 to 30 years.

To Summarize……

Reflecting back on all three major themes (including Part I and Part II), the message from this book is:

  • Risk management is a must. In my dividend portfolio, the risk to dividend (or passive cash flow) is something that I must take into account. I must provide myself a mechanism to measure this risk (infrastructure!) in my dividend portfolio.
  • I need to position myself and invest in emerging markets. All of the existing S&P500 dividend aristocrats started raising dividends in 1970s and rode at the back of US economic growth. Similarly, if I can sow dividend seeds in emerging markets now, I can possibly ride the growth story. The challenge is to find the right investment vehicles from a small individual investor perspective.
  • The asset allocation model in this book is not oriented towards individual investors. But if I understand the fundamental basis on which it is build, I believe it will provide me good guideline to frame my individual portfolio.

I believe the book was worth a read for these three messages alone. Now the challenge for me is to see, if over a period of time my portfolio reflects these themes. We will see how it goes…

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