Saturday, January 15, 2022

Week in Review

"Have a plan. Follow the plan, and you'll be surprised how successful you can be. Most people don't have a plan. That's why it's easy to beat most folks." - Bear Bryant

Do you ever look out in the distance and see storm clouds rolling in? Do you panic as they approach? Did you pay attention to the weather report from last week? Did you make preparations? 

Over the last few weeks as I review the Dividend Town portfolio I feel prepared for what comes next. The plan is to invest in high-quality dividend growth stocks, maintain a more reasonable sector weighting than the market, and generate income via cash-secured puts and covered calls.

If I take the existing portfolio and measure the historical dividend growth, there's a 7.6% increase each year over the last 10 years. Without any stock appreciation or reinvestment, my annual income would have gone from $2.8K to $7.8K. Dividend Growth

Continuing this trend, assume a 5% appreciation in share price annually, reinvestment of dividends at 2.7%, a dividend growth rate of 7.6% and $15K a year contribution, the current ~$300K will reach ~$2.2M and generate $82K of dividend income a year. 

Dividend Town Graphs

So what if things don't go as planned? I plan for a few contingencies.
  • Dividend cuts: I use SimplySafeDividends and monitor their Dividend Safety score. Of the dividend producing stocks I invest in, only Medifast is rated Borderline Safe, the rest of the companies are Likely Safe (>60%). 
  • Consistent trend of dividend growth: 50 of the 52 dividend generating companies in the portfolio issue consistent dividend increases each year. Of those 50, the average number of consecutive year increases is 22. That's through good times and bad times. 
  • Consistently great companies: I use a custom screener that I refresh each week with input from a variety of sources. I then apply a series of weightings against ~1,700 companies and force rank them based on growth, quality, dividend safety and some other factors. The companies that rise to the top is where I will invest.
  • From that list, I need to make some choices. Is it overvalued/undervalued? For value, I calculate a blended average of fair values from a variety of sources, throw out the high/low, then apply a discount for highly ranked companies or a premium for poorly ranked companies.
  • Watching my sector risk: This is my biggest fear about index investing. 
    • For example, take $XYLD. It's an S&P 500 Covered Call ETF. It's in my portfolio. Generates a great yield (~9.0%). Mirrors an index. What's the sector breakdown look like? If I committed more of this index, do I want the risk of ~30% of my portfolio tied to Tech?
    • Tech dominates the financial news, but it doesn't always dominate returns. On the Novel Investor, there's a great diagram showing top performance by year.

All the above are elements of the strategy and keys to executing the plan. As the quote above mentioned, I'll follow the plan to be successful.

Dividend activity this week was good, netting $142 total. 

Option activity was good this week as I closed a few puts against $EMBK thanks to The Bear Cave.
  • Closed the call end of my $ABBV strangle for a $94 loss, but keeping the put option open. Expires on 01/28 at $135 strike. I do believe this is overvalued slightly so I'll keep this open.
  • Closed a covered call against $WLK, netting $100 gain. I'm glad to have this stock in my portfolio, but some of the swings lately have been churning for option activity. 
  • Closed my puts against $EMBK for a $420 gain. 
  • Remaining open: Verizon Iron Butterfly, $AMC put for June expiration, $HIMX call for June expiration (currently underwater)
Overall performance was good, gaining 0.62% this week vs. S&P, NASDAQ and DJIA all negative. 

I'm currently working on a few books from Kuppy's Book List. Really enjoying Tomorrow's Gold on the perspective of looking for future trends. 
  • You can be a Stock Market Genius
  • Tomorrow's Gold 
Over the next two months I'm considering narrowing the portfolio from ~60 stocks to ~40. I'd like to have more targeted bets but need to think critically before taking any type of action. I asked the question on this Twitter thread earlier this week and there's a large range of answer. It's good food for thought.

Have a great weekend!

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