Is It Tree Trimming Time for Your Dividend Growth Investing Portfolio
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Dividend-Growth Investing: It’s Tree-Trimming Season!

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Welcome to our monthly passive-income portfolio (PIP) update—#17 in the series! Before we get to the November update, I wanted to take a moment to share our thoughts on the portfolio review and trimming process. After all, it is tree-trimming season—and that means your “money” tree (aka portfolio) as well!

This Week’s Focus: The Annual Portfolio Review and Trimming Process

It’s the start of the most wonderful time of the year and—if you’re like us—Thanksgiving signals one of my favorite activities… decorating the Christmas tree! However, it also marks another important season (end-of-year portfolio reviews) and investing activity (trimming the portfolio to prepare for the new year).

As you will see in our portfolio update, we have made some significant changes to our site’s public passive-income portfolio as part of our annual trimming process and I wanted to take just a moment to discuss how we approach the decision-making process when it comes to reviewing and, inevitably, trimming our DGI portfolio.

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What Trimming a Dividend-Growth Portfolio Is NOT

Dividend-growth investing is predicated on a long-term investing approach—a buy and hold mentality. However, this does not mean that we never trim positions or close positions.

Your strategy should never be so strict or regimented that it pigeon-holes you and prevents you from effectively managing your capital. After all, the portfolio is merely a means to an end. That end is driving as high of a long-run return as possible (i.e., the effective use of your investment capital).

Unfortunately, while many dividend-growth investors cling too tightly to an “I can’t trim anything” ideology… far too many retail investors stray dangerously close to the other extreme—suffering from short-term thinking and impatience. This leads to knee-jerk reactions and emotional decisions—the antithesis of strategic, long-term investing.

This produces a continuous state of churn—which is counter-productive when seeking to effectively manage your capital.

Appropriate and productive trimming is NOT churn!

To learn more about the cost of churn, please read Portfolio Churn Is Destroying Your Dividend-Growth Potential–a previous portfolio update where we focused on this problem.

What Trimming a DGI Portfolio Should Look Like

As opposed to damaging churn, appropriate and effective portfolio trimming is guided by a strategic approach to capital deployment. Specifically, it manifests these five (5) characteristics or qualities:

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Portfolio Trimming Is Rational and Unemotional

First, proper portfolio trimming is rational and unemotional. This means that decisions are based on the underlying fundamentals of a given position, the overarching investing strategy, and current condition of the portfolio—a condition that will always be impacted by the unforeseeable forces and developments in the markets and real world.

We live in a dynamic world of change and we must adapt to thrive. However, proper trimming should not be based on an emotional response to those changes. When we allow emotions to control the process, we succumb to herding. This leads to churn and losses (buy high & sell low).

Portfolio Trimming Is Structured

Second, proper portfolio trimming is structured. This means our decisions are built around a schedule.

Churn is a continuous process—a result of a short-term mentality. Proper trimming is not continuous. Rather, it adheres to a structured and scheduled process.

Typically, in a long-term portfolio, underlying fundamentals are reviewed quarterly and annually. This provides ample opportunity to recognize the opportunity for beneficial changes, while avoiding market noise and emotion—providing a layer of protection (buffer) against churn and herding.

Portfolio Trimming Is Focused on Capital Efficiency

Third, proper portfolio trimming is focused on capital efficiency and rates of return. We have “X” amount of capital that we can invest, and we want to produce the greatest return we can on that capital—within our risk profile and tolerance and in accordance with our strategy and process.

Again, trimming should not be focused on feelings—whether we like, or dislike, a given position. Rather, it should be focused on the potential long-run return provided by the underlying fundamentals. This requires an absolute approach to our investing rather than a relative one.

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Portfolio Trimming Is both Holistic & Atomistic

Fourth, proper portfolio trimming is holistic—it takes into account the functional relationship between the individual positions (parts) and the portfolio itself (the whole).

However, it is also atomistic—recognizing the distinct and independent nature of each position.

In other words, each position must be evaluated independently (it must stand on its own thesis); however, those positions must work together to form an effective portfolio.

Thus, appropriate trimming can be the result of an idiosyncratic issue (one related to the company itself) or the general function of the overall portfolio—for example, the need to reduce exposure to a given sector or industry.

Portfolio Trimming Is a Function of Risk Management

Finally, proper portfolio trimming is a function of risk management. When contemplating a portfolio change, we should always be cognizant of what our exposure is both before and after the move.

While a great deal of portfolio trimming is the product of changing fundamentals (i.e., our investing thesis for a given position is no longer valid), an equally important stimuli for change is the changing exposure of our portfolio (balance).

Balance may be disrupted because we trimmed a position(s) for atomistic reasons, or because of significant growth in one or more holdings over time. Both are critical to recognize, and both must be managed through effective portfolio trimming in order to manage risk and balance our exposure.

In essence, portfolio trimming is a dance—one in which each action has an impact on the whole. It requires a systems approach to maintain proper balance and exposure.

What Our Approach to Portfolio Trimming Looks Like

While we generally prefer to conduct our broad portfolio review and trimming on an annual basis, we have performed it at nine months for our site’s public DGI portfolio (in November).

We launched this portfolio in March, so the first year’s schedule is a bit accelerated. However, this will enable us to (1) transition to an annual schedule moving forward, (2) perform some tax harvesting with the end of the year now in site, and (3) be prepared for 2020.

Our target is 50-60 positions for our site’s public DGI portfolio. Over the year, we added a large number of developmental positions (to be expected with a new portfolio)—taking us well over our long-run target. With this month’s trimming, we are now at 41 positions. While this is slightly below our target range, it has enabled us to (1) redeploy capital into existing positions with high potential rates of return and (2) build our cash position in preparation for 2020—both strategic decisions.

In carrying out our trimming, we primarily targeted developmental positions. We closed a number of these positions based on four primary reasons:

This is in alignment with our overall portfolio building process—one where we initiate developmental positions (with long-term potential), thin them out over 1-3 years, and keep the best of the best as core, long-term positions. To learn more about this approach—one Buffett has masterfully used for decades, I encourage you to read our article 9 Sure-Fire Signs You’re NOT a Long-Term Investor.

It is important to remember that we don’t trim because a position is down—that may represent an even greater opportunity to build. Rather, we trim because (1) the underlying thesis is no longer valid, (2) we have (or anticipate) better opportunities to deploy our capital, or (3) we need to adjust our broader exposure (manage risk).

We encountered several positions that rapidly became overvalued. Sometimes the market recognizes the value you saw before you get a chance to build out your position. Take advantage of it! Your thesis was right… you just didn’t get to it in time. That’s a good problem to have. Take the small win and move on—redeploy the capital in higher-return opportunities.

Furthermore, as we have detailed in other articles, we employ a value investing strategy with a dividend kicker. This includes the flexibility to make some small-scale pure-value plays—ones on a shorter time frame (typically 3-5 years). Some of these plays hit our targets much more quickly than anticipated, and we closed them out. Those gains now (1) fuel the building of other positions or (2) provide us with additional dry powder for next year.

All in all, we are pleased with our tree trimming and feel we are positioned well for 2020. We have begun to build some excellent core positions (a process that can take 3-5 years) and have a growing war chest of cash to deploy into new developmental positions when the opportunity presents itself.

Now, let’s dive into our November update and see where we are at…

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Our November Dividend-Growth Portfolio Performance Update

As I noted, we’ve made some significant changes to our portfolio as part of our annual review and trimming process… Let’s take a look under the hood of our passive-income portfolio and recap the month of November!

Dividend Growth Portfolio Performance

As we close out the month of November and our 37th week, we currently have a portfolio value of $4,460.25—up from our starting value of $500 on March 13th.

In terms of market performance, we are down -2.1% since inception, up +2.3% over the past quarter, and down -1.1% over the past month.

Dividend Growth Portfolio Performance MONTH 112919
Monthly Performance
Quarterly Performance
Total Performance
Dividend Growth Portfolio Sector Performance 112919
Total Sector Performance
Portfolio Capitalization 112919

As you can see, our portfolio capitalization growth has slowed. This is due to two interrelated factors: (1) great opportunities have become more challenging to find given current valuations and the market’s PE expansion and (2) we have increased our cash position on the sideline—waiting for the right opportunities to materialize in 2020.

We are absolute investors. If great valuations are available, we’ll patiently wait (while slowing building existing positions). We will not settle for relative opportunities based on the potential for continued multiple expansion—possibilities that can quickly evaporate in a game of musical chairs. We have a system and a process—and we stick to it long-term just as we encourage you to do on our website!

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Dividend Growth Portfolio Dividends

As we always emphasize, this is both (1) an income-investing portfolio and (2) a long-term investing portfolio. As such, capital gains/losses are only a secondary performance metric. Your focus should always be placed primarily on income metrics!

With a DGI (passive-income) portfolio, our primary goal is to build passive income. Market volatility should simply be viewed as potential opportunities to deploy your capital more efficiently and generate more income over the long run.

Here’s where we are at in terms of income metrics…

We have earned $150.88 in dividends since inception, $89.70 over the past quarter, and $59.24 during the past month.

Dividends continue to trend in the right direction with basically 60% of our earned dividends coming in the last quarter (representing 32% of the portfolio’s lifespan).

In terms of dollars, here’s a look at our paid-dividends trend:

Dividend Growth Portfolio Yield

Our yield-on-cost (YOC) has increased to 8.5%, while our current yield is at 9.2%.

Below is a graph of our YOC and current yield since inception. From a portfolio-level perspective, anytime YOC is below the current yield, it’s a targeted buy zone—there is opportunity to increase our capital efficiency (i.e., raise our YOC).

This indicates that we are deploying our available capital about as efficiently as possible with this portfolio.

As we always note, we utilize an opportunity-focused portfolio allocation approach—one that seeks to deploy capital (both new and reinvested) with the greatest efficiency possible.

Below is a chart of our portfolio’s current yield-variance distribution—showing where we currently have opportunities to deploy new capital.

Dividend Growth Portfolio Allocations

To wrap up, here are our current allocations (post trimming) by holdings, capitalization, asset type, position size, and sector:

Additionally, here are our allocations for our two sectors that include additional industry/type subsets:

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Conclusion

We hope you’ve enjoyed this week’s update on our public-view dividend growth portfolio and my always-opinionated (but usually valid and hopefully beneficial) discussion!

Trimming your portfolio is a necessary and beneficial part of investing. However, it can easily degrade into counter-productive churn if you’re not careful and following a solid investing plan. Specifically, you should ensure that your trimming process is:

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You can always view our Wicked Capital dividend growth portfolio at https://m1.finance/1zUclN2JL

If you’re interested in starting an M1 Finance portfolio, please consider using our referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!

That’s just one more reason to start your dividend growth investing today! It’s never too soon to start working towards your financial freedom!

If you’re interested in dividend growth investing—you’re in the right place! We focus exclusively on helping others be as successful as possible with this approach and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!

Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that portfolio with a solid process and winning mindset!

The key is developing, understanding, and consistently sticking to your process!

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Doug

Doug is the founder of Wicked Capital. He holds an MBA, BBA (Summa Cum Laude), and AAcc from Liberty University and has over 20-years of corporate finance, accounting, and operations management experience--spanning the public, private and nonprofit sectors. He is a member of Sigma Beta Delta International Honor Society in Business Management and Administration, Delta Mu Delta International Honor Society in Business, and Tau Sigma Academic Honor Society. He is also proud to have served his country as a member of the 82nd Airborne Division. His professional wheelhouse is corporate financial reporting, analysis, and forecasting—buoyed by his passion for fundamental analysis and valuation. Doug has been actively engaged in trading and investing for several decades, with a focus on value and dividend-growth investing. He has authored several books and, when he's not busy living the corporate dream, trading and managing investment portfolios, he enjoys playing the drums and spending time with family--especially in the Outer Banks of NC.

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