Investors Need Goals & Strategies

28 Aug 2013 22:47

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Dividend Growth Investing (DGI) is not an investment strategy by itself. DGI is a proven successful investing model but the more you investigate the topic you will discover investors use different approaches. Each investor has a different level of dividend yield and dividend growth rates. For example I prefer a yield greater than 3% yield and growth rate greater than 9%.

No one DGI investor’s criteria are the perfect answer; instead what you are seeing is an individual’s strategy to DGI investing. The key to a strategy is defining a goal, without a goal you are simply blindly investing with a strategy that may or may not be correct. The key is to define a goal and pick the right strategy. Since I haven’t shown my goals we can use my scenario to see why I use the strategy I use for picking DGI stocks.

Current age: 45
Current Annual Dividend: $1905
Emergency Funds: 1 month salary
Goal: To have $20,000 in annual dividends by age 60 without exposing my portfolio to high risk.
Initial Strategy: Invest in DGI stocks with a dividend greater than 3% and growth rate greater than 9%

Part of my goal is also to avoid high risk so I need to modify my strategy to address risk.

Revised Strategy: …payout ratio cannot exceed 70% and debt/asset ratio cannot exceed 1.2

With these factors we can now forecast how much my annual dividend will be at age 60 assuming dividends are reinvested at 3% and dividend growth is 10% which comes out to $12,500 annually. Not quite the $20,000 I was expecting so we’ll have to revisit my strategy.

Options to close the gap:

  1. Change the dividend criteria to greater than 6%
  2. Invest in high yielding stocks with little or no growth
  3. Save some money and contribute more annually

Items 1 & 2 are viable but they add risk which doesn’t jive with my goal of low risk. Item 3 might work. Going back to my spreadsheet I discover that I will need to contribute an additional $4,000 annually to meet my goal at age 60. Looking at my annual budget I seem to only have a spare $3,000 annually to invest falling short once again. It looks like the only alternative is to expose myself to some risk and since I have 1 month of salary tucked away I can afford some risk.

If we combine some options it might get us there, by contributing $2500 to DGI stocks with my original criteria and invest the remaining $500 in high yielding stocks my annual dividend yield at age 60 becomes $20,220. Finally a combination that works but now I need to finalize my strategy:

Final Strategy : Invest 83% of future contributions in DGI stocks with a dividend greater than 3%, growth rate greater than 9%, payout ratio cannot exceed 70% and debt/asset ratio cannot exceed 1.2. Invest 17% of future contributions in high yield stocks (greater than 9%).

The only reasons why I ended up at this strategy were:

  1. I could not meet my goal
  2. My time horizon was only 15 years.

If I had a longer time period by only 5 years I could have met my goals without adding risk. So what are your goals & time horizons?

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