Tweaking the SF portfolio

With the end of the year is coming closer, many people start to think about the New Year’s resolutions. It is a well-known tradition almost everywhere in the world. Personally, I know it’s resolution-time when the gym is totally crowded in January. It is always amazing to be a witness of this beautiful play year after year.

In the new period everything should be better. We want to lose weight, stop smoking, reduce stress or spend more time with the loved ones. In general new year’s resolutions are about changing an undesired trait and accomplishing a personal goal. Simply said: we want to improve our life. Whereas I’m not the biggest fan of new year’s resolutions, it feels like a good opportunity to scan where we are standing on our financial journey. Personally, I want myself to give an honest answer for two important questions. First, is the overall goal still in front of my eyes? Second, are all my actions aligned towards achieving it?

Dividend Growth Investing

Back in 2015 I have started my investment journey with a specific purpose in mind. I aim to create a reliable income stream by building a well-diversified portfolio of dividend growth stocks. In future I want this income stream to cover my costs of living. That’s it! Very straightforward and still valid today. What about the actions? Are they in line with my overall goal? Well, I buy dividend growth stocks to build a growing passive income. I consider the dividend income generated by my holdings as reliable and predictable.

Let’s take Procter & Gamble (PG) as an example. PG has rewarded their shareholder with 62 years of consecutive dividend increases. $10.000 invested in 1998 would accumulate $7.266 in dividend payments by the year 2018. And this is even without considering dividend reinvestment and capital gains. PG has a CAGR of 9.2% over a period of 19 years. It’s just like a clockwork mechanism, steady and reliable. That is the reason why I like the DGI approach. It is truly a major part of my investment strategy and absolutely in line with what I want to achieve.

Index Fund Investing

My second pillar is about investing into low-cost index funds. It’s a fact that the vast majority of fund managers can’t beat a simple index in the long run. Warren Buffett has delivered another proof of this thesis with his famous ten-year bet against Protégé Partners. All funds involved have underperformed the S&P500 over the period of ten years. You can find the final outcome of this bet in the table below.

Since you can’t beat the market by picking individual stocks, the smartest thing you can do is to buy a low-cost ETF of a broad index such as S&P500. Simple as that! You will have fewer worries and superior results in the long run. That is almost guaranteed. Having said this, an attentive reader could now claim that dividend growth investing is equal to picking stocks and therefore should be exchanged in favour of indexing. Well, to find a good answer for that thesis we need to look at it from a more differentiated aspect and take individual preferences into account.

If you target to outperform the market, any strategy that involves picking individual stocks is a losing game – dividend growth investing included. As we learned from before, even very experienced fund managers can’t achieve it in the long run. The Buffett-Protégé bet is the best example for that. That is why sticking to a simple index fund is the single best strategy in this case.

Now it is very important to outline that dividend growth investing is not about trying to beat the market. Not at all! The ultimate aim of the DGI approach is to create a passive income that will grow from year to year. I’m very aware about it that by utilizing dividend growth investing I do underperform a simple index. And this is absolutely fine since I target a different goal with this investment strategy. Putting it all together, if you want to build a reliable cash flow stream, dividend growth investing might indeed be a fantastic tool to arrive at that destination. But keep in mind, the best strategy is the one that you feel comfortable with.

Tweaking the SF portfolio

Looking at the SF portfolio in the context of my desired aim, I have decided to reallocate the capital from my three ETF holdings towards dividend growth stocks. This is quite a major change but I feel comfortable with that. Please don’t get me wrong, I still like index investing a lot. In terms of costs, diversification and total returns it is by far the best investment vehicle. Especially for people who don’t have the passion and time to analyze stocks, index funds are a sleep-well-at-night solution. In my personal situation however, I’ve decided to put all of my focus towards growing the passive income. Thus I’m making this changes to be in line with that scheme.

That being said, I have executed the sell orders in December and currently evaluate some potential buy candidates. In general, I plan to distribute the available funds among existing positions like MO, ALV, T, ENB, JNJ, TXN, ITW and GD. Furthermore I like ABBV, OZK, LMT, D, AAPL and JPM at current valuations. So there is a good chance that some of them will be my new holdings.

Let me know about your thoughts and personal experience in optimizing indexing and DGI. What stocks are on top of your buy list with the recent market decline?

I wish you all a Merry Christmas and a good start into the New Year.
Enjoy the holiday season!

Leave a Comment