As I work full-time again, I am preparing to grow our dividend stock portfolio in the next few years.
Investment assumptions for my stock portfolio
Here are my general investment assumptions about our portfolio management:
A. PORTFOLIO VALUE: Total investment in individual common stocks to be around RMB3,000,000 (~USD$450,000). This should generate us around USD$15,000 per year in earning assuming a modest 3.5% net dividend yield.
B. PORTFOLIO COMPOSITION: To own around 30 stable and reliable companies, manly large caps because they have robust final accounts and provide healthy profitability, efficiency and liquidity. For instance, Dividend Kings and Dividend Aristocrats give stable and growing dividends. Focus mainly on buying dividend stocks with good dividend yield and dividend growth – companies that I can easily hold forever.
C. PORTFOLIO STRATEGY: Buy when prices drop for high yields to capture value investments opportunities:
a. Sharp decline in the stock market. Increase investments when there is 20% correction. If the decline continues, increase investments again.
b. Declining sector and industries. Pay attention to good companies in those sectors. They can gain the most in the following year.
Buy stocks with preferably with low P/E (Price/Earnings) at the time of purchase <20. Weak months for equities are generally September and October each year. Reinvest all dividends.
STEP 1: INITIAL STOCK PORTFOLIO (NOW):
To build the initial portfolio, I have invested around USD$10,000 through Interactive Brokers where I had opened my brokerage account earlier last year.
My strategy for building stocks portfolio boils down to purchasing shares of well-established multinational businesses with long traditions of paying and increasing dividends. My expectations are very modest. I expect around 8% annually on average for share price to grow and receive 4% after TAX in dividends. Shortly, predictable dividends plus moderate growth.
NOTE: My investment strategy boils down to ‘predictable dividends (4%) plus moderate growth (8%)’.
Currently, there are 14 companies in my initial portfolio (AQN, MMM, UL, SO, SON, D, ED, GIS, KO, PEP, JNJ, PG, CL, MCD) and one Real Estate Investment Trust (REIT) which is O. More than half of these companies are either Dividend Kings or Dividend Aristocrats.
I prefer the most investing in the following three sectors of the economy such as Consumer Defensive, Utilities and Healthcare. And, when it comes to industries, I focus on Household & Personal Products, Regulated Utilities and Drug Manufacturers – General. We all need to eat and drink every day, look after our households, use water, gas and electricity, and visit a doctor when falling sick. Right?
The initial portfolio has Yield on Cost (YOC) of 3.66% before TAX and 3.33% after TAX. As I am based in China, the TAX on dividends paid by the US companies is only 10% and on dividends paid by the Canadian companies is 15%. When it comes to Predicted Annual Dividend Income (PADI), my portfolio pays USD$318.70 before TAX and USD$290.43 after TAX.
STEP 2: TARGET STOCK PORTFOLIO (FUTURE):
In the future, I will be increasing my investments in Industrials and Financial Services, mainly Insurance and Banks. In addition, there are 16 companies on the waiting list that will be added to my stocks portfolio over time. These include ABBV, SAFT, DUK, NWN, KMB, K, AMGN, AVGO, SJM, WEC, EMR, WTRG, CNI, WMT, CB, CBSH.
Ultimately, my target portfolio will have approximately 30 businesses as diversification to me is both important and necessary.
My ultimate goal is to increase Yield on Cost (YOC) to at least 4% after TAX. And, to increase Predicted Annual Dividend Income (PADI) to USD$15,000 after TAX. I wish to invest around USD$350,000 to USD$400,000 in stocks in total over the next couple of years to finish building the 4th passive income stream for my family.
