Published April 2nd, 2017
Building your dividend portfolio is probably the most exciting part of investing. Searching for the next great company, looking into their financials, defining your investing thesis and, finally, buying the right shares at the right time. I don’t know why, but there is just something about being human and that great feeling of buying and acquiring assets.
But, there is a lot more than simply buying and cashing your dividends quarterly. A less exciting, but even more important, part of investing is to manage your portfolio as a whole.
I would like to suggest a few tips for when you have more than a few stocks to manage. These are among the best tricks I’ve learned over my 10+ years in the investing world.
High dividend yield stocks are usually paying great distributions for a reason: because the market fears they will stop. At best the company will continue paying its dividend but you won’t see any growth from either the payout or the stock value. There are a few exceptions, with companies paying yield between 5%-6%, but, unfortunately, many of them fail their shareholders over the long haul. Go for companies that will supply you with both types of growth instead. A company showing strong dividend growth is most likely showing both revenues and earnings growth. Therefore, it isn’t just your quarterly check that will increase, your portfolio value will too.
Don’t limit your thinking to today’s dividend yield, think about the future as well. I’ve made several plays so far with low dividend yield stocks that have paid more than 7-8% dividend yield stocks (APPL, DIS, CNI for example).
There are only a few companies that you will hold during your investing life that are flawless. You will love their products, love their growth and love their dividend. However, it’s important to write down the reasons why you bought them and make sure you keep in step with them.
Falling in love with a stock will blind you from poor results; you may excuse missed earnings projections and forget about a bad year while the market is up. These events should actually become a good reason to go back to the company’s fundamentals and focus on the real reasons why you bought it.
Even the strongest companies will have their challenging periods. However, those who successfully go through difficulties are often those who present the strongest investment thesis in the first place. You can learn more about defining your investment thesis through the 30 days of dividend growth investing series.
I’m sure you have heard about investors who have a “special rule” for selling. If the stock makes +15, +20 or +25%, they sell. If you talk with these investors they will tell you they most likely make up their rules, sell the stock, rinse & repeat. If you keep talking with them, you will also realize they have left tons of money on the table.
There are no esoteric rules in the investing universe that will bring a stock down after going up by X%. Therefore, you are simply hurting your portfolio if you sell a winner while it continues to go up. I never look at how much a stock makes in my portfolio to determine if I should sell it or not.
Sometimes I sell stocks and they are up by 40%, sometimes I sell them when they show a loss and sometimes I keep them even if they are +100%. The secret is to have solid investing rules you can rely on and use them to sell your stocks.
I’ve seen many investors throughout the years think they could (read should!) make up for their past losses with their next play. Investing is not a casino where you can play until you win. There are no “win or lose” scenarios and this is not a game. Investing is a process where you can put the money to work for you. A casino doesn’t work that way. This is why you play at a casino and you invest in the stock market. Never gamble your money, you will lose it.
If you pick dividend growth investing as your main investing strategy patience will be a greater gift than recklessness. Don’t be in a hurry to make money, dividend growth will happen over time and will reward you for your diligence.
During your life as an investor you will see that, sometimes, a specific sector seems unbeatable. The economic environment sets the base for high growth for a small group of companies. Companies from the same sector will all show very strong fundamentals. It doesn’t mean you should buy all of them. In the early 2000s, Canadian banks and oil sand companies were in two highly promising sectors. We saw the same phenomenon with techno stocks right before Y2K.
When you pull a stock filter, it is possible you get 5 to 10 companies coming out of the same sector as this industry is currently booming. Investing in too many stocks within the same sector can result in fabulous returns if you are right but will eventually finish with brutal drops once the party is over. This has happened in every successful sector at one point or another.
For the same reason you should learn to keep a winner, you should also learn to sell a loser. While I’m very proud of my investing returns so far, it doesn’t mean I have never lost money on a trade. In fact, I’ve suffered from several stocks losing 50% in my early days of investing (RIM, VNP, PDN just to name a few). But I had to let them go and concentrate on the winning plays. The reason why I lost money on those stocks was a lack of methodology in the beginning of my investing path. I thought I could simply beat the market with any risky picks.
A bad investment is a bad investment. Then again, there are no esoteric rules guaranteeing that a losing stock will come back from the dead and that you will be able to sell it if it gets its value back. This is not going to happen in most cases. If a stock keeps going down, there must be several reasons why. Once you find them you can determine if it is worth keeping it or not. But the historical stock price is not a valid reason.
think this advice is probably the most important right now. If you are a young investor who started his portfolio over the past couple of years, you will definitely think it’s easy to invest. I started my investing journey in 2003 and made the same mistake. During my first three years of trading, all I was doing was making more money trade after trade. What I didn’t know is that a monkey would have done the same thing! My mistake was to start thinking I couldn’t be wrong. This is when I deviated from my investing process and eventually experienced my first loss on the market.
Build yourself a strong set of investing rules like my 7 dividend growth investing principles and adjust them over time. As you become more comfortable using those principles, your investment process will kick-in automatically when you look at a new stock. It will be like wearing a pair of special glasses that will enable you to find the right company for your portfolio.