I have resolved the DRIP versus targeted reinvestment dilemna. I'm still a DRIPer

I read several treatments of the issue and nothing changed my mind from the current position.

All of my holdings reinvest. That means between 2 and 10% growth in shares in each holding yearly.

Valuation may go up or down, but even if down, it's cushioned by the reinvested dividend. The growth in share count assures that dividends will grow. Since most of the companies I hold also raise dividends yearly, that also produces compounding as the position grows.

Since all positions are growing, the portfolio holdings grow in parallel, making less re-balancing required.  A lot of discussion results from concern about whether reinvestment produces less growth in the portfolio because some holdings are over-valued. Those who espouse targeted reinvestment claim that they can purchase the most under-valued holdings in their investment universe which produces greater dividend growth.  I'm not convinced.

Most investors will agree that rising earnings results in rising stock price as well as rising dividends.
If rising stock price outstrips rising dividend, then the ability of reinvestment to purchase more shares is blunted. However, if rising earnings also result in rising dividends, one benefits from both factors in appreciation of the value of the position. Then, if one rebalances, one harvests the capital gain and the reinvestment goes into another holding with favorable dividend growth characteristics. The portfolio is reinvesting, even when one is moving money from one holding to another. Both new money and rebalancing are forms of targeted reinvestment, so the portfolio has both forms of reinvestment working simultaneously.

At the moment, most high quality dividend stocks are at fair value or above. The ones that aren't (amongst those I wish to own) already occupy a full position in my portfolio. So, I am accumulating some cash.  I continue to get stung on covered calls. One makes money, but if the stock appreciates above the strike price, you lose the difference and the stock is called, or you have to purchase the call back at a loss. I do better with cash covered puts; I either get premium payments or stocks at discount to strike price.

When I can't find stocks I want to own at current prices, purchasing cash-covered puts keeps the cash in motion, and keeps the over-valued stocks on the radar screen, so when they come into acceptable purchase range, then I can purchase or sell an in-the-money put so that the shares will be assigned at expiration of the put.

What has transpired over the last few years is that I have become comfortable with a strategy and knowledgable about how to moniter that strategy. It means I can spend less time worrying, more time studying how to find better performance. It's a nice place to be, compared with where I started 

Yield lessons;

So, I'm finally convinced. I can think of 3-4 holdings that were in the high-dividend category that have cut dividends and I've been burned...Otelco, Frontier Communications, CenturyTel Telecom of New Zealand. I got out of Annaly Capital, Windstream, a few others...

I think it's time to dump all the rest: I don't have many left with yields over 5%.  Since I don't have an automated way to see the payout ratio and rate of change in payout ratio, I'm vulnerable to changes in company operating status that cause management to change their dividend policy.  It's not the dividend cut that hurts: it's what the dividend cut does to the value of the position. After all, I'm buying earnings and dividends. If earnings drop and dividends are cut, then I have an investment of deteriorating value. The stock price may follow in lock-step, or suddenly and precipitously when the dividend is cut. Dividends are cut by policy, not by a daily vote on the company value by the market.

I need to change the way I monitor the portfolio;  The very first thing I should look at is earnings per share. Then I should look at the percentage change in earnings per share over the preceding year, 3 years, 5 years and 10 years.

After that, I should look at the dividend yield. I should look at the change in dividend payment over the preceding 1, 3, 5 and 10 years.

I should look at the payout ratio; it should stay within a reasonable range.  i should then look at what the company did with profits not paid out to shareholders; stock repurchase, capital investment, etc.

I'm in a state of conflict over the DRIP versus targeted re-investment issue; right now I'm DRIPing.
I like seeing each position gain shares on a steady basis. I'm not sure I'd like the pressure to make new investment decisions frequently with accumulated dividends. I'm also not excited about having chunks of cash sitting around that aren't "at work". However, I have been handling the issue of re-investment using cash covered puts for companies of which I'd be happy owning more shares. Out-of-the-money puts generally simply yield more cash. In-the-money puts can result in purchase with a little put-premium bonus.  Selling the put means the cash is at work.  That could be a good reason to turn off the DRIP, because the put premium is often larger than the next dividend. However, that means no participation in price appreciation if it occurs. Also, it requires constant attention to find, analyze the options.

