This page reflects my portfolio and I try to update it quarterly. Keep in mind that I have a high risk tolerance and my investing horizon is very long. This is how my portfolio is 100% equity with roughly 65% of my holdings in US stocks and 35% in Canadian equity (I’m Canadian, should you wonder). If you want to know when I make trades, make sure you subscribe to my newsletter (at the bottom of this article).
I’ve built the portfolio based on my 7 investing rules of dividend investing. I also manage 13 other portfolio models. 11 of the 13 portfolios beat their benchmark since 2013. Click here to review my performance.
I split my holdings into two categories: a core portfolio generating dividend payment and a growth portfolio generating both dividend and stock value growth.
|Canadian National Railway||CNR.TO||Industrial|
|Walt Disney||DIS||Consumer, cyclical|
|Gluskin & Sheff||GS.TO||Financial|
|Helmerich & Payne||HP||Energy|
|Johnson & Johnson||JNJ||Healthcare|
If you have been following me for a few months, you already know that I quit my job this summer to live my dream; building my own online business. I focus helping people investing the right way by saving them from the eternal buy/sell struggle. Today, I’m sharing my own strategy to build and manage a relatively small portfolio of $192,430 through its way to an iconic million dollar portfolio.
Many bloggers, financial writers and planners have highlighted the math behind reaching a seven figure portfolio. In fact, it’s quite easy. You can reach any investment goal by following those simple rules:
#1 Start early
#2 Save a lot
#3 Stay invested
This is a nice plan and it works. Unfortunately, not everybody starts investing in their 20’s. Most people don’t have $2,000 to invest monthly either. . Please note that I used the verbs start and want instead of being capable of. We can all do it, but our priorities are not the same. For this reason, I rather focus on showing you how you can manage your portfolio instead of telling you need to save X amount during Z years to get rich and retire early.
I’m 36, married, and I have three children of 5, 10 and 12. I’m the only income provider to my family. Last year, I took 12 months off to travel North America and Central America in a small RV with my family. You can tell saving money aside isn’t exactly my #1 priority. However, I managed to amass nearly $200K in investment already. I achieved this milestone using the three simple rules mentioned above.
#1 I started investing at the age of 23
#2 I saved about 20% of my income in my retirement plan
#3 After I bought my second house at the age of 26, I never got out of the market.
I could have gathered a lot more, but I preferred traveling, eating at nice restaurants and doing tons of activities with my family. As I said, it’s all about priorities. Now, let’s get to the important part: how will I make my 192K into 1 million dollar before I turn 60.
Using a classic investment calculator you can find on the internet (I used Calculator.net), I figured I need about $500 per month invested at a 6% to reach $1M mark by the age of 59:
To be exact, I need to save $457 monthly. Interesting enough, if I can boost my investment return to 7.43%, I have to save a bit fat $0 and I will still reach my objective. Now you can see the true power of compounding interest!
I told you this wasn’t an article about saving X amount during Z years to get rich and retire early. Instead, I’m going to show you how I will invest that money. Because in the end, if I can make a 7.50% return, I don’t even have to worry about the amount I’m saving. This is what I call thinking outside the box.
My Focus on Dividend Growth
My nickname is “The Dividend Guy”; you can tell that I will focus on dividend investing to fund my retirement. However, I’m more a “growth” guy than an “income” focused investor. I started my investing journey trading stocks on a weekly basis and adding a few penny stock trades in the basket. I decided to quit this type of strategy mainly because it was time consuming and, once in a while, you hit your teeth on the brick wall and it hurts.
Since 2010, I’ve been focusing on companies with a solid dividend growth history. The word “growth” is the most important one. I want companies increasing their payment by high single to double digit numbers. I don’t mind about companies paying a 5% yield or showing 40 years of dividend history. If the dividend growth isn’t there, it’s not a stock fit for my strategy.
Based on the Dividend Triangle, I select companies with a potential for revenue, earnings, and dividend growth. No company can make more profit over the long haul without a growing business. And no company can increase their dividend if they don’t increase their profit first. Finally, a company showing strong dividend growth must be confident the first two factors will kick in.
