This is my “All About Interest” business plan. This is a dividend growth plan that will focus on investing in sound companies that meet certain criteria listed below. These are companies that typically have a long track record of paying and increasing their dividend each year at rates higher than inflation. A business, whether that be an established business or a startup, may have had its 409A valuation to determine its value, it may be wise to look into that to see how that can help with making investment choices.
While this plan is long overdue in writing, I’ve had it formulated in my head for some time. Alongside some careful budgeting (why is budgeting important?), I hope my plan will help some others create their plan for financial independence (FI).
Main Goal: Produce a consistent income stream from dividends that will grow each year at a rate higher than inflation. The companies producing these dividends should be hand-picked and meet all of the criteria in my plan.
1.) At least 90% of all stocks chosen should be in the CCC lists, that is the Champions, Contenders and Challengers list maintained by David Fish. This list can be found on my Get Started tab.
2.) Small-Cap or larger ( >250 million market cap).
3.) 10-year YOC should be 10% or higher (typically using 5-year CAGR).
see a monthly CCC Ranking to find out how i calculate this metric here.
4.) Minimum yield of 2.5% (exception can be made as long as target total portfolio yield holds).
5.) Dividend growth over last 5 years (5-year CAGR) must be over 4%.
6.) Large moat or competitive advantages.
7.) Sound fundamentals.
Stocks chosen should be at “Fair” value or better. Valuation is determined by P/E multiples, payout ratios, future growth projections, cash flows and debt levels.
1.) Target of 40 total companies in final portfolio.
2.) Target weight of 2.5%, no company should be above 10% weight unless a very compelling reason exists.
If the total number of companies do not equal 40, then the target weight percentage will be calculated by dividing 100 by the current number of companies (i.e., 20 companies will give 5%). The max allowed weight will be four times this number.
3.) Total portfolio yield > 3.5%. That means to produce $60k in yearly income, I’d need a portfolio size of $1,714,285.71.
All dividends should collect and not be automatically reinvested. Instead they will be added with fresh capital and deployed into my best ideas at the time. This prevents investing in a company when I think it’s overvalued.
When to Sell or Strongly Consider Selling:
1.) Dividend is eliminated, cut or held constant
2.) A major reorganization happens
3.) The company has serious changes to fundamentals
4.) The company becomes extremely overvalued
5.) The company has a total return less than 5%/year over last 5 years
6.) The company increased its dividend at a rate below inflation
7.) The company plans to be acquired or merges
1.) Target Sector Weights:
Energy & MLP’s – 15%
Healthcare – 15%
Consumer Staples – 15%
Financial & REIT’s – 12%
Industrials – 10%
Telecom Services – 8%
Utilities – 8%
Materials – 8%
Information Technology – 6%
Consumer Discretionary – 3%
2.) Target Geographical Exposure:
U.S. – 75%
International – 25%
3.) Target Market Caps:
Mega-cap: Over $200 billion – 10%
Large-cap: $10 billion – $200 billion – 60%
Mid-cap: $2 billion–$10 billion – 25%
Small-cap: $250 million–$2 billion – 5%
Micro-cap: $50 million to $250 million – 0%
Nano-cap: Below $50 million – 0%
I think this lays out a good start to my business plan. There are parts of my plan that are subjective and I’ve left room to improve upon or modify this plan as I get closer to FI. I have tried to set some good guidelines to use for myself in building up my “All About Interest” plan. I also realize I have a couple of companies that don’t meet all of these guidelines. As I approach FI, I plan to reduce exposure to any speculative positions.
I look forward to any feedback.