I find that I don't like selling covered calls all that much. I don't like the long-duration calls. I'm selling calls, hoping the position WON'T get called. That puts me into the position of having to buy my way up-and-out if the stock price moves up above the strike price. It turns out that capping my gains and having to buy back into a position isn't what I like about investing. I can't track gains over time because they are broken up into little call premiums and short term gains, rather than a long term gains and share accumulation history.
Puts result in an occasional assignment, but more often the position stays intact and the cash builds a bit.

I guess the state of affairs will continue for a while...I'll continue DRIPing so as to see positions grow, avoid the demand of making larger, more frequent capital allocation decisions. I'll re-position as required when a holding exceeds my 3% (about) rule and then either use the cash to purchase cash-covered puts on positions I'd enjoy growing, or simply purchase new holdings if something looks good. 

It's time to prune out the high-yield companies that are at risk for dividend cuts. I can't stomach the loss in value when those cuts occur. I just need to remember WB's rule number 1; never lose money.

I'm going to go back and re-examine my fast-graphs subscription; perhaps it can show me earnings per share, earnings per share growth, dividend growth, payout ratio for the portfolio.

If my portfolio were a football team..

If I thought of my portfolio as a football team, how would the whole thing look?

Offense;

quarterback
fullback
halfback
wide receiver
wide receiver
tight end
left tackle
right tackle
left guard
right guard
center

Defense

middle linebacker
right tackle
left tackle
left end
right end
right outside linebacker
left outside linebacker
cornerback
cornerback
left safety
right safety

Who is my quarterback?

The quarterback runs the offense. The quarterback manages the ball (capital). Views the field, calls and executes the play. Deploys the ball; hand-off, pass, keep and run, sneak.  The quarterback is the field general.
no better quarterback than the conglomerate CEO; candidates are Warren Buffett, ( CEO of Loewes, Markel,        )

running backs; grind out the yards, 3-5 yards per play, over and over. These are growth and income companies; can be relied on to make money in most market conditions; Full back is big and strong, can carry others on his back; large cap, drives through tough times, pounds out a bit of growth and steady dividends year in, year out;
Half-back; a bit smaller, more nimble, with explosive potential; smaller-cap, higher earnings growth, plenty of cash flow, could belt out a big surge in earnings, increase dividends sharply

offensive line;  Center; hikes the ball; puts money in motion;  this is a low growth, big dividend company; churns out the cash and dividends, market is mature, not much room for growth, but a cash-producing machine.
Guards:  Similar to center; large cap,  create earnings through production of  commodities, food, consumer staples
Tackle;  Similar to guard; perhaps a different sector, very steady earnings,
Tight end;  this one can run; catch a pass; higher growth potential, dividend at low end of acceptable, but with strong dividend growth potential
Wide receivers;  Pure growth/speculative; dividend may be a token, or none. potential for explosive growth.

Defense;   These players are those that protect you against a market swoon. They are the contrarian sectors; they are best when the current phase of the market is in decline.
So,  who is in the front line against a market melt-down? First, it has to be a company whose product is used in good times and bad. Utilities come to mind. Second, it's performance can't be threatened by a loss of earnings and large debt service. Most utilities have debt, but poeple also keep paying their utilities until times get really tough. Low debt, staple companies sound good to me.

What defensive players might be in the back-field? Linebackers, cornerback and safety; They have to counter the effects of a dramatic downdraft, like intercepting a runner, or a wide-receiver who has broken through to catch a long pass; The first line of defense is sector diversification, as rarely are all sectors performing similarly at once. The next would be investments that run a bit counter to a broad market move down. Hard to know, but perhaps short term bond funds, or international diversification. Finally, a store of value that counters a global meltdown.  I would think that would be a contrarian investment, one that rises when everything else is falling. Precious metals might be an example. I'm not particularly interested in owning gold, silver, platinum and the like, so I'll have to think about whether there is something out there that fills this role better.
I'm also not interested in those short-index funds aimed at rising when the market is falling. They're simply an insurance policy that costs money as long as it is in force.

