Monday, January 5, 2015

2015 Dividend Machine Strategy

Hello 2015.  What a nice run we have had since I started this blog 4 years ago.   

 If you did not make money, you were not paying attention. Bonds made money, stocks made money even real estate made money.  These great results had nothing to do with me.   But as you will see, the strategy I write about did pretty well as compared with the broader market.   

This is good news for everyone but what should you do in 2015 to build another portfolio dedicated to creating ever increasing income?

I will answer that question later but first, I want to emphasize that ordinary investors who manage the income producing portion of their portfolios, need to use a simple and disciplined approach.  

Simple Investing Strategies for Young and Old

For young investors who do not have time to learn how to invest for income, I like the easy and disciplined approach of dollar cost averaging into low cost ETF’s like SPY, SDY and VIG.   For young and old investors who want to manage the dividend stock and discount bond portion of their portfolios with the hope of outperforming SPY, SDY and/or VIG, this blog is for you.   

I know that a structured and disciplined approach to income investing has a really good chance of succeeding.  I can now prove that during the past several years of bull markets in stocks and bonds, stocks I call Dividend Machines have kept up nicely.     Just look at the 2011 portfolio up over 60% and paying more than 4% on the basis.  You know that many hedge funds have not done as well. 

2014 Results

I was very worried that this strategy would lag in 2014 because everyone was touting dividend stocks and that drives up the price.    But, the portfolio is doing o.k. compared with SDY and VIG.  It was up 5.71% the end of the year with more income than can be produced from bonds or low cost ETF’s

Each of the portfolios is nicely diversified by market capitalization as well as industry.  This is simply the result of random picking of stocks that had to comply with my four Dividend Machine criteria and no other talent on my part.

Again, I was worried that the 2014 portfolio would be too concentrated in one industry because the pool is so small.   I profiled only 17 stocks in 2014 that I call Dividend Machines.  There are a few small caps and a couple of mega caps and the rest are mid to large caps. 

In 2011 I profiled 52 stocks and that portfolio is up over 60%.  It is highly diversified.  In 2012 the portfolio has 48 stocks and in 2013, 20 stocks.  All portfolios ended up being diversified without even trying to achieve that goal.

2015 Dividend Machine Criteria

I will follow all these portfolios over time but in 2015 I will continue to write about stocks I call Dividend Machines.   I will write about covered calls on Dividend stocks that might not quite qualify as Dividend Machines but pay you to wait and I will write about any bonds I buy that trade at a discount, with durations less than 7 years and current yield competitive with stocks.

What should you do in 2015 to build a portfolio dedicated to ever increasing income?   I will invest my first money of 2015 in a Dividend Machine.  This year I will stick with the same criteria as 2014.

These criteria have worked in the past so why change. 

Change to Tracking Methodology

This year I will change the methodology of tracking results in the follow way.   When I profile a stock in a closed market, I will place a buy on close order and report that cost basis for the stock.   In order to track my Dividend Machine Portfolio results and compare it with VIG and SDY, two low cost ETF’s that concentrate on quality dividend stocks, I will use the ETF closing price on the day I buy my Dividend Machine to also buy VIG and SDY.   Please note that this is for tracking purposes.   I usually buy the Dividend Machines I profile, but I do not invest the same amount of money in VIG and SDY.  

I hope we all do as well in 2015 as we did in 2014.  My first pick will be coming soon.