I believe that investing is like running a business, hence I need to have a plan which comprises of

  • Primary goal

  • Strategies designed to achieve that goal

Primary Goal of the Dividend Growth Portfolio

Build a reliable, steadily increasing stream of dividends worth $1000 in monthly income.

Strategies

To help me to stay focused on my investment goal, I will focus on what is under my control:

  • Amount of money I invest every month

  • The types of dividend growth companies I invest in

  • Reinvesting dividends

  • Keep investment costs low

  • Staying diversified and invested for the long run

Projections

Mathematically, for each $1000 I invest, I expect to generate about $30 in annual dividend income. I expect that the dividend portfolio would grow dividends organically at an annualized rate of 5%-7% in the future. Based on my conservative projections around growth and annual contributions, I expect to reach my goal by 2026-2027.

Types of growth companies

There are 3 types of companies from a growth perspective that I will diversify in:

  1. There are companies that have low yield, but high dividend growth. There are companies that would likely generate high yield on cost in the future and are in their initial phase of dividend growth.

  2. There are companies with moderate yield and moderate growth expectations. There are companies in the sweet spot (3% yield 7% dividend growth), which would generate dependable, yet boring returns.

  3. There are companies with high yields today, but slower dividend growth. Mostly concentrated in certain industries like REITs, Tobacco, Utilities. They provide high current income today, but are at risk of a cut during a recession. In addition, they are losing purchasing power to inflation.

Reinvesting dividends

I will take all my dividends in cash and reinvest monthly in the companies I find the most attractive at that time.

I will not be sitting on cash, all the money I have available will be 100% invested.

Buy / Sell

Entry valuation is important. Different companies and industries are available for sale at different times. Hence, I will build my portfolio slowly over time. Even though valuation is part art part science, I will use a mix of historical P/E, historical dividend and research providers to determine fair value.

I will also keep in mind that interest rates affect valuation; in a low-interest rate world I would not consider to be overvalued a quality company selling at a 25 P/E. This changes in a rising interest rate world.

Since I am a long term investor. once I buy a company, I will be holding it through thick and thin as long as the dividend is not cut.
I will stop allocating money to a company that froze it's dividend or had a marginal dividend raise.

Diversification

I currently do not have any hard rules around sector diversification, I will not buy into a sector for the sake of diversification. Different sectors are available at a fair valuation at different points in time.

I will generally try to keep any position at a lower value then 5% of total portfolio.