Tuesday, July 25, 2017

How To Invest $100,000 In Dividend Growth Stocks

By Mike McNeil

I recently decided to quit my job and to build my own business. Having contributed to a defined pension plan, I’m soon going to receive more than $100,000. With the markets trading at all-time highs, the question is: How should I invest the $100,000?

I decided to invest the full amount in dividend growth stocks. This article explains my decision and presents the step-by-step methods I intend to use.

Why Invest in Dividend Growth Stocks?


Investing $100,000 in a short period of time would present a big challenge for many investors.

The main reason I picked dividend growth investing (and not other investing strategies) is that I believe in the added-value provided by companies sharing part of their profits with shareholders. In fact, it’s not just about my opinion – most dividend growth indexes consistently outperform the S&P 500.

Compare the returns of the S&P 500 Dividend Aristocrats to those of the broader S&P 500 index over the past decade:



The Dividend Achievers similarly outperform the S&P 500:



Of course, choosing dividend growth investing does not automatically guarantee that you'll beat the market or perform well. Your performance depends on your investment decisions.

In my view, dividend growth investing is like picking your fruit from the best basket. Small cap traders, options gurus, and penny stock maniacs could do a lot better than dividend growth investing, but they can also lose everything in a heartbeat. This is less likely to happen to dividend growth investors.

Investing at All-Time Highs


Having decided which strategy to use for my pension account, another big challenge became apparent:

The stock market has never been as high as today! When will the next correction happen?

What if I invest in September and the market drops by 20% between October and December 2017?How would I feel if my account balance dropped to $80,000 by years end?

Nobody would want to invest in a stock market just before it goes bust:



This is a scary picture and one that everybody talks about.

However, I don’t mind investing at an all-time high because of the perspective I have as a long-term investor. Looking at a 10-year time horizon, the 2008 crash doesn’t look so scary after all:



If I had invested in the previous all-time market high right before 2008, I likely would have doubled my investment even after taking a 35% hit soon after investing. Also, note on the earlier charts how compounding dividend growth boosts total return over a longer period of time.

Since I won't need to access this money for the next 30 years or so, waiting for the next market dip to invest seems irrelevant, especially since I’ll be missing out on juicy dividend payments while waiting!

Asset Allocation


As previously mentioned, I'll be investing the full $100,000 portfolio in dividend growth stocks.

I'm planning to allocate my assets between two stock categories: core and growth:

Source: 7 Dividend Growth Investing Principles – Dividend Stocks Rock

The idea is to use 50% of available capital to build a solid core of stocks that I could buy and hold forever. Stocks of companies that have proven their business model over decades and have been rewarding shareholders with ever increasing dividends, such as Johnson & Johnson (JNJ), 3M Company (MMM), and Colgate-Palmolive (CL), are great core candidates.

The second half of my portfolio will be invested in companies with great capital and dividend growth prospects. These companies include newer dividend growers with strong growth potential in their business model. Examples include companies like Apple (AAPL), Disney (DIS), and BlackRock Financial (BLK).

My portfolio should look like the following:



Source: DSR Portfolio Booklets

Stock Selection


How do you pick the right companies in an overvalued market?

That is a tricky question!

I'll start by searching through the Dividend Achievers list, an index comprising of all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, the complete list of Dividend Achievers contains 265 stocks.

Using the Dividend Achievers list as a basis, I highlight companies based on the following metrics:

  • dividend yield above 2%
  • positive 5-year revenue growth
  • positive 5-year earnings growth
  • positive 5-year dividend growth
  • cash payout and payout ratios under 80%

Interesting enough, after filtering the list with these simple filters, the list is reduced from 265 stocks to 51 stocks.

Since I'm planning to pick about 20 companies for my portfolio, I’ll need to select about half of the stocks on the reduced list. Then, I'll carefully analyze the stocks and sort them in order of upside potential using a Dividend Discount Model. This is the valuation method I use to determine the intrinsic value of each company.

Final Thoughts


While I intend to invest the entire sum of money instead of waiting for a market dip to start buying, this does not mean that I’m going to build my portfolio overnight. I will most likely purchase one or two stocks per week, with each purchase the equivalent of about 5% of available capital.

I believe it is important to apply a systematic approach and not to go on a shopping frenzy!

Following your investing rules probably is the most important advice I've ever received.

Disclosure: I'm long JNJ, MMM, CL, AAPL, DIS, BLK


This article was written by Mike McNeil of The Dividend Guy Blog and Dividend Stocks Rock.
Mike started his career in the financial industry in 2003. Along the way, he earned several
promotions and a good pile of diplomas (bachelor's degree, CFP title, MBA, etc).
Mike enjoyed working with clients in a private banking environment,
but he wanted to do more with his life.
So Mike started an online venture to educate people about investing
and was able to spend more time with his family.

5 comments :

  1. Interesting toughts,i think one of my dividend and growth stock was AAPL,worked out good for me.Except BLK/CL i do own shares in others you mentioned most of them added early in my dividend career.

    ReplyDelete
    Replies
    1. Thanks for commenting, desidividend! I like Mike's approach to stock selection. Some good food for thought!

      Delete
    2. Thx for commenting. I actually like BLK a lot. I think it will be a growth stock for several years to come due to the interest in ETFs.
      Cheers,
      Mike

      Delete
  2. Hey Mike / FerdiS,

    tx for sharing your strategy. i like especially your asset allocation thoughts. I plan to build a portfolio around "core" holdings in which i'll invest way more money than in other companies. Because of that it's crucial to select them carefully. On the other hand i think that diversification is important too.

    If i had 100k of free cash to invest right now, i would do it a little different than you. First of all i agree that investing on a regular basis is a good idea cause no one can predict the markets. I invest regularly myself. But on the other hand a correction or a crash will occur again, no doubt about that. And i'd like to be ready to grab shares of wonderful companies at a huge discount. And this is only possible with free cash. So to sum it up, i would split the 100k...maybe like that: 65k for investing month after month and 35k cash reserve. But that are only my thoughts...

    Best Regards,
    DividendSolutions

    ReplyDelete
    Replies
    1. Hi, DividendSolutions -- thanks for your comment! Hopefully, Mike will also reply.

      So far, I have not identified core holdings for DivGro. I do own larger positions in several stocks on which I trade options, specifically covered calls. Without my strategy of boosting dividend income with options, I guess I'd consider the idea of investing more in so-called core holdings.

      As for deploying 100k right now, I'd probably identify 10 quality stocks and buy in multiples of 100 shares (so I could sell covered calls), provided I can enter at a reasonable discount to fair value. Failing that, I'd sell puts on those stocks at strikes matching my preferred entry points. Doing so would allow me generate some income while I wait for the stock price(s) to drop.

      Thanks and happy investing!

      Delete

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