Since I don’t want to screen the whole market, I usually start my research with the Dividend Achievers List. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.
As a complement to my research, I also look at strong dividend growers over the past five years using Ycharts. There are some pearls that show between five and nine years of consecutive growths. Those companies fly under the radar of many investors. Using my 7 dividend growth investing principles, I was able to find hidden gems such as Lazard (LAZ), Gentex (GNTX), Disney (DIS) and Visa (V). The very same investing rules that helped me build highly-performing portfolios in Dividend Stocks Rock (you can get an idea of my performance here).
Listing a bunch of stocks is fun, but that doesn’t make a portfolio. There is a lot more than picking companies you like with strong fundamentals when you build your portfolio. The problem is that all stock lists are biased. They are biased because they are taken at a specific moment in time. During that moment, some sectors may outperform others. Just think of any Canadians building their portfolio with plenty of REITs and Oil Income Trusts back in the early 2000’s. Or think of an investor in 2009 or 2010 that would not pick a single financial stock because they all showed bad fundamentals. This is why you must “force” yourself to pick companies in several sectors instead of simply picking the best of the breed at the moment.
Picking all stocks from the same sector would be like building a hockey team with only Centers and Left Wings. You need defensemen and goalies too!
While I’m building my portfolio, I want to invest in various sectors. The idea is to get a smoother growth trend and avoid making huge mistakes. Imagine if you invest 50% of your portfolio in a single sector and the industry goes through some serious challenges? Your portfolio value may be hurt for a while or even never recover at all. Here’s what my current portfolio looks like:
Source: author’s chart
My goal is not to hold that much cash (12%), but I am not done investing the full proceeds of my pension plan yet. My most important sector is the techno. This is because I have an important position in Apple representing about 10% of my total portfolio. Since more than half of its value is profit, I don’t really mind!
I believe in a solid and stable portfolio. For this reason, I have invested the bulk of my money across consumers, financials, and industrials sectors. The only energy stock related is Helmerich & Payne (HP) which is categorised as an industrial in this portfolio. I’m not convinced to hold energy stocks in my dividend growth portfolio. This is probably because I find it harder to forecast future payments.
I do not hold any REITs as my focus is put toward dividend growth and not income generation. I don’t think they are bad investments, but they just don’t meet my personal investment criterion. Before I pick a stock, it has to go through my 7 dividend growth investing principles.
My goals wasn’t to have the most diversified portfolio ever either. Since I’m aiming at a 7%+ return, I must concentrate my money into specific sectors. I think that investing about 40% in techno and consumer cyclical will help me catching bullish waves for example.
Core & Growth…
The asset allocation of my portfolio is divided into two types of stocks: core & growth. The core portfolio is built with strong & stable stocks meeting all my requirements. The second part is called the “dividend growth stock addition” where I may ignore some of my investing rules because I believe there is an opportunity.
While the core section is like any other dividend growth portfolio, the growth segment will require closer follow-up. This is the part of my portfolio that will most likely generate the most volatility… but could also generate the highest level of profitability.
Those picks will come and go as there is an opportunity on the market; it’s the salt they had in my Salted Caramel Latte for Halloween. It is what makes investment interesting and exciting!
When I select a growth stocks, my investment horizon is reduced to 12-18 months. A good example would be SNC Lavalin (SNC.TO). I sold my ScotiaBank (BNS.TO) shares to buy SNC when the company was implicated in a lawsuit form the RCMP for fraud. The company is a leader in engineering firm and it is not true that a few clowns that committed illegal activities would make the whole company plummet. SNC shares slowly got back on track and I sold SNC shares with a nice profit about 18 months later.
In order to protect my profit when I make such trades, I use stop sells. It’s important to note that I don’t use them for my core holding (I really don’t mind showing a + 175.93% return on AAPL in my RRSP account). I only do it when a risky stock has reached my target of a healthy profit in a short period of time.
A Good Example of Stop Sell
Here’s a good strategy to use if you want to protect some of your profit. First, a stop sell is a trade feature enabling you to start selling a stock at a specific price. It doesn’t mean you really want to sell it, but it protects your profit (or minimise your loss) upon market swings.
