Stick To Your Plan

This article originally appeared on The Div-Net on February 16, 2012

The market has been on a tear to start 2012. The S&P is up 6.81% YTD, and it’s showing little signs of slowing. This is a good thing or a bad thing, depending on your investment strategy. If you’re a value-oriented dividend growth investor like myself, a market on fire can dim the prospects of finding a good value with which to put your capital to work.

There’s a lot of talk about a forthcoming pullback in the market, due to the strong performance out of the gate. I agree that there is probably a pullback on the horizon, but when will it come and how large will it be? I lack the ability to answer these questions so I do one thing: I stick to my plan.

I have a plan. My plan involves saving a high percentage of my net income (over 60%) and using that excess capital to invest in attractive dividend growth stocks month after month after month. The market will go up and down by many percentage points during the course of this plan, which is likely going to be more than a decade long. After I’m done with the plan, I’ll have a large portfolio filled with dividend growth stocks that pay out dividends in amounts that exceed my monthly expenses, and continue to raise those dividends at rates that exceed inflation. This way, even as my expenses go up over time my income rises even faster.

I’m showing my dedication to that plan. Even though the market is strong and many are awaiting an eventual pullback I entered the fray and recently added to my positions with PEP and NSC. The market could drop like a rock tomorrow, and you know what? I’ll just buy some more. That’s me sticking to my plan.

What’s your plan? Are you sticking to it?

Thanks for reading.

Photo Credit: Master isolated images

Comments

  1. says

    Good work on sticking to the plan.

    My plan is to keep purchasing stocks, and also to supplement that strategy with some cash/bond holdings, occasionally selling puts to buy stocks at a lower cost basis, etc.

    It’s all about buying quality companies at reasonable prices. Plans can differ as long as they are rational and consistent, like yours.

    • says

      Matt,

      Thanks for stopping by. Always good to hear from you!

      You have an excellent as well as rational and consistent plan as well and it’s obviously treating you very well.

      BTW, I look forward to your newsletters! I signed up as soon as I could.

      Best wishes!

  2. Anonymous says

    Mantra,

    When the stock market is up, that is the time to look for individual stocks which are relatively cheap. I track the low and high dividend yields for each stock. When the dividend yield is high for that stock, that stock is relatively cheap.

    On this basis, EXC, MAT, NSC are cheap. With the latest dividend increase, KO is now relatively cheap.

    Ken

    • says

      Ken,

      I agree that using historical high/low yield is a useful metric, among many other metrics to use when evaluating a stock for relative value.

      I like KO at these levels and wouldn’t mind adding to my position. I don’t follow MAT, however.

      EXC is interesting. I like their position in nuclear energy, but the stock price has been flat for the last couple years, and even worse if you go out 5 years. The dividend hasn’t been raised in a number of years, which puts it outside my radar. I wouldn’t mind holding a stock that doesn’t implicitly raise the dividend (like TOT), but their has to be a good thesis behind holding the stock. I just don’t know if I have one for EXC. It would make a nice secondary utility holding, but that would be about it for me. No earnings growth or dividend growth would lead me to invest in other places.

      Best wishes!

  3. says

    My plan is to retire in about 25 years. Part of the plan is to build a portfolio of good Dividend-paying stocks to (hopefully) cover most of my expenses when I reach retirement.

    Since my target is so far off, I actually look forward to a correction. While I’ll continue to buy the entire 25 years, on a correction I plan to boost my purchasing to take advantage of the lower prices to pick up some extra shares for the same cost.

    • says

      Jodun,

      Sounds like we have similar plans. Best of luck to you.

      I look forward to a correction just as much as you, I just do not plan for, or predict, such corrections. I’ll be very happy if one comes though, as my capital will purchase a larger amount of equities.

      Keep in touch.

  4. says

    Well done DM. You hit the nail on the head by emphasising the improtance of sticking to a plan. Doesn’t have to be a perfect plan, just something that keep you from getting distracted by the market regardless of what it is doing. That being said, I think I picked a good time to build up my cash position. I just can’t handle the thought of purchasing some of these companies at their current prices. Patience is a virtue…

    • says

      The Stoic Investor,

      Thanks for adding that. I agree. My plan certainly isn’t perfect, but following it will certainly lead me to be much wealthier than I would have otherwise been if I had just blindly made investment decisions without planning or thought.

      Fail to plan, plan to fail…no?

      I agree with you on building up your cash position. Now certainly isn’t a bad time for that, especially if you don’t already have a large capital base (dry powder) from which to deploy when an opportunity rises. I’m certainly thinking about making my monthly purchases in smaller lots to still take advantage of dividend growth investing, but also keep a little cash on hand. We’ll see.

      Best wishes!

  5. Nuno André says

    Nice post, I too believe in sticking to a plan, but I would like to know if an yield of say 3% is considered low, normal or high, Mattel has 3.87% just now, and you would have to pay tax on that.

    Since my bank now offers me around 4% after tax which would be the best investment? Or the real point in dividend growth is choosing companies that you believe to increase the dividend value in the future?

    • says

      Nuno,

      4% is pretty solid. I don’t know of any bank around here offering anything even remotely close to that. If your market is offering that, then I would certainly take advantage of that! I think it’s still a good idea to be invested in equities, but when you’re getting an after-tax take of 4%, you would probably want to be a bit more picky about what you invest in…maybe look for higher yielding securities?

