Starting from Scratch:  Building Your Dividend Growth Portfolio

Are you just starting your investing career?  I wish someone would have sat down and talked with me about how to invest when I first started out.  I got lucky, and broke even when I started, but I could have done so much better.

Investing can seem extremely complicated.  It is and it isn’t (how’s that for vague?).  The amount of ratios, formulas, and styles of investing are nearly endless.  Sound investing for the long run is very simple:

Buy great businesses with strong competitive advantages at fair or better prices

The statement above covers all there is to know about successful investing  (admittedly, not in great detail).  Buying high quality businesses has historically been a winning strategy.  The Dividend Aristocrats index, which is comprised of businesses with 25+ years of dividend increases without a reduction, has outperformed the overall stock market by 2.88 percentage points per year over the last decade.  Not bad for a passive index.

Why Have Dividend Aristocrats Outperformed?

The reason is simple.  Dividend Aristocrats are high quality business.  A business  has to have a durable competitive advantage to increase its dividend year after year for 25 or more years.  What businesses make are in the Dividend Aristocrats Index?  You can download the complete list of 54 here .  Some examples of household name Dividend Aristocrats are:

• Coca-Cola (KO)
• Pepsi (PEP)
• Wal-Mart (WMT)
• Target (TGT)
• ExxonMobil (XOM)
• AT&T (T)

Investing Is Easy

You can compound your wealth over time by investing in businesses that have proven they can grow year after year.  You can buy the ETF NOBL, which has an expense ratio of 0.35% and tracks the Dividend Aristocrat Index.  Buying this one ETF gives you access to all 54 Dividend Aristocrats at once, for a very low 0.35% expense ratio.  This takes virtually no research and can be done in a few minutes with a discount broker.

Digging Deeper

If you are not comfortable investing in all 54 Dividend Aristocrats, you can select individual stocks from the index to add to your portfolio.  You can weed out overvalued stocks in this manner and invest only in the highest quality businesses when they go on sale; when their P/E ratios fall.  Determining ‘quality’ is difficult.  Coca-Cola passes the gut check for a quality business, but what exactly makes it quality, and is it more quality than Wal-Mart?  Coca-Cola’s P/E ratio of 22 is far higher than Wal-Mart’s P/E ratio of 16, but is it worth it?  There are no exact answers to these questions.  One approach to dissecting price and quality is to use bias free ranking metrics that sort stocks based on quality and price.  The 5 Buy Rules from The 8 Rules of Dividend Investing do just that.  Each rule ranks 127 businesses with 25+ years of dividend payments without a reduction over a different metric that measures either valuation or quality.  The highest ranked businesses are deemed most suitable for investment.

Quantitative ranking systems avoid one of the biggest pitfalls of investing:  biases.  We are all biased in ways we don’t easily recognize.  Quantitative systems remove emotional buying and selling decisions from the equations; all that is required is to execute according to the plan you’ve laid out.  Of course, it is important to not screen for any old rule.  The 8 Rules of Dividend Investing are based on academically verified strategies as well as common sense ideas from some of the greatest investors of all time.

If you are not comfortable with ETFs or using systems to invest, you can copy from the best.  Great investors such as Warren Buffett. Monish Pabrai. and Joel Greenblatt are required by law to publish their portfolios quarterly (click on the person’s name to see their portfolio).  Mimicking the portfolio of your favorite investor is another excellent way to start investing.

How to Build a Portfolio

When you start investing, generally you don’t have great sums to put into your holdings.  It is important to save a set amount each month and buy at regular intervals.  Each month, buy the highest ranked stock (or ETF) you own the least of based on the set of criteria you have established.  Buying the highest ranked stock you own the least of each month will build a diversified portfolio of high quality businesses purchased at attractive prices over time.  The longer  you invest, the more money you have to invest, and the more diversified your portfolio will become.

Discipline Is Key

What sets apart those who will retire wealthy from the rest is the amount of discipline you have to stick with the plan you lay out.  If your investment strategy is sound, and you follow it diligently, you are likely to do well in the market over time.

The stock market does not go up in a straight line.  You can experience losses of 50% or more investing soley in stocks.  If you have the fortitude to persevere through market downturns, you can benefit from the compounding effect of owning fantastic businesses over long periods of time.

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