Asset Selection

Asset Selection

In the previous page I outlined my methodology used to identify my target amount to hold within each of the eleven major sectors, which is 1/11th of the equity portion of my portfolio.  The previous page also explained my rule of thumb of limiting any single investment to a cap of $10,000.  As a result, I will at a minimum have 33 equity holdings.  With rules in place to come to this conclusion, the next fundamental step to clarify is which stocks to invest into, and conversely, which stocks to not include within my portfolio.

In order to develop guidelines to follow for this assessment, I once again considered the basic problems that investors must overcome to achieve their goals, with a major focus upon the overall lack of market knowledge and sophistication.  Even though I believe I have gained experience in investing for myself , as a typical individual investor I am certainly not an expert in the field.  With this in mind, I tried to develop guidelines that take as much guesswork out of the equation as possible.

The first rule I gave myself is within each of the major sectors, to identify companies that are recognizable, longstanding, and provide products or services that are easily understood.  The main benefits of this tactic is that I can always reflect upon the value that the company provides, and find resolve in the power of brand recognition and success business management principles, amid the routine market cycles, which results in a desire to hold the investment for the long-term.  In short, I invest in companies I want to own.

The second rule I gave myself relates to the overall goal I have for my investments, which is to establish stable and growing dividend income, while simultaneously achieving overall capital growth.  Many investors write about minimum and maximum dividend yields, cash balances, P/E ratios, market capitalization etc…but I came to the conclusion that this leads towards too technical of a path.  I do, after all, have a strong desire to keep my strategy as simple as possible.  In the spirit of keeping things simple, I only look for a history of stable and growing dividends, with a preference for companies that have a reasonable dividend yield in the typical range for the asset class.  I also take into account the effect of the financial crisis a few years back that forced many strong companies to reduce their divided (such as GE), and focus more on post-recession performance.  For companies that converted from unit trusts to stocks for tax purposes, I do not consider the distribution changes that resulted as a negative, but again, prefer to look at post-conversion performance.

To assist me with evaluating stocks to include within my portfolio I have developed a stock evaluation method called Dividend Tactics Stock Scores or DT Scores for short, where I evaluate a potential stock on ten key metrics and calculate a DT Score.  A higher DT Score indicates that in general a company has been around longer, has good dividend practices and is in better financial shape than a company with a lower score.

In summary the underlying tactic I employ with investment selection is to purchase holdings in companies that I feel offer valuable products and services, have demonstrated resilience, and have solid brand value that I would be proud to own.