End of Year Portfolio Tune-up

23 Dec 2016 22:04
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Investors everywhere will be evaluating their year-end portfolio performance and will be impressed. 2016 has been a pretty good year for investors and most will see gains in some form or another. A few will admire their dividend growth, others their capital gains and some may admire both.

Take a moment and feel proud of your accomplishment! Let it motivate you to continue investing into 2017 and beyond. Now that you are feeling good, let’s take a deep breath and remember the investing rules that got you to this point and take the time to re-evaluate and give your portfolio a tune-up. Here are 4 steps I run through at the end of the year to keep me on pace.

1. Update mid and long term goals

Has there been any major life changes throughout the year? Maybe you got married, had a child, bought a house or changed jobs. Do you need to adjust a mid or long term goal or maybe even add an additional goal?

Also, do not limit yourself to just investing goals. Use this time to also consider if you have adequate insurance coverage. Do you need to increase life, home or auto coverage? What about disability insurance?

2. Review Portfolio Holdings Financials

If you have a lot of holdings this could be a bit tedious but it is vital to know the financial health of your holdings. Check earnings, debt, cash flow, investments, and acquisitions. Also use this time to read a few annual reports and read the CEO’s letter to shareholders to evaluate if the CEO’s tone or strategy has changed.

3. Time to Sell?

Have some losers or under-performers? Are you holding on to these emotionally, hoping that you can get back to a break-even point before you sell? I get it, no one likes losing but the faster you admit the mistake and sell the quicker you can put it behind you and relieve any stress going forward.

Do not forget about over-performers. A rule I use for high dividend growth stocks that I have owned more than 1 year is if the stock price has appreciated 4x faster than the divided from the time of purchase then it is a potential to sell, I’ve nicknamed this rule “The Prune Ratio”. For example:

I bought Thor Industries (THO) two years ago at $53.25/share and a 2.05% dividend yield. Currently THO sits at $102/share and a 1.3% dividend. In just two years there is a 90% capital gain and 22% dividend growth. The stock price has appreciated 4x faster than the dividend growth so the logical step is to lock in the gains and re-invest into a higher yield with similar dividend growth. I just need to decide if I want to sell a portion (pruning) or sell the entire position.

4. To DRIP (or not)

Some investors always DRIP and some never DRIP. For myself I use a hybrid approach where I only DRIP select holdings.

A dividend re-investment program is a powerful tool available to investors to quickly re-invest dividends without any effort or much thought. However, there are arguments for and against DRIP’s and while both sides have valid points I favor neither.

Instead I evaluate a stock’s current dividend in relation to its dividend growth rate. If it is favorable I will DRIP the stock and if not I turn the DRIP off. At this time of year I will evaluate which stocks meet my criteria in the table below. For example:

I originally bought GATX Corp. (GATX) with a 4% dividend yield and a 10 year dividend growth rate of 6.77%, because this met the requirements in the table below I decided to DRIP new shares. As I re-evaluate my portfolio GATX now only yields 2.53% and does not meet the minimum growth rate of 9.7% so I will have to stop DRIP’g shares.

Yield Growth Rate
2.00% 11.50%
2.50% 9.70%
3.00% 8.00%
3.50% 6.70%
4.00% 5.50%
4.50% 4.30%
5.00% 3.20%
5.50% 2.00%
6.00% 1.00%

I have performed this process of re-evaluating twice a year for the last 6 years and it has kept my portfolio on track to meet my goals. Though I do recommend you perform the tune-up before the new year so if you have to sell any losers you can capitalize on tax loss harvesting before years end.

Happy Holidays Everyone!

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