Wednesday, August 27, 2014

Value Dividend Investing System

Let me start by saying I am not a professional investment broker. I have no educational background that should lead you to think that I am giving professional advice. I’m just an engineer, who knows how to make spreadsheets and is looking to not be left behind as the world moves forward.

Having met some of my previous investment and saving goals I’ve recently moved on to try and improve my ability to retire as young as possible. Further, I recognize that with Beth’s schooling, we are a bit behind in where we should be investment wise. This is not to begrudge her the education, which in and of itself was an investment we see paying off, but an acknowledgement that for ten years or so, my job was the only one pulling retirement funds out.

Since my first week out of college I’ve put aside 5% of my income. My employer will match up to 5% so I took all of the free money I could. This has been invested in the Government’s TSP program, a very well-run and stable system for growing your nest egg. I have few complaints about it, and odds are if they met my demands, it would only confuse things.

I’m now looking for some longer term investments to make to pay out in twenty to thirty years. With this kind of goal in mind I went out seeking guidance and counsel from the interwebs.

I’ve always been a fan of Warren Buffett. Not just because he’s rick, there are a lot of rich people, but because I think he embodies the “Get Rich Slowly” principle of long view, value based investment. He has a few simple rules that he uses to invest by. He only invests in companies he understands. He considers his investments to be “buying ownership of a business” instead of the usual “buying a stock hoping it goes up.” Finally I like his “buy a wonderful company at a good price, not a good company at a wonderful price” approach.

With all that in mind, the Dividend Investing Strategy combines with Value Investing made the most sense. The goal is to acquire companies that pay a healthy dividend. Use that dividend to buy more stock in companies that pay dividends. All the while you’re stock value goes up over time, hopefully outpacing inflation, and with it your dividend outpaces inflation. If started early, done right, and well-funded, you can set up a PERMANENT income stream to fund you through retirement while still leaving a portfolio to your loved ones when you die.

I started by buying a list of companies I know of, that historically pay dividends, and have a long growth history. These include the usual suspects of Coca-Cola, Johnson and Johnson, AT&T, McDonalds, etc. I weeded out companies I have some moral problems with (tobacco, low wages, racist history) or I don’t see being around in 30 years (i.e. Best Buy) and was left with about 40 companies. I then organized these into a Google Sheets spreadsheet with an automatic stock information feed (see the command “googlefinance()”) and set to work with a rule set.
Here are my rules.
  1. Dividend payment higher than 2%,
  2. Price to Earning Ratio (P/E) of less than 20,
  3. Currently priced at 90% or lower than the 52 week high.
Once I have the shortened list for the month I look at the financials. Are they low because it’s a good deal, or because they made a serious business mistake. From what I read, these rules, while restrictive, will usually kick out a few companies as potential investments a month. I’ll hold off on purchases until I can make them in orders bigger than $500 to keep my investment cost below 1%.

Then Buy, Hold, Profit.

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