I have identified my goal and formulated a plan for my dividend portfolio. When I am executing this plan, I need to know exactly how I am doing relative to the overall market. It also helps me evaluate how my strategy is performing. I use few different parameters to measure my portfolio performance.
I use S&P500 based exchange traded fund, SPY, as a benchmark for my dividend portfolio. I consider the first trading day of the year as starting point, and last trading day of the year as end point. The percentage differential of SPY acts as my benchmark. I compare this value to the value of my portfolio. The performance of SPY ETF is marginally less than actual S&P500 index due to the expense ratio associated with ETF. The expense ratio of 0.10% is very small and I do not believe it will have any significant impact on my comparison. The goal would be to ensure (note: not target) that it is always better than this index ETF performance. Now I do not make any proactive efforts to make this happen. I make investments in good fundamentally strong dividend-based companies and hope that market takes care of the rest.
This is the sum of all dividends received from all stocks in my dividend portfolio. I am still in the portfolio building and accumulation phase of my life. Therefore, all of the dividends are reinvested back into the same stock. My primary objective for dividend portfolio is to increase this cash flow and maintain sustainability. I target to continuously increase my cash flow by consistently making regular investments. My Year 2009 cash flow goals can be viewed here.
Yield-on-Cost (original investment):
YOC based on original investments is metric that determines the yield I am getting from my input capital. The basis for my yield is sum of all input capital (which could be single or multiple batches). Here, I do not add the dividends that are reinvested. This parameter gives me how much my original investments are compounding.
Yield-on-Cost (including dividend reinvestment):
As the parameters suggest, in this YOC, I include all the reinvested dividends. For this YOC, the cost basis is the sum of all original investments and dividends received. In this way, the YOC gives me a measure of dividend growth. This shows the effect of initial yield and the compound growth of that yield.
Typically, when we want to calculate our individual portfolio returns, the general practice is to use the percentage value based on differentials of present value of portfolio and original investments. This approach is good for calculating the absolute portfolio values at a given point in time. This method does not provide a time-weighted return for our investments. I make multiple numbers of small investments over period of time. Since I give different timeframes for each individual investment, I need to determine the time-weighted returns. This is also known as personal rate-of-return. It can be easily calculated by Microsoft Excel function XIRR. The way I calculate my XIRR is based on my input investments (-ve values) and output value at a given point in time (+ve values). Although the dividends are output from my portfolio, I do not use them because all of the dividends are reinvested back into the stocks. The final output value includes all these new stocks (or dividends).
This is the value of my portfolio at a given point in time. Here also, I do not have any control over my portfolio value. Controlling and/or targeting the value of my portfolio are outside the circle of my influence. However, what I can control is how and which particular investments I make. If my portfolio value is significantly different then market and is not sustainable, then it tells me something is not right with my portfolio management process.
I make investments on continual basis depending upon availability of funds and my watch list. However, I do a formal performance review on calendar year quarterly basis. In future posts, I will discuss (1) above performance parameters using an example; and (2) how I use asset allocation as a portfolio risk management.
Let me know your thoughts, comments, and viewpoint on my performance matrices.