One "store of value" is simply owning equities that pay consistent dividends. Even if valuation drops, payments continue and with reinvestment, share count rises. That compounding occurs irrespective of share price, and if dividends are preserved or grow, it is a contrarian compounding, as lower valuation causes share counts to accumulate even faster. That reduces position value volatilaty (even if not price volatility)  REITS make a good means of owning real-estate, because you can incrementally grow your holdings, rather than purchasing them in illiquid hunks.

more on this to eome

some thoughts on the temptation to speculate

Some thoughts on avoiding the temptation to speculate, or to avoid the risks associated with speculation.

Risk to capital;

The reason for Benjamin Graham's "margin of safety" teaching.
The reason for Warren Buffet's first two rules:  "never lose money", and "never forget rule number one"

Risk avoidance drives investors to fixed income investments, which then exposes them to inflation risk, or valuation risk on the fixed income investment, if not held to maturity.

The opposite end of the investing spectrum, growth stocks, places the investor at risk to capital if he chooses a company without talented and disciplined management, without long term growth prospects, with technology at risk for obsolescence.

In the middle are the "safe equities"; large caps, dividend-paying, dividend growing, mid-caps, REITS, MLPs, utilities, etc.  These are not speculative investments, as they aren't likely to POP to much larger valuations in short intervals. They carry risk to capital, although not as much, as your dollars purchase a lot of infrastructure, bricks and morter, inventory and their purchase price is not as loaded with expectation of highly inflated future earnings.

This kind of investment is "doomed" to modest appreciation and relatively generous dividend distributions. If one is disciplined and reinvests dividends, the total returns are solid, if unspectacular.
One can only have outsized returns in this market by carefully guarding capital, deploying when valuations are artificially low, recognizing overvaluation and redeploying strategically; in short, paying close attention, having nerves of steel and a willingness to buy and sell based on a series of rules that do not accommodate any sentimental feeling about one's holdings.

However, that kind of torture is, in my opinion, far preferable to the torture of making a bet on a growth stock and seeing it end badly for one reason or another.

One place where one can potentially juice the returns in the staid world of unsexy holdings is in the world of options. Now, options have "risky" written all over them. However, coupled with the disciplined approach to unsexy large cap investing, they appear to offer some added performance at very low risk.

I'm talking specifically about cash-covered puts and covered-calls.

Let's examine the cash covered put; Say, for instance, you intend to purchase another block of the most unsexy large-cap stock you can imagine, as part of your portfolio foundation. The next ex-dividend date is 3 months away and the stock price is a bit above it's moving averages, has a slightly higher than normal P/E, trading at the upper edge of it's recent historic range.  Your cash is only at risk if it isn't earning interest, or if it purchases an asset that then depreciates.
Take a stroll through the options premiums;  There's a 2 month covered call that, if excercised, will allow you to purchase the stock at 1% cheaper than it's current price. Figuring in transaction fees, you will make 0.9% on your cash to sell that put. If, in two months, you don't receive the stock  because the price hasn't dipped, you have 100.9% of your cash 2 months from now.  Say, for instance, the stock moved up instead of down and now you are faced with the un-savory prospect of buying it at an even higher price. WAIT...is it overvalued? would you be better off selling another cash-covered put?
Say, for instance, you do this 6 times in a year and still you don't own the stock. It has gone through 4 dividend distributions (3.5% return), and is up 5% from the price when you first committed your cash. You have 5.4% return on your cash and you don't own the stock. Have you lost money? Has your money earned nothing?

Say, for instance, you sold that put, pocketed 0.9% and 2 months later you own the stock, but it's price dipped 1.5%. You're down 0.6%. The ex-dividend date comes and goes, and you're now up 0.8% on the dividend.  You own the stock and you're up 0.2%  Have you lost money? Did you want to own that stock in the long term? Remember, you also have the put premium, and your purchase price is effectively the strike price minus the put premium. You purchased at 1% down, added 0.9% in put premium, so you purchased at 1.9% down, no a stock that lost 1.5% of it's value at the time you committed; so you're up 0.4% and then comes the dividend (0.8%, in this example) and you're up 1.2% in 3 months, with a lower stock price.  Is that bad? Is that worse than having purchased and lost 1.5% when the stock price declined?

