Skip to Content

Portfolio Philosophy

Central Notion

The idea behind the model portfolio developed here is that a safe, reliable and growing income stream can be created using companies that can reliably be predicted to increase their dividend payments by 8% to 10% per year.  The primary emphasis is on the growth in income, consistent with very low risk.

What’s The Trick?

Most people are familiar with companies such as Nestle, Proctor & Gamble, McDonalds, United Technologies, and Coca-Cola that have been increasing their dividends at three times the inflation rate for decades, and can safely be expected to continue doing so.  Why can these companies be depended upon to keep increasing their payouts, and how can we identify other companies with the same characteristics?  The trick, of course, is how to find these companies.

Basic Variables

Several techniques are used to answer these questions and to identify the companies that will have the required future payout growth rates.  All of these identification techniques are equally important, and include five basic sets of variables.  These variables are drawn from the following categories.

  •  Long histories of very regular dividend growth, where this growth is at a rate of  2 ½-3 times the average inflation rates. 
  • Stable capital structures, accompanied by predictable corporate investment policies.
  •  Long histories of consistently growing free cash flows, along with similar metrics for revenue and income. These histories preferably should have similar characteristics to the dividend growth metrics. 
  • Management commitment to cash flow metrics that allow a company to grow payouts regularly in both good and lean economic periods. This