Business Plan For The Income Builder Portfolio – Update for 2023

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

So with Year 5 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:

This site’s co-founder, Greg Patrick, will allocate $2,000/month for Mike Nadel to buy stock for the Income Builder Portfolio. Primarily using the DGI strategy, Mike will choose all the investments, and he will write at least one monthly article about his selections.

Mike 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 the portfolio’s dedicated website.

Inception Date:

Jan. 16, 2018.

Goal:

Build a reliable, growing income stream by making regular investments in high-quality companies, most of which have a track record of paying and increasing dividends.

The secondary goal is to build a portfolio that will experience solid total return.

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.

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

About $24,000 ($2,000 monthly) is being invested annually. At a 2.5% yield, each year is projected to produce $600 in dividends. That $600 would grow 5% per annum. In the table above, “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, which was created at the start of 2018, looks ahead 20 years through the end of 2037, showing how a forward income stream of nearly $26K would be generated were the portfolio to exist that long.

But again, for the sake of this project, the stated Income Target is at least $5,000 annually by the end of 2024. Five years into this endeavor, the IBP already was nearly 90% of the way there; therefore, we expect to reach our target at some point in 2023.

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. 13, 2022, that it was raising its quarterly dividend 10%, from $1.94 to $2.13 per share, with the first payment under the new rate to be made on March 8, 2023.

That translates to $8.52 for the year, so an investor who owned 10 shares of AMGN at the end of 2022 could expect to receive $85.20 in income in 2023. That forward income, from each IBP position, is an example of what is included in the “Dividends” column of the table presented earlier.

Funding:

Greg Patrick’s $2,000 monthly commitment is expected to continue until the Income Target is realized. However, he could increase or decrease his funding level for the IBP at any time (or eliminate it entirely).

Greg will retain all profits and income produced by the portfolio, and he 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.

Greg will pay all commissions and fees associated with building and maintaining the portfolio. These costs should be minimal because most brokerages have eliminated commissions for routine trades.

Stock Selection:

Every month, Mike Nadel will select the companies that will be bought with the allocated money. 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. Mike’s colleague, Dave Van Knapp, has authored a DGI primer that can be found HERE.

Because the IBP will be held in a taxable account, we prefer not to invest in foreign companies that levy withholding taxes, though exceptions can be made. Master limited partnerships and other investments with potentially complicated tax structures will be avoided.

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

ETFs and mutual funds are not forbidden, but there are no plans to include them in the IBP.

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 is being built over time through regular purchases of between $200 and $2,000 – similar to the concept of dollar-cost averaging.

Still, valuation will always be an important part of the discussion. We always want more reliable income, and a good way to get more “bang for the buck” is to buy stocks when they are attractively valued.

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, the IBP’s broker (Schwab) offers no-fee dripping on the majority of U.S.-based, publicly traded companies.

In the event that dividends can’t be reinvested due to Schwab’s limitations, income will be used to buy fractions of shares of the same stock shortly after a distribution. During 2022, only one such company was in the portfolio — Ireland-based Medtronic (MDT). The following image shows that MDT paid dividends on July 15 and Oct. 14, and that a few days later on each occasion Mike executed the purchase of a fractional share using about the same amount of money.

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. Still, this is a DGI portfolio, so 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, and the position 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 fifth year of existence, 2022. (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 spin off a business 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 document it in an article. 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:

In early January of each year, there will be an annual review of the IBP’s performance over the previous 12 months.

There also could be periodic updates during the course of each year, as well as articles related to the IBP even if there have not been purchases or sales.

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 home page also includes links to all IBP-related articles.

WRAPPING THINGS UP

This project is about presenting interesting investment candidates for further research, about discussing concepts and principles, and about demonstrating the process of building a reliable, growing income stream through DGI.

In other words, we are not suggesting that fellow investors replicate the Income Builder Portfolio.

Furthermore, we understand that many DGI proponents, especially younger investors or other newcomers to the strategy, might not have $2,000/month available to invest. After all, to many investors, $24,000 per year is a lot of money.

However, whether one has $200 per month to invest or $200,000 or anything in between, the principles will be the same.

NOTE: Mike also manages another real-money portfolio, the Growth & Income Portfolio. Although it has an income component, it is “growthier” than the IBP. Check it out HERE.

— Mike Nadel

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Source: Dividends & Income