Monitoring and Adjusting Your Portfolio

To maximize the benefits and ensure that your portfolio continues to meet the criteria required to reach your goals, it’s essential to regularly review and adjust your holdings. In this lecture, we will discuss the key aspects of monitoring and adjusting your dividend growth portfolio, including tracking fundamentals & performance, rebalancing, and reinvesting dividends.

1. Reviewing Earnings Reports

Earnings reports are crucial documents that provide insights into a company’s financial performance. As a dividend growth investor, you must review each earnings report to ensure your investment criteria are still being met. Here are some key aspects to consider:

1. Revenue and earnings growth: Analyze the company’s revenue and earnings trends to determine if the company is growing its top and bottom lines. This growth is essential for supporting dividend increases over the long run.
2. Dividend growth: Assess whether the company’s dividend growth is meeting your expectations in order to achieve your goals (based on starting yield + growth).
3. Debt levels: One of the main reasons companies end up cutting their dividends is debt load becoming too large vs profits generated. Follow the absolute debt levels, its relation to earnings generation, terms of the debt and its maturity schedules closelsy.
4. Free cash flow: Dividends are paid out of the free cash flow generated by business activities. Ensure that the company is generating sufficient free cash flow to cover its dividend payments. This is a key indicator for a dividend growth investments health.
5. Corporate strategy: Make sure that the company is still committed to its dividend policy. Is the dividend being mentioned in the CEO’s or CFO’s remarks?

NB! Analyst calls following the presentation are worth listening to!

Management will try to always paint a rosy picture of the company prospects but analyst follow-up questions might reveal some underlying weakness.

2. Adjusting Your Portfolio

As you monitor your dividend growth portfolio, it’s essential to make adjustments to optimize performance and minimize risks. Here are the key steps to consider:

When to Sell

In an ideal scenario, we would never have to sell a single share and coast towards our financial goals.

However, that’s an extremely unlikely scenario.

Investors loathe to sell their shares at a loss, since it’s an acknowledgement of a failed investment. But that’s a perfectly normal part of investing.

We make investing decisions based on the information available to us at any given time. But there is always an element of uncertainty when it comes to any investment. If a company is not meeting the criteria we expect of it, or the risk of dividend growth failure increases sharply – it might be the time to head for the exits.

By diversifying well and always demanding a margin of safety at purchase – we mitigate risks and a few company-level disappointments don’t derail our overall investing success.

Here are the 5 main reasons for me to consider selling an investment:

A. When The Dividend Is Cut

A dividend cut directly impacts

B. When the Company Doesn’t Raise the Dividend

A safe and growing dividend is the cornerstone of dividend investing success. If a company fails to raise its dividend, it’s the first sign that the dividend might be in danger of being cut and an indication of financial trouble or a change in the company’s priorities. In such cases, it might be time to reevaluate your investment and consider selling the stock.

However, a maintained dividend doesn’t automatically mean it’s a sell for me. There are some factors that influence that decision. For example, when the whole industry is being hit with specific challenges and a company chooses to keep some extra liquidity just in case, whilst still maintaining the dividend. A good example of that is Canadian major banks during the 2008-2009 Great Financial Crises. They stayed resilient in spite of the challenges and kept the dividend unchanged during the turmoil. It was a sign of strength, not weakness in that case.

C. When Dividend Growth is Lackluster

When we buy a dividend growth stock we expect a certain amount of yearly dividend growth (based on the starting yield we capture at time of purchase). If you notice that a company’s dividend growth has been running below your target rate, or its dividend growth rate has been consistently declining, it needs to be further researched. Is this due to free cash flow growth insufficient to support desired dividend growth? This could be a cue to exit the position and look for better investment opportunities.

D. When Free Cash Flow Growth is Negative Over a Multi-Year Period

Free cash flow (FCF) is the cash generated by a company’s operations that is available for distribution to its investors after accounting for capital expenditures. FCF growth is essential for dividend-paying companies, as it provides the necessary funds to pay dividends and invest in future growth.

If a company’s FCF growth is negative over a multi-year period, it indicates that the company might be struggling to generate sufficient cash to sustain its dividend payments. This could ultimately lead to dividend cuts or suspensions. In such situations, it may be prudent to sell the stock and reallocate capital to more promising investments.

E. When Debt Gets Too High

A company’s debt level can significantly impact its ability to pay dividends and grow its business. High debt levels can strain a company’s finances, making it challenging to maintain or increase dividend payments. If a company’s debt level becomes too high, it might be forced to cut or suspend its dividend to service the debt.

To evaluate a company’s debt level, we can use the ratios we learned in the previous lectures such as the debt-to-EBITDA and Interest Coverage ratios. If these ratios are significantly above the company’s historical range or the industry average, it could signal that the company’s debt burden is too high to be able to sustain and grow the dividend.

An exception to the rule in this case could be a company that executes many acquisitions and has proven it can de-lever quickly after taking on the debt for the purchase. A good example is Broadcom, as it has a long track record of successful acquisitions via debt and a rapid de-levering process after that.

Rebalancing

Periodically rebalancing your portfolio is necessary to maintain your target asset allocation and ensure your investments remain diversified. This involves selling some assets that have increased in value and buying others that have decreased in value in order to bring your portfolio back into balance.

To rebalance your dividend growth portfolio, consider the following:

• Rebalancing frequency: Determine how frequently you should rebalance your portfolio, such as annually or semi-annually. This will depend on your investment time horizon and personal preferences.
• Rebalancing triggers: Establish clear rules for when to rebalance, such as when an individual holding, stock market sector or jurisdiction exceeds a certain percentage of your portfolio value (or % of total dividend income).

Sourcing New Investment Opportunities

In order to improve your portfolio’s performance, it’s crucial to continually look for new investment opportunities that align with your dividend growth strategy. If one of our holdings fails to meet our criteria and we are forced to sell – we have an existing watchlist of potential candidates to source for an investment to take its place.