Year 2009 was the first time that I made my goals public. It has been a truly a roller coaster ride. The year started with equity markets going down steeply, and then it came back up quite significantly. Throughout the year I continued to add good quality dividend growth stocks in my portfolio. So how did my dividend portfolio perform with reference to my goals set at begin of 2009? The table below shows the summary of parameters at end of year 2009. The portfolio now has:

(1)  Dividend Cash flow is $2221 (2008: $1358, Target: $3000);

While I continued to increase year-over-year dividends, I missed my goal by large margin. The primary reason I missed my goal is desire to maintain asset allocation and valuations. Many of the stocks that I would like to buy have had significant run ups and hence the valuations did not justify buying them. In the beginning of 2009, when I had identified my goals, I had not anticipated this level of change in the market pricing. For year 2010, I have set my dividend cash flow goals at $3200.

(2)  Yield on my original investments, YOC, is 4.18% (2008: 5.17%, Target: more than 4.5%);

The yield of my original investments dropped almost by 1%. Here also the observations remain the same, my YOC dropped far greater than my goal to remain above 4.5%. This is again the reflection of continued increase in market price of the stocks I had been buying. However, the positive aspect is my dividend portfolio gives me 4.18% cash which is far greater than any high yield MMA account. For year 2010, I am not setting any target, only because it will remain fluid.

(3) Year-to-date portfolio gained 34.72% in value (Target: more than S&P500, +20.25% for S&P500);

Along with the market increase, my portfolio also had a significant increase in value. My life-to-date is aged 3.5 years. The life-to-date portfolio went back to the positive side and is now at +15.72% in value compared to original cost. One of the draw back of this calculation is that it does include the time factor. It is simply based on original value.

(4) Personal rate of return, XIRR, stands at +38% (2008: -9.0%).

I compute XIRR to keep track of my personalized rate of return. The beauty of this is the inclusion of time factor. The overall life-to-date portfolio XIRR was +38%. In addition, I also keep track of XIRR for individual securities so that I know which one gives me better rate of return.

2009 Year End Portfolio Update

In addition to these tangible targets, I had few other intangible areas of portfolio management that I needed to continue to work on. How did I do in these?

1. Manage asset allocation and diversification from risk-to-dividend viewpoint: I now have desired level of asset allocation and diversification. There are few bad ones like IGR and IGD that I need to weed out of my portfolio
2. Invest in international dividend paying companies: Here also, I now have started investing in international companies. As of today, my targets have been for emerging market equity (5%, uses ETF) and developed market equity (10%, uses individual stocks). I plan on slowly increasing my allocation in year 2010. I do not know what should the increased target but will continue to evaluate. I will update during my quarterly risk analysis.

Last year, I had anticipated that the challenges I would face would be (1) provide sufficient funding; and (2) Balancing dividend risk versus initial yield. In turned out, funding was not a problem. However, the continued increase in market price affected the initial yield.

This year I do not anticipate funding as an issue. I will have enough cash available to reach my 2010 dividend goals. The challenge would be the valuation, initial yields, and number of stocks in my portfolio. I believe I am already at the high end of my comfort level. As an individual, I think holding 32 securities is quite a bit of work. So if none of my existing stocks are in attractive valuations, I would have additional challenge to figure out how to keep less number of stocks. That leaves room to think, what the number of stocks an individual should hold in their portfolios? Let me know what do you think?

In my investment process, I have mentioned about my 2020 dividend cash flow goals. I am targeting to achieve a dividend-based cash flow of $30,000 by year end 2020. In this post, I am discussing a back-of-envelope empirical exercise to demonstrate the feasibility of achieving this goal.

At end of year 2008 the dividend champion list has 128 companies. The annual dividends that these companies pay range from $2.80 to $0.20. The average dividend for all of 128 companies is $1.17 and the average price is $35.71. In addition, there are 75 companies that pay at least pay $1 annual dividend. The average dividend of these 75 companies is $1.53 annualized.

Let us assume we invest in 50 companies that will pay at a minimum $1 annual dividend. This is just an assumption for empirical calculation and has no basis.

· with my end goal of $30000, we will have to buy 600 shares per stock [30000/50].

· total funds needed = [50*600*$35.71] = $1,071,419 i.e. we can have this cash flow today with one million dollar.

Now let us do empirical optimization and make it simple.

Looking at dividend champion list, the average dividend for 75 companies (with at least $1 dividend) is $1.53 annually. Assume that the 50 companies that we have invested in has average annual dividend of $1.53. In fact I expect this average to be more – but let us be conservative and simple).

· number of shares needed per companies = [30000/(50*1.53)] = 393

· total funds needed = [50*393*$35.71] = $701,780 i.e. now need $702K.

In this calculation, we still need to include dividend growth (positive effect), dividend reinvestment (positive effect), and price appreciation (perhaps negative effect).

Let us consider that at begin of 2009; we have 50 shares of one company stock in our portfolio and each stock costs us $35.71. Each share has an average annual dividend of $1.53. Therefore, the total investment in one company is $1786.

· we will consider dividend growth rate of 8% every year;

· dividends are reinvested only once at the end of each year; and

· at the end of each year, we will appreciate the price of stock by 8%.

Let us do the math:

· at end of 2009, total dividend received $76.5, price of share $38.57

· beginning 2010, number of shares [(76.5/38.57)+50] = 51.984

· end of 2010, total dividend received $85.9, price of stock $41.65

· continuing this until end of 2020 – number of shares 76.706, total annual dividend $273.6.

· on our initial investment of $1786, we will receive dividend cash flow of $273.6

Extrapolating this for 50 shares each in 50 companies

· total invested capital [50*50*$35.71] = $89,275

· total dividend cash flow [$273.6*50] = $13,682

· we have still not reached our end goal of $30,000 dividend cash flow.

Solving this backward, to achieve $30,000 dividend cash flow, we get:

· 110 shares for each company [total 50 companies*110 shares].

· total initial investment is $196,405.

To summarize….

As of today, if we invested $196,405 in 50 companies from dividend champion’s list (and bought 110 shares for each), we should be able to reach our 2020 goal. The yield on cost would be 15.3% [30,000/196,405]. This assumes dividend growth of 8%, annual dividend reinvestment, and share price appreciation of 8%.

Our first calculation of one million dollar came down to approximately $196K. This can be further optimized by including quarterly reinvestment, stock selection, and initial buy price.

The purpose in this empirical calculation is to show (1) the significance of dividend growth and dividend reinvestment; and (2) we can use simple back-of-envelope calculation to figure out the initial feasibility of our goals. To evaluate the first pass feasibility of our objectives we do not necessarily need complicated mathematical models. Once we understand that the objective/goal is reachable (and not out of whack), then we can go to next step to understand how to execute the process and optimize it for best results.

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.

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.

Step 1: My Investment Goals

Here I am discussing and setting my investment target for dividend portfolio.

Step 2: My Investment Principles and Rules

In this post, I describe the rules I use to manage my dividend portfolio. This is a starting point because I do realize that these are intangible rules. In future, I will need to make tangible rules.

Step 3: My Risk Profile

I will discuss about my risk profile with reference to my investment time frame and capacity,

Step 4: My Investment Buckets – An Overview

This is an overview of my complete investment strategy and different investment buckets. I have defined my investment buckets based of my objectives. These are not an asset allocation for my investments.

Step 5: Dividend Portfolio Performance Matrices and Measuring Progress

Here I plan to present the performance measures I use in evaluating my dividend portfolio. I will discuss different matrices such as my benchmark, cash flow, YOC, annualized XIRR, portfolio value, and asset allocation.

Step 6 (a): Dividend Portfolio Building – Generate Watch List

I plan to discuss the parameters I use for stock screening and stock selection. I use qualitative and mild quantitative procedure. I generate watch list based on these screening and selection process.

Step 6 (b): Dividend Portfolio Building – Accumulation

Depending upon the available funds at a given point in time, I start accumulating the security. I can accumulate a new security or add to existing one.

Step 6 (c): Dividend Portfolio Building – Dividend Reinvestment

I believe dividend reinvestment is a lifeline of dividend-based portfolio. I will discuss its significance and how I execute it.

Step 7: My Exit Plan

When I started investing using a dividend-based approach, I had a very fixed view that I will be buy-and-hold investor because it is a long term process. But Year 2008 changed that view. It is prudent to remove an apple gone bad.

This provides a summary-level procedural framework for my investment process. Once I finish writing about each process step, it will provide detailed insight into my investment process for dividend portfolio.

A customary caveat: This is my investment process compatible to risk I am willing to take, the resources I have, and the amount of time I am willing to spend on managing it. I am here to share my journey and hopefully generate constructive critic from the readers (kudos is also welcome – we all need it!).

If I do not know where to go, how can I start the journey? This seems to be a very simple question we face day-in and day-out. But when it comes to investment plans, in general, most of the individuals fall short in identifying the defined final destination. In this post, I will discuss what is my vision and what would I like to achieve in my dividend portfolio. I have started planting the dividend seeds. Only time will tell whether I can reach that goal, and grow the tree with dividend fruits।

Since the name of this blog spot is Dividend Tree, here I will focus on my goals for my dividend-based portfolio. It is to use my savings to generate a stable and sustainable stream of passive cash flow. So why not just use savings, CDs, and/or other fixed income vehicles? Well, a $100K invested in CD’s and/or savings will generate at the most 4% or 5% interest income. Additionally, it does not have potential to increase the value of my capital. Instead, if I make investments in fundamentally strong companies which consistently pay and grow (y-o-y) dividends, then I will not only have an “increasing” passive cash flow but also have a potential for capital appreciation।

To begin with, I am targeting to have an annual dividend-based cash flow of $30,000 by year 2020. I came up with this number after analyzing and modeling some of the past historical data for few blue chip companies (e.g. JNJ, PFE, GE, BAC). While I plan to discuss this model sometime in future post, the model showed that with consistently growing dividends and by continuously reinvesting it, this level of cash flow is an achievable target। Since this is based on past historical data, I acknowledge that it may not be possible to repeat such scenarios in future। However, I have identified a tree that I want to grow, so that I can plant the seeds now.

Time will tell whether I can grow my tree of dividends. For now, I have started planting the seeds, and have started my efforts to grow it.