Remember; buy low.  At any reasonable purchase price, if you can buy at 1-2% lower, you're that much further ahead. If you miss a dividend date, you're missing an opportunity to harvest cash. But if you time the puts correctly, you'll never miss one, as long as you own the stock. If not, you're banking put-premiums.

What about that covered-call;
You own 500 shares of boringconsumerstaplecompany that pays out 5% dividends per year and grows earnings at 3-4% per year. You're happy with your dividend-reinvested total return of 8-9% per year. Since the stock is predictable as the rising of the sun, you can't expect to see large capital gains.
On the other hand, there's a call premium that'll pay you 1% over 2 months, as long as the stock doesn't rise too far too fast.  1%, repeated 3-4 times in a year,  improves your total return by 30-50%.
If the stock is called, you bank the appreciation up to the strike price, plus the call premium. You can turn around and purchase that stock right back, bank the next dividend and do it again.  You may cap your earnings in any given period, but that doesn't mean you can't get right back in if you desire.
You may forgo a bit of capital appreciation; but you haven't lost ANY of your capital.

I don't think it makes a bit of sense to sell a put on a stock you don't want to own in the long term.
It doesn't make a bit of sense to sell a covered call on a stock that is rapidly rising and raising dividends rapidly. That should reward you adequately for owning that stock. However, some of the more boring and predictable stocks may allow you to sell insurance premiums to other investors and take the "float", knowing that you will only have to pay out in the form of accepting shares or giving them up a fraction of the time, and you can re-enter the market in a moment, once that transaction is complete.
That's a form of trading that really doesn't put your hard earned capital at much risk, knowing you are either acquiring stock at a price you deem to be favorable, or acquiring cash from an investment that is rising in value, perhaps over it's intrinsic value.

If you are managing a stable of stocks, some as holdings, some as prospects, even if your shares are called and you have been handed some cash from a closed call transaction, there should be a candidate stock waiting in the wings to take your money at a lower price-point and put you in position to sell another call. If it's a stock you want, you're in pig heaven. If it's a candidate for a cash-covered put, your money is back in motion, even if you've lost the capital appreciation that your called-stock is experiencing.

Remember that rule;
"never lose money".

If you believe the "never lose money" dictum applies to your long positions, should you hedge your holdings? Should you have trailing stops?

Buying puts is insurance, but it costs you capital. Buying calls is a bet on stock appreciation, but you still pay real dollars for the premium and you don't get it back, even if you win.  It might make sense if you have a small stake and want to participate in a large bet, with capped downside of only sacrificing the premium if the story doesn't pan out.  That sounds like a gamble to me and I don't like gambling. I like making money, either more or less, but never losing.

With respect to options, that means selling cash-covered puts and covered calls, as neither involves the risk of losing capital, as long as you avoid highly volatile stocks that can fall dramatically.

more on this at a later date...

Looking under the hood;

Am I adequately diversified?  Let's look at the details

energy:

Conoco phillips 6076
Linn Energy 27201
Chevron    17064
Enterprise Products Partners 16029
Kinder Morgan Management 15589
Seadrill 14015
Spectra Energy Corp 9434
Teekay LNG Partners 14832

120240
14.69%

utilities

Atlantic Power Corp 10629
Southern Corp 21177
Duke Energy Corp 14008
National Grid 16559

62373
7.62%


telecom

Consolidated Communications Holdings 6271
France Telecom 5095
Otelco 878
China Mobile Ltd 17409
Chunghwa Telecom 11889
CenturyLink 9470
AT&T Inc 14574
Verizon Communications 13933

79514
9.71%

consumer staples

Sysco Corp 24152
Put General Mills 7800
Heinz HJ Corp 14256
Proctor & Gamble 17811
Kimberly Clark14559


78578
9.60%

consumer discretionary

Staples 7166                                                 
Costco 17330
Darden Restaurants 16396
McDonalds Corp 14013
Walmart Stores Inc 14499
Put Hasbro 3750

73154
 8.94%

basic materials



technology


Nokia 1424
Axion Power International 9149
Cisco Systems, Inc 7594
Intel Corp 12068
Johnson Controls 18341
Microsoft Corp 13951
Exide Technologies Com 9124

71651
8.75%

healthcare

Abbott Laboratories 16420
Johnson and Johnson 15973
Teva Pharmaceutical Industries 14922

47315
5.78%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

financials


Aflac Inc
Paychex 9020
Automatic Data Processing 15289
Hudson City Bancorp 14904
US Bancorp 15239
Wells Fargo and Co 15159

69611
8.50%

industrials

General Electric Co 7622
Waste Management 14712
Navios Maritime Partners 13029

25363
 3.10%

REITs

Healthcare Trust of America Inc 1198
National Retail Properties Inc 6569
Health Care REIT Inc 15582
Realty Income Corp 16054
Corporate Office Properties 6076
Retail Opportunity Investments Corp 5585

51064
6.24%

Conglomerates

Central Securities Corp 5792
Compass Diversified Holdings 8402
Berkshire Hathaway Inc 17700

31894
3.90%

Mutual Funds

                          Matthew's Asian Growth and Income Fund 6173

0.75%

Bond Funds

Alliance Bernstein Global High Income Fund, Inc 17886
Western Assets Emerging Markets Debt Fund, Inc 13291
Pimco Strategic Global Goverment Fund, Inc 12483
Templeton Emerging Markets Income Fund, Inc 15241
Blackrock Income Opportunity Trust Inc 12263
71164
8.69%



I seem to be lacking any basic materials...will need to study why I have missed that sector.
My healthcare is essentially all big pharma, except that I have some healthcare REITs

I have a good exposure to global bond funds, but bonds are still only 9% of my overall portfolio.

The conglomerates muddy the waters a bit with respect to sector diversification. I don't have a really good idea of which sectors they represent.

From a standpoint of geographic diversity, my international holdings include the bond funds, the Asia mutual fund, GE, Navios,  Big Oil and LNG, Aflac, Big Pharma, Consumer discretionary, Technology, Consumer staples, Telecom and Utilities

In fact, I'm surprised at how well I have international investments covered with the holdings I have.

The pundits would say I should be 50% in bonds, given my age. I just can't bring myself to do that, so my alternative is a high concentration of dividend paying, dividend growing large-cap stocks with relatively low volatility.  I think the REITS have similar qualities, since irrespective of property valuations, the lease returns on property pay out similar to a bond. I can convert any of them into income when the time comes, and given my time frame, the underlying capital value is pretty safe.

Compared to the Standard and Poor 500, I'm overweight energy, utilities, telecom, consumer staples, consumer discretionary. I'm underweight basic materials, technology, healthcare, financials and industrials.

Neither the S&P 500 or the NYSE lists REITS as a sector.
I am 6.24% REITS, 8.69% bond and diversified income funds.

If I were to rebalance, I'd increase my health care a bit( Perhaps McKesson, Medtronic, Novo Nordisc) , increase my industrials a bit ( I'm thinking EMR, Cummins, Deere, CAT, maybe Illinois Tool Works, RPM, Dow, ) , find some materials that meet my criteria (perhaps fertilizer, uranium, lithium, silver) of producing dividend income. I like my overweight in energy and utilities, but perhaps I could so a very selective pruning of these to allow diversification into the sectors where I'm really short.

This has been a productive workshop; we'll see how I address this in the new year; should be some profit sharing coming along, so I can rebalance with new cash as opposed to selling a bunch of shares.

nuts and bolts

I was recently reminded that I haven't written a cogent business plan for my retirement portfolio. I have a general understanding of what I want the porfolio to do, but no specific goals and benchmarks. I think I'll start writing an outline and then fill in the details;


1) Over-all goals for the portfolio

a) Produce a stream of cash from dividends that is adequate to support me and my family.
b) Produce a stream of cash that grows at or greater than the rate of inflation
c) Produce capital growth that grows at or above the rate of inflation

2) Contribution phase
 I am 52 years of age as I type.
a) I will contribute another 4 years at maximal rate, at a minimum
b) I will contribute another 10 years at some rate, as will my wife

3) Accumulation phase

a) I will continue to accumulate assets for another 15 years, until age 67 at least, from internal returns from the portfolio.
b) I will continue to work and support my maintenance in some fashion until age 67 and possibly longer

4) Distribution phase

a) We will live on dividend distributions, rental income and social security, if it still exists, in retirement.
b) The portfolio will continue to grow in value at or above the rate of inflation by capital appreciation, as well as dividend re-investment above and beyond our maintenance needs and minimal distribution requirements.

5) Portfolio design

a) Individual stocks;

business model easily understood.
current dividend >/= 3% ( exceptions for extraordinary company with rapid DGR)
CAGR revenue plus CAGR dividend >/= 10%
member of Dividend Champion, Contender lists (David Fish)

b) sector diversification;
roughly equal distribution into 10 major sectors

energy
utilities
telecom
consumer staples
consumer discretionary
basic materials
technology
healthcare
financials
industrials

OK to overweight sectors according to preference on a year-to-year basis

Individual stocks will be held at roughly equal percentage in the portfolio.
The full allocation for each position will be 2%, with target of 50 holdings
I may choose to purchase half a position or less at a time based on available cash.

c) management of dividends
default position is automatic dividend reinvestment
I will consider a move towards complete or partial targeted reinvestment in order to grow under-valued positions

d) management of new cash inflows
first priority will be given to addition of shares to undervalued holdings
second priority will be given to addition of shares to partial positions

e) rebalancing;  on a yearly and ad-hoc basis, rebalance to bring holdings close to the 2% target

f) criteria for selling;
 earnings stop growing
failure to raise dividend
dividend cut
company spin off, company will be purchased

this represents a pretty good start....

Can't you hear the silence? No campaign ads. It turns out you can't buy the White house, or the Senate after all.  I hope all those super PAC donors think hard about donating to support the "I got mine" philosophy the next time. Most of us want our government to look out for the little guy. After all, the tycoons don't appear to need any help.


So there's a little post-election correction. Sorry, y'all bet wrong, and bidding up stock prices didn't help much. Now there's the issue of the "fiscal cliff". I'm betting it's going to by like Y2K...remember that? We all thought the world was going to come to an end, and it didn't. Likewise the 'fiscal cliff'. Taxes go up a bit, for folks who can handle it. The government lives with less. It's exactly what we need; we're living beyond our means, collectively. We have to stop spending money we don't have,  pay down our debt.
 Life goes on. Washington is like the stock market; too much hype and over-reaction to news.
I think the companies I own will continue to sell their products, continue to pay dividends, and i'll continue to invest them. Even if we get a real correction, what should I do? Abandon a strategy to grow yearly income and put the cash under a mattress? Come taxes, come recession, the best strategy I know is to be invested in the best companies on earth, selling things that people can't do without.

The following trends seem inevitable; we need energy, will produce more domestically. I own the pipelines and regulated utilities, as well as big oil and domestic, land-based oil and gas, a fair piece of renewables buried in there.
The population grows, and each member grows. That means food. I own food distribution, food production, groceries and the like.
We need shelter; I own REITS, rental property.
We need health care; I own the property where health care is delivered.
We need technology infrastructure; I own the best of breed amongst them.
 We want and need to communicate more; I own a bunch of the telecom infrastructure.

I'm dabbling back into some financial institutions; so far not too successfully. I have a couple of speculative investments in the energy space, also taking a beating. Don't know why I don't learn those lessons...but by percentage, just a bit of my investments. I can afford to wait these out and see if the theses play out as expected.

The passing of another election makes me think about chunks of time and the events that mark the end of one thing and the beginning of another. Early in life there was the onset of school. Then high-school, college, med-school, residency and fellowship. All defined amounts of time, with endpoints and new beginnings. I skipped the academic ladder, with tenure, associate and full professor, etc., o what I had was starting practice and retirement, with some unofficial landmarks in there...becoming medical director, becoming managing partner, but nothing all that solid.

Really, though, the career interval is age 35-67; 32 years, arbitrarily divided into 4 8-year segments, or 8 4-year segments.  So, at age 52, I'm through 4 1/2 of those 4 year segments, with 3 1/2 to go. 
If I work until age 67 (fat chance!), I have another 15 years to stash away about 50k per year if I can keep working the pace I do now. Actually, I can't imagine doing that. at least 2 of those 4 year segments need to be directed to doing something different than I'm doing now, perhaps 3 of them. That means only 2-6 more years of humping it, before bailing out of my current activities and finding meaning elsewhere. I have plenty of ideas. I wonder if I have adequate courage?