I usually don’t carry too many “calculated gambles” in my portfolio, but I like to make a small bet once in a while. I guess this is my old day trader days coming back to me! Not too long ago, I had Qualcomm (QCOM) in my portfolio. The company was having problems with anti-trust rules and it is fighting with both the Chinese government and Apple (AAPL), the wealthiest company on Earth. That bad news brought QCOM stock to drop sharply and I picked up some shares in the low $50’s. At that time, the stock was down by over 20% since the beginning of the year.
Then, three major events happened during the very same week. First a rumor that Apple could drop Qualcomm for its next iPhone generation. Then, management published robust earnings (considering the situation). Finally, more rumors about Broadcom (AVGO.O) that could purchase QCOM at $70+ a share. Here’s what happened on the market:
As you can see, there is lots of volatility around the stock. I purchased QCOM at $50 right before all that happened. On one side, I thought it could go higher if the rumor revealed to be true. After all, Broadcom was expected to pay over $70 per share. I didn’t want to miss that occasion. On the other side, I knew for sure that if the rumor fell short, QCOM would drop like a rock. I had a unique opportunity to cash a 20% return over two months, I wasn’t going to let it go. For this reason, I intended to hold QCOM, but I put a stop sell at $59.50 to secure my profit. Over the weekend, rumors were confirmed that AVGO wanted to acquire QCOM. Then, the stock jumped to $64 on opening. I decided to sell at $64.90 on that day as I had another stock on my radar.
It’s important to note that I’m not using stop sell on my holdings in general. The reason is simple: I intend to hold them for years, read decades… or maybe for life! However, I also allow a part of my capital to be invested in a riskier pick in order to generate additional growth. The goal is to hold this pick for a maximum of two years based on my investment thesis. QCOM had already generated enough return to fit in this strategy. I was then able to realize a 29% profit and use the proceeds and buy another falling knife… Shopify (SHOP).
Ah! The never-ending debate about valuation! There is not a single investor who doesn’t ask this question: “Is this a good price to buy XYZ? Don’t you think it’s a bit overvalued?”
Honestly, while I make an effort in including a serious valuation process in my stock analysis, this is definitely not the most important pillar of my process. The reason is simple; valuation changes all the time. It does because we use data from the past to give a value in the present that should reflect the future of a company. Does that make sense? Not really. This is why I always mention that I rather pick strong companies that are “overvalued” than a weak one that is “undervalued”.
My valuation process includes two steps. The first one is quite simple; I take a look at the past 10 years history of PE ratio. This gives me a good indication of how the market values a stock. For example, you can see that the latest Texas Instruments (TXN) stock run isn’t PE expansion, but because the company is making more money than ever:
Obviously, this method gives me more a hint than a real valuation. The idea is to know if the market is currently giving company XYZ a strong valuation or not. Then, I can start digging and find out why.
The second method I use is the dividend discount model. The idea is to treat an individual share as one little free cash flow machine. The dividends are the free cash flow, since that’s the cash that we as investors get. In the company-wide example, a company could spend free cash flows on dividends, share repurchases, acquisitions, or just let it build up on the balance sheet, and the point is, we have little control over what management decides to do with it. The dividend, however, takes all of this into account because the current dividend as well as the estimated growth of that dividend takes into account the free cash flows of the company and how management is using those free cash flows. Here’s an example of the results of my calculation on TXN (this is included in all stock cards we produce at DSR).
The DDM isn’t perfect, far from it. Please read the Dividend Discount Model limitations to fully understand my calculations.
I know… this was a long article. However, if you are starting your adventure in the stock market, this is the kind of reading you need. As you can tell, I have spent hours of work in my investment methodology and I follow it to the dot. This is my secret for being successful on the stock market. I don’t know everything, I’m not the smartest cookie in the room, but I know that my method works and that following my plan is my best bet for success.
If you enjoyed this article, please forward it to your friends. I’m sure it will help many investors!
Disclaimer: I’m longing all of the above.Google+