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I use an investment code as a tool to help me manage my portfolio. It is something that I recommend all investors do as it helps manage emotions. It is much harder to make an emotional decision if you have certain rules of portfolio management that you are committed to following. For this blog, I put pen to paper (so to speak) and wrote them down as part of The Dividend Guy’s Investment Process series (see my sidebar to the right). I believe this investment code should be consistent during think and thin, however I also believe that there are times to update it based on learnings and market experiences. If there are more sound investment principles to live by than the ones I have chosen, then I want to ensure that I am using those.
This recent market changes and dividend cuts has got me thinking about my dividend growth strategy. In my original dividend code I had the phrase “Never Sell” as part of the list. I also included the following: “Hold dividend growth stocks that consisitently raise dividends to my core portfolio“. These are actually contradictory statements as I cannot achieve both without violating one or the other. If a company cuts its dividend then that definitely is in contradiction to the dividend growth code. However, based on my principles I can never sell. Stalemate! I therefore have initiated a change to my principles that I would like to receive your feedback on.
The changes I have made are as follows:
Instead of:
Hold dividend growth stocks that consisitently raise dividends to my core portfolio
Use the following Investment Code:
Generate a reliable and growing stream of income from dividend stocks
and
Instead of:
Never Sell
Use the following Investment Code:
If a company cuts its dividend, then immediately sell that stock and move money to another dividend growth stock (according to asset allocation)
The obvious risks with this strategy are that the stocks I sell because of the dividend cuts will rise in price in the future as the company recovers and become a dividend growth stock once again. However, there is no way to predict the future and we need to act on information we have. A company that cuts its dividend is not being managed well and I do not want that stock in my portfolio. I anticipate that the returns I will receive from a better company will far outshine any potential gains on the dividend cut company.
So there you have it, my evolving strategy to build a solid and growing portfolio. Let me know what you think!