The strategy to achieve my goals is based upon following investment principles:
(1) Quality Dividend Growth Stocks
I invest in dividend-paying stocks with long track records of regular annual dividend increases. Usually, these are companies with a rock-solid business model, strong competitive position (economic moat), increasing earnings and a healthy balance sheet. I use a quality rating (more about it: here) to evaluate the excellence of a company as a business.
Even if the quality rating indicates a great business, I aim to buy it at a reasonable valuation. I don’t want to overpay. Ideally, the purchase will be done, when the stock is trading at a discount. I use a valuation rating (more about it: here) to evaluate whether a stock is under/over or fairly valued.
(3) Purchase Frequency
Quality is right, valuation looks good. It’s time to pull the buy-trigger. I appreciate time in the market over timing the market. So the simple rule is to buy when enough money in hand. Due to costs/fee efficiency, I will initiate a purchase when an amount of minimum €1,000 is accumulated via savings and dividend income. The target is to make one investment every month or every other month.
Don’t put all your eggs in one basket. My goal is to diversify across a) industries/sectors, b) geography c) dividend yield/growth characteristics. A well-diversified stock portfolio will lower the risk. It helps me to sleep well at night.
I’m sticking with the general rule of thumb that an individual stock should not exceed 10% of the stock portfolio value. In case this mark is crossed, I won’t sell any parts of this security, however. Rather I would invest new funds into other dividend growth stocks (new or existing positions) to offset the overweight security.
(6) Investment Horizon
This one is simple. My investment horizon is forever! The magic power of the DGI strategy unfolds with time in the market. This is true since the more you wait the more money is working for you. Thus the payment check is growing bigger every year. Combined with yearly organic dividend growth it is a multiplier for wealth! Think about how an exponential function looks like and you know what I am talking about.
(7) Exit Criteria
I don’t intend to sell any of my holdings. Nevertheless, sometimes situations might show up when I will liquidate a position. This is especially the case when a company
a) cuts its dividend or
b) there is a high risk that the dividend payment will be cut in the future.