      I look for a balance between lower yield/higher dividend growth and higher yield/lower dividend growth and I gravitate toward the former simply because of my age. As I grow older I’ll gravitate toward the latter.

      Best wishes.

    • Nuno André says

      Yes, the mix between between lower yield/higher dividend growth and higher yield/lower dividend growth sounds perfect. I will have to look into it, but seems to me safer to go on higher yield on my case.
      Still SNH was with an 8% yield the other day, Let’s just wait for stock prices to come down. And if they get lower one can always average down.

      Thank you for your reply

      Best regards

  6. says

    Mantra,

    Great article. New subscriber here. I have been following you for a couple of months just reading your post and then did the unthinkable 3 weeks ago. I cashed in $10,000 of Mutual Funds and opened a brokerage account and bought 6 stocks (NLY, AT, MCD, PEP, PM, T). I am trying to do what you do that is add money monthly and live under my income and hope the dividends will eventually pay for my lifestyle.

    Heres the question: When doing this are you looking for overall yeild the portfolio gives off or looking for stocks that consisently raises its dividend?

    • says

      jdavis4982,

      Thanks for following my journey! Glad to see you stop by.

      Great news there. I’m glad you decided to take control of your financial future. Sounds like some solid picks there, but I’m not a huge fan of NLY. MCD is a little rich, but PEP, PM and T seem pretty solid at current prices.

      As for your question, I talked about this in an earlier question. I like high yield/lower growth (like T) and lower yield/high growth (like MDT) both, but gravitate more toward the latter because of my age. I’ll likely gear myself toward the former as I grow older, but I think it’s good to have a healthy balance of the two. Dividend growth is extremely important to me, but it’s not guaranteed like current yield is. Nobody knows how much dividend growth a company is going to give, so again it’s important to have balance.

      I hope that helped! Keep in touch.

  7. says

    I think since your monthly purchases are part of an overall plan your strategy is correct, and it doesn’t make sense to worry about timing the market really since this buy represents only one of at least 120 monthly purchases you will make between now and retirement.

    For me personally though, since I don’t already have such a system in place and am still in the process of learning about dividend investing, I am waiting to enter the equity markets. I think there will be a fairly large correction within the next 3-4 months, after which there will be a run-up until the elections. We’ll see if I’m right!

    Keep up the good work.

    • says

      TMM,

      Your comment laid out my plan pretty succinctly. I think you said it better than I could have. You are completely correct, every purchase is just one small part of a much larger series of purchases, although each one is still important. Still, one or two bad months (overvalued purchases) aren’t going to kill me. It’s important to realize it will all average out (like a DCA strategy).

      I hope you’re right about the correction. I’m anxiously awaiting better entry prices!

      Thanks for stopping by and laying that out so well!

  8. Anonymous says

    Hi
    Just bought a hundred of MFC, hope it recovers. I think that it is a secure company but has just fallen on bad times. Tell me I’m right. Earl

    • says

      Earl,

      I wish I could tell you you’re right, but honestly I don’t follow MFC. It’s simply not on my radar, but I do believe that Passive Income Earner and My Own Advisor (both quality Canadian bloggers/dividend investors) follow that one. They’d probably have a better idea than I do.

      I wish you the best with your investment!

  9. says

    I know somebody who follows the markets pretty closely and they usually tell me how it’s going. I don’t follow it myself because it doesn’t really change my plans any. I buy dividend paying equities when I have the money. Unfortunately that is not every month like I would prefer, but with my long timeline I am following a similar plan.

    • says

      Poor Student,

      I follow the market to a degree and, more specifically, I follow the stocks I own along with a small list of stocks I consider for ownership. The market can swing up and down, but I’m generally more concerned about the subset of dividend growth stocks I’m interested in.

      It sounds like you have a long-term plan in place, and I wish you the best in executing it!

  10. Shean says

    I took little gamble about January effect so I bought 2 stocks with great promising before annual report and going to sell them during annual meeting.

    Day after annual meeting is the day when stocks drops same amount as dividends. If dividends is 1€ stock price also drops 1€. At this moment seems great because both stocks are around +5-7 % up.

    Here where I live in Finland companies pay dividends once a year during march, april, may. Stocks sure rally high because of upcoming ex-dividends date.

    After saving 2 years money for special mortgage account where I can have 24 months where I dont need to pay mortgage but only interest. My plan grand plan for this year is to reduce several stocks I have because I´m planning to go back to school and buy a house same time. Now Im 97% on stocks so Im going to reduce it to 70%.

    Keeping stocks PEP, PG, T, CCJ, CLF and some finnish stocks that are focusing stainless steel and steel product maker. Selling other stocks that have gone no where.

    Im expecting market to drop during summer and when it does it I may iniate position on.
    1. POT
    2. FCX
    3. CVX
    4. Diageo/PM

    Also looking for opportunity on KONE one of worlds biggest elevator maker.

    • says

      Shean,

      It sounds like you’re sticking to your plan, there. That’s great man.

      I’m also hoping for a market correction this summer, and there are a lot of people expecting one. If so, I’ll gladly pick up more equities at reduced prices, which buys me more shares for the same capital spent.

      Best wishes for you!

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