You’ve probably heard of Investment Policy Statements (IPS) that people use to describe objectives, asset allocation, etc… for all their investments. To provide us with some guard rails in our taxable stock portfolio, I thought it would be best to create a Stock Policy Statement (SPS).
The SPS will differ from the IPS in that it’s focused only on stocks. This will be a living document, which means I’ll edit it as my portfolio grows, needs change, and whether I’m in pre/post-retirement.
Remember, this is only focused on individual stocks in my taxable account so you won’t see anything describing cash, 401(k), bonds, or any other part of my portfolio.
Stock Portfolio Goals (2019-2025) – Pre-Retirement
- Create a stock portfolio valued at over $425,000 by 12/31/25
- Generate forward dividend income of over $15,000 annually by 6/30/25. This means by 6/30/25, my forecasted 12-month dividend income should be over $15,000 annually.
Guiding Principles
- Generate dependable and growing dividend income
- Minimize capital loss
- Effectively manage expenses and taxes by minimizing portfolio turnover
- Growing dividend income is critical to meet portfolio income goals but total return should always be considered
- Don’t chase yield
- Invest in “best in breed,” meaning quality companies with strong brands
- Don’t overpay for growth; valuation and purchase price is critical for the stocks on the Master Stock List
Stock Philosophy/Approach
- Invest in individual stocks and exchange traded funds (ETFs)
- 90% or more of the stock portfolio will be invested in companies from the Master Stock List
- Though most of the stocks will be invested in U.S. companies, we remain open to international companies too
- Excluding ETFs, 2%-6% is the target value for an individual security in this portfolio. No single security (other than ETFs) should have a value weighting over 10% of the total equity portfolio.
- We are targeting diversification into at least 6-7 sectors
Dividend Strategy – Pre-Retirement
- Dividends will be reinvested for most stocks
- Dividend Income Diversification
- Excluding ETFs, the dividend income received for an individual stock should range between 2%-5% of all annual dividends received for the stock portfolio.
- No single stock (excluding ETFs) should account for over 10% of annual dividend income received of the total stock portfolio.
- NOTE: It’s recognized that my early accumulation phase will make it difficult to achieve this dividend income diversification. The targets are being set so that I don’t go into retirement receiving an overweighted amount of dividend income in any one stock.
Selling Strategy
Though highly unlikely, it’s possible that a Master Stock List security might need to be sold. Remember, these are my “sleep well at night” stocks so it would have to be an extraordinary condition for me to sell a Master Stock List security.
Unlike some dividend investors, you won’t see me automatically sell a stock if they freeze or cut the dividend. There are times when it makes more sense for the dividend to be frozen for a while to deal with debt, share buybacks, or grow the business. If it makes sense then I’ll stick with the company.
Creating this list was difficult because so many scenarios can occur and these are suppose to be my buy and hold forever stocks. I have no doubt my views on this will change over time. It’s very important that I get away from trading and emotional selling. But I will make mistakes and I’m willing to sell if I feel a mistake has been made.
My companies have long histories and I should be able to hold them for decades. Knowing I’m going to hold onto an organization through thick and thin is helpful. I’m reminded of my Brace Yourself: Most Stocks Are Losers article that demonstrates the benefit of buying and holding strong companies.
It gives me strength and it keeps my emotions in check when things aren’t going well for the company in the short-term. It might not keep me from selling something but I’ll certainly think long and hard about it first. Interestingly, my wife has become a good sounding board when I’m considering selling a stock.
Summary
This document represents my taxable account stock policy and it will very likely evolve – it’s a living document. I’ll think of new items to include or something just might not make sense after further review. But this is a start and I’m happy to have some guidelines.
Thanks for reading!
Mr. TLR