Business Plan For The Income Builder Portfolio – Update

Any investor’s portfolio is his or her own small business, and any business should have a well-articulated plan to help it run successfully and efficiently.

So with Year 2 of our real-money, real-time Dividend Growth Investing endeavor now in the books, I thought it would be a good time for an update.

Summary:

Every month, Daily Trade Alert will allocate $2,000 for DTA contributor Mike Nadel to make two stock buys for the Income Builder Portfolio. Primarily using the Dividend Growth Investing strategy, he will choose each company, and he will write at least one article about each selection. He will execute each purchase and provide proof of each transaction. He will maintain and monitor the IBP, reporting regularly on its progress and updating relevant data on a dedicate website.

Inception Date:

Jan. 16, 2018.

Goal:

Build a reliable, growing income stream by making regular investments in high-quality, dividend-paying companies.

The secondary goal is to build a portfolio that will experience good total return, much of which will occur organically because of the excellent companies owned.

Income Target:

Build a portfolio that will produce at least $5,000 in annual dividends within 7 years of the IBP’s inception.

Many investors will have (and should have) a longer time frame in mind. Indeed, DGI is a long-term strategy that truly bears fruit after years (or better yet, decades) of compounding.

Nevertheless, we are realistic enough to know that this project might not last for multiple decades, so we are choosing a shorter time frame as the Income Target.

The following table shows how the IBP’s income stream (“Dividends”) potentially could grow over time. It assumes 5% annual dividend growth and 2.5% yield – numbers we believe are very conservative and likely attainable.

About $24,000 ($2,000 monthly) is to be invested annually. At a 2.5% yield, each year is projected to produce $600 in dividends. That $600 would grow 5% per annum. “Drip” refers to new assets purchased by reinvested dividends — essentially, dividends from dividends. “New Div” represents the dividends the IBP expects to bring in via the following year’s $24,000 investment.

The table looks ahead through the end of 2037, showing how a “forward income stream” of nearly $26K will have been produced in 20 years.

But again, for the sake of this project, the stated Income Target is at least $5,000 annually by the end of 2024.

After a few years, as the income stream grows, a new target could be established.

Note that when discussing income for the purposes of the IBP, the reference is to “projected” or “forward” income.

For example, IBP component Amgen (AMGN) announced on Dec. 11, 2019, that it would raise its annual dividend 10%, from $5.80 to $6.40 per share, with the first quarterly payment of $1.60 to be made on March 6, 2020.

An investor who owned 10 shares of AMGN at the end of 2019 could expect to receive $64 in income in 2020. That forward income, from each IBP position, is what is included in the “Dividends” column of the table presented earlier.

Funding:

Daily Trade Alert’s $2,000/monthly commitment is open-ended. However, DTA could increase or decrease its funding level for the IBP at any time (or eliminate it entirely). Should the commitment be changed in any way, the Business Plan will be updated accordingly.

DTA will retain all profits and income produced by the portfolio, and it also will incur any capital losses.

More than $2,000 can be spent on the two monthly purchases as long as cash is left over from previous months. At the end of Year 2, about $47,882 of the $48,000 allocation was used, meaning $118 in extra funds were available at the start of 2020.

DTA will pay all commissions and fees associated with building and maintaining the portfolio. These costs should be minimal; in 2019, our brokerage, Schwab, began the zero-commission trend that has swept the industry.

Stock Selection:

Twice every month, Mike Nadel will select the companies that will be bought with the money provided by DTA. He might initiate new positions or add to existing holdings.

He will assess each company’s business model, dividend growth history, “moat” (competitive economic advantage), financial strength (through metrics such as earnings, revenue and free cash flow), and other readily available information.

Dividend Growth Investing will be the preferred strategy when selecting companies. DTA contributor Dave Van Knapp’s DGI primer can be found HERE.

Because the IBP will be held in a taxable account, Daily Trade Alert prefers not to invest in foreign companies that levy withholding taxes. Master limited partnerships and other investments with potentially complicated tax situations will be avoided.

Stocks will not be shorted. Margin will not be used. The IBP will not use options, futures, derivatives or similar trades.

There are no plans to include ETFs or mutual funds in the IBP; they are not forbidden, though.

Valuation:

A stock’s valuation will be strongly considered before each purchase, but the perceived quality of the company is of utmost importance.

An investor making sizable additions to a large, established portfolio might be primarily concerned with valuation. The IBP, however, is a DGI portfolio that will be built over time through regular $1,000 purchases – similar to the concept of dollar-cost averaging.

When trying to decide between two or more similar companies, the more attractively valued stock usually will be selected.

Reinvesting Dividends:

Dividends will be automatically reinvested right back into the companies from whence they came, a process informally called “dripping.” This simple, cost-effective method of increasing each position’s share count is another form of dollar-cost averaging.

Like most major brokerages, Schwab offers no-fee dripping on the majority of U.S.-based companies available.

Portfolio Characteristics:

While acknowledging that it is easier to manage a portfolio that doesn’t get too large in scope, there is no requirement that the IBP hold only a certain number of stocks.

There is no minimum yield mandate. Nor must a company have been growing dividends for a certain number of years. Even companies that don’t pay dividends could be selected. This being a DGI portfolio, yield and income-growth history will be considered during the stock-selection process.

It is strongly preferred that no company produces more than 10% of the portfolio’s income or makes up more than 10% of the IBP’s total value.

If a company does surpass 10% in either of those categories, that stock will not be considered for future purchases (other than reinvested dividends). Therefore, any company that does exceed 10% gradually will see that percentage fall as the rest of the portfolio is built up. If a position grows so much that it is expected to make up more than 10% of the portfolio for a significant length of time, it could be trimmed.

The IBP will be diversified across sectors, industries and dividend characteristics (yield, growth rates, histories, etc.).

The following graphic, from Simply Safe Dividends, shows the sector breakdown of the Income Builder Portfolio at the end of its second year of existence, 2019. (This is presented as an example, and it does not necessarily represent future expected sector percentages.)

Selling:

Portfolio turnover will be held to a minimum, so selling will be rare. The IBP nonetheless will be closely monitored, and there will be reasons to consider selling a company:

  • There are fundamental changes to its business model or viability.
  • It reduces, freezes, suspends or eliminates its dividend.
  • It is going to be acquired by or merged with another company.
  • It is going to buy another company or to spin off businesses it operates.
  • It becomes extremely overvalued.
  • It makes up too large a percentage of the portfolio.
  • Its presence interferes with proper management of the portfolio for some reason.

Again, those are reasons to CONSIDER selling a company. There are no “automatic sell” triggers.

If Mike Nadel decides to sell a company, he will write an article detailing the reasons. He also will choose a replacement stock to be bought with proceeds from the sale, and he will explain why it was a better choice for the IBP.

Portfolio Reviews:

IBP updates will be presented in Daily Trade Alert articles several times per year.

The Business Plan will be reviewed annually and updated as necessary.

Portfolio Holdings:

The Income Builder Portfolio’s positions, complete with regularly updated income and value data, can be viewed HERE. That page also includes links to IBP-related articles.

WRAPPING THINGS UP

The main change I made to the Business Plan this time was eliminating the 50-company maximum.

I replaced that rule in the Portfolio Characteristics section with: “While acknowledging that it is easier to manage a portfolio that doesn’t get too large in scope, there is no requirement that the IBP hold only a certain number of stocks.”

Generally, I still believe a more concentrated portfolio will benefit most DGI practitioners. However, one mission of the IBP project is to present interesting investment candidates for further research, and I decided that an arbitrary maximum might restrict my efforts in that regard.

Remember, we absolutely are not suggesting that fellow investors replicate the Income Builder Portfolio.

In addition to presenting investment candidates, this endeavor is about discussing concepts and principles, and demonstrating the process of building a reliable, growing income stream through DGI.

Furthermore, we understand that many DGI proponents, especially younger investors or other newcomers to the strategy, might not have $1,000 available to invest twice a month. After all, $24,000 per year is a pretty big chunk of change.

No sweat. Whether you have $200 per month to invest or $200,000 or anything in between, the principles will be the same.

Happy investing, everybody!

— Mike Nadel

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