DGI Lesson 12 (Part I): Invest According to a Plan

You know, so much of the time we’re just lost….We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs….But today you are the law. You ARE the law. (“The Verdict,” 1982)

One of the great things about investing is that you are in charge.

In your job, you have a boss, who also has a boss. But in your investing, you are the boss. You answer to no one other than yourself (and maybe your partner).

Run Your Investing Like a Business
When you invest, you are running your own little business. That’s exactly how you should think about it.

Envision yourself as the founder and CEO who wants to run the business well. Every well-run business has:

  • a primary goal;
  • strategies designed to achieve that goal; and
  • tactics, programs, and activities to execute the strategies.

I believe strongly that you should create a document that sets forth at least the first two of those elements. Your goal and your strategies should be written down. They form the core of your business plan.

What Is Your Business Model?
In selecting stocks to invest in, one of the things you do is figure out the business model of any company that you are considering investing in. How do they make money?

I have written several articles about individual stocks, and in each article, I spent considerable time examining the company’s business model.

For example, see these articles about Coca-Cola (KO); Procter & Gamble (PG); and Sunoco Logistics Partners (SXL).

Just as you require that you understand what any company’s business model is, in your role as CEO of your investing operation, you demand that you understand your own business model: How do you make money, and why will that method continue to work?

With that in mind, let’s focus on the business plan for a dividend growth investor.

What Are the Qualities of a Sound Dividend Growth Investment Stock Program?

The investing legend Benjamin Graham often referred to an “investment operation.” I like this term, because it implies that you, as an investor, are running a business. Here’s what he said:

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

So you are running what Graham would call a dividend growth investment operation. I would suggest that a good one has these characteristics:

  • It is realistic for a self-directed individual investor to implement and maintain.
  • It provides a sufficient and reliable cash flow from dividends.
  • The cash flow grows steadily, at a rate that beats inflation over long periods of time.
  • The program offers long-term safety of principal and good chances for principal to grow.
  • The operation provides peace of mind and psychological relief from market volatility.

Your Goal
I cannot tell you what your goal ought to be. Your investing goal is quite personal to you. It probably depends on your age, financial situation, stage in life, tolerance for risk, and a host of other factors that are important to you.

But what I can do is share my own goal, the one that I use in my Dividend Growth Portfolio that is portrayed here at Daily Trade Alert.

The goal of my Dividend Growth Portfolio is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies. The numerical target is for the portfolio to deliver 10 percent yield on cost within 10 years of inception. I am more interested in the ability of this portfolio to produce income than its sheer size.

I have written this at the top of my business plan for this portfolio.

Here are some of the elements from that goal that may resonate with you.

Steadily increasing stream of dividends

This is pretty obvious, right? As a dividend growth investor, I want to receive dividends that are reliable, and I want more each year. If I compare Q1 of this year to Q1 of last year, I want to see that I received more dividends than the same quarter last year. When I compare a full year with the preceding year, I want to see year-over-year growth.

If I don’t achieve that, my business plan is failing.

If I do achieve it, then my business plan is succeeding. Since the inception of my Dividend Growth Portfolio, that goal has been achieved every year.

Here is a table of the dividends produced each year by the Dividend Growth Portfolio. Years 2008-2013 show the actual dollars received, while the numbers for 2014 are projections.

DGP DividendsNotice in the last column how my yield on cost is marching steadily upward toward the 10% goal in 2018. (If you don’t remember what yield on cost is, look back to “Dividend Growth Investing Lesson 6: Yield and Yield on Cost.”)

Paid by excellent, low-risk companies

In preparing my Top 40 Dividend Growth Stocks eBook each year, I place great emphasis on company quality. There are lots of ways to measure company quality. Some are quantitative while others are subjective.

However you approach it, the goal is to purchase stock in companies that can be relied upon to be profitable most years, increase their earnings over time, and pay increasing dividends each year. Many of the companies that do this are familiar to you, such as Coca-Cola (KO), Chevron (CVX), and Procter & Gamble (PG), all of which I own. Those companies have increased their dividends every year for 52, 27, and 58 years, respectively. They represent what we mean by excellent, low-risk companies.

More interested in income than sheer size
Many investors believe that the goal of investing is to “win.” They want to beat the market and amass the biggest fortune.

That is a worthy goal, and I do not criticize it. Indeed, I track the total value of my own Dividend Growth Portfolio, and my wife’s and my Perpetual Dividend Portfolio, out of curiosity if nothing else.

But total return is not the central focus for most dividend growth investors. Instead, the primary mission is to optimize the income stream.

The reason I use optimize instead of maximize is because different investors might have different views of what they consider the best dividend goal.

  • A young investor with many years to build an ultimate retirement income stream may prefer to invest in a stock with, say, a 2% yield and a potential 20% per year growth rate instead of a stock with a 3.5% yield and a 7% growth rate.
  • An older investor may prefer just the opposite, reasoning that he wants more income right now, and he doesn’t demand extreme growth so long as his income grows faster than inflation.
  • An investor may like to have a few really high yielding stocks (9% +), and tolerate occasional dividend cuts, so long as the overall long-term trend is up. He may reason that he can use the high income flow from riskier stocks to fund the purchase of more dependable stocks that will become his core portfolio many years down the road.

You Will Get Total Return Anyway
Let’s end this lesson by reminding ourselves of an important fact. Just because a dividend growth investor focuses primarily on optimization of the dividend stream does not mean that he or she will not do well on the total-return front.

Actually, it is quite the opposite. After all, if you are investing in excellent, low-risk companies that have the wherewithal to increase their dividends every year, doesn’t it stand to reason that over long periods of time, they will do well in stock price as well as in dividend growth?

The stock market is a strange creature at times, but over long periods of time, it tends to produce rational outcomes. Benjamin Graham put it this way:

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

What he meant is that in the short term (a week, a month, even a year or more), the way that the market prices a particular stock can become like a popularity contest or beauty pageant. Investors may over-react to earnings “misses,” political or global news headlines, and other things that over the long run have nothing to do with the ability of a company to produce and to grow its earnings.

But, said Graham, in the long run, the market does tend to weigh the things that are important: Earnings, earnings growth, and business sustainability.

That’s how you, as a dividend growth investor, get total return too. I leave you with this graphic of the total value of my Dividend Growth Portfolio since its inception in 2008. It has never trailed the S&P 500 in total value, even though “beating” the S&P 500 has never been a goal of mine.

DGP vs SPYIn the graph, the black line is my Dividend Growth Portfolio (DGP), while the gray line is SPY, an exchange-traded fund that tracks the S&P 500. Both portfolios are shown with dividends reinvested.


  • Run your investing like a business.
  • You are the CEO of your investing operation. You own it.
  • Write out your business plan.
  • Start with your primary goal. It is personal to you. You may seek guidance from others in formulating your goal, but ultimately it is yours.
  • If your goal involves optimizing income over the long term, you will still get total returns.

Next time, we will talk about some proven strategies that can help you to achieve your goal.

Dave Van Knapp