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?

Progress Update October 2009

Portfolio Status Update

• The total annualized portfolio dividend cash flow was $1912 (up from $1786 in September 2009). This change was due to new purchases.
  
• The portfolio’s total yield on cost went up to 4.31% (down from 4.82% in September 2009). As a note, this YOC does not take into account additional shares or dividends added up due to reinvested dividends. I plan own adding those up at by end of the year.

New Purchases

• Purchased ABT with annualized dividends of $64.00. The purchase yield was 3.27%.
• Purchased AFL with annualized dividends of $62.00. The purchase yield was 2.77%.

Additions to Existing Positions – None.

Selling – None.

General Comments

• My over exposure to AOD for total portfolio dividends is automatically getting reduced since I am not adding to my existing position. My exposure has reduced to 13.3% of total dividend income (from more than 20% in January 2009) and 3.5% of total portfolio value.
  
• I expect one or two more purchases before the end of this year. Hence, I am going to miss my year goal of reaching $3000 cash flow from dividends.
  

Until next month, happy investing.

Last week, I presented an update on the monthly progress of my dividend portfolio. In this post, I am discussing the quarterly risk analysis. My objective here to make sure I am continuing to following my risk management process.

1. Maintain pre-determined asset class allocation;
2. Maintain pre-determined diversification (any sector should not exceed 10%); and
3. Dividends from a single stock should not exceed 5% of total dividends.

My dividend portfolio holdings can be referenced in My Portfolio menu at top of this page.

Maintaining Asset Allocation

Chart 1 shows the asset class allocation along with my maximum target limits. In general, I am continuing to meet (or much closer) to my pre-defined target levels. During 3Q09, I did not make any contribution to the emerging markets index funds such as VWO and EPI. This was because I believe they rose too quickly to my comfort level. I am still tad lower than my maximum limit for emerging markets.

Dividend Portfolio : 3Q09 Asset Allocation

Maintaining Diversification

For industry sectors, I have a pre-defined maximum limit of 10% for each sector. Chart 2 shows that I have higher exposure (relative to my limit) in financial derivates and consumer sector. Energy sector is almost equal to my max limit.

• Financial derivatives is a sector including dividend CEFs and REITs and hence it has higher percentage. Since this includes two sub sectors, I am comfortable with this exposure.
• The consumer sector allocation increased significantly because of my recent purchases. I took the opportunity of lower valuations and initiated position within the same quarter. This resulted in higher allocation. My future purchases will likely to be limited in this sector.

For morningstar style classification, I do not have any pre-defined allocation limits. Chart 2 also shows that my portfolio is concentrated around large cap stocks (more so on value and growth). Intuitively that seems to be correct because majority of the dividend-growth stocks are stable and mature companies. I add two mid cap dividend growth stocks in last few months. I will continue to look for small cap dividend growth stocks. Another option is to invests in a broad small cap index ETF.

Dividend Portfolio : 3Q09 Diversification

Criteria of Maximum Dividend per Stock

My objective here is to make sure that dividends from any given company do not exceed 5% limit. This limit allows me to reduce the impact of dividend cuts on passive cash flow. The chart shows that O (~7%), AOD (~14%) exceeds my pre-defined limit. I will not be making any changes any of the individual positions. I do not expect to see dividend cut in O. My capital allocation to AOD is very low and even if the dividend is cut in half, my yield will still be more than 5% and dividend contribution be still above 5% of total dividends cash flow. However, I will not be making any future purchases. Therefore, my allocation will automatically come down.

Dividend Tree : 3Q09 Max Dividend Criteria

The quarterly update shows what action I took during 3Q09.  I hope with this approach to risk-based allocation, I will reduce my risk to dividend cash flow and continue to maintain potential for capital appreciation.

In my view, Closed End Funds (CEF) are very similar to mutual funds with 1%+ of expenses, and many are actively managed. The difference lies in trading and not able to create new units. When I started investing few years back, in income domain, I was attracted by high yields. While I got rid of quite a few CEFs, I still continue to hold IIA, IGD, and AOD.

Among others, one of the issue with these funds (for which I get annoyed) is the way the fund managers drift away from objectives and execution strategy. Investors continue to remain invested under the impression that fund managers are continuing to stick to the originally stated objectives. Furthermore, there is nobody to question these managers. The whole premise of using actively managed funds (including CEFs) is that managers will keep up original objectives and use their skills for reducing downside risk. Let me discuss two examples:

• AOD: Originally, one of the objectives of the fund was to look for best dividend opportunities around the globe. In doing this, it will focus on dividend income and long-term growth of capital. When I had bought the fund, it had approximately 65% invested in international companies (i.e. Europe, Asia, South America, Australia, etc). As the downturn began, in my opinion, the fund managers fail to grasp or anticipate the potential risk to its funds. Keeping with its holding companies, dividends very reduced. In addition, the funds underwent changes. The fund drifted and now has 50%+ of US investments. As other growth or emerging markets recovered, AOD missed the bus, because its most of the holdings were in US. Basically, fund managers get paid for doing nothing!

• IIA: This is one my buys from yield chasing days. The fund focus was to invest in US REITs and provide regular monthly income. With the downturn, this fund was almost a toast. Dividends became a trickle. And now the fund has been merged with another fund IGR (with similar objectives but for global market). The notion that nobody saw it coming does not justify the failure. Again fund managers get paid for doing nothing!.

The point is as individual investors, we just do not have visibility into the funds operations. We do not know when and how the funds gets away for its original strategies and objectives. This is another reason to invest in ETF (instead of CEFs) which are following certain index and are likely to stick to it.

Portfolio Status Update

• The total portfolio dividend cash flow was $1786 (up from $1612 in August 2009). This change was due to new purchases.
  
• The portfolio’s total yield on cost went up to 5.21% (up from 4.82% in August 2009)

New Purchases

• Purchased JW-A with annualized dividends of $36.00 (2.0% of total portfolio dividends). The purchase yield was 1.9%.
• Purchased DOV with annualized dividends of $53.00 (3.0% of total portfolio dividends). The purchase yield was 2.94%.
• Purchased WMT with annualized dividends of $44.00 (2.4% of total portfolio dividends). The purchase yield was 2.21%.

Additions to Existing Positions

• Added SYS, annualized dividends is now $77.00 (4.3% of total portfolio dividends).

Selling – None

General Comments

• My over exposure to AOD for total portfolio dividends is automatically getting reduced since I am not adding to my existing position. My exposure has reduced to 14.2% (from more than 20% in January 2009).
• As we enter the last quarter of calendar year, it is almost certain now that I will miss my year end goal to reach total dividend income of $3000. I am holding on to cash expecting that there will be better opportunities (i.e. at lower price levels). Most of the stocks on my shopping list are quite above my high end of fair value buy range. Therefore, I am continuing to pursue my year end goal instead of revising the goal. I would have revisited and revised my goal if I did not have cash waiting to be deployed.

Later this week, I will publish the quarterly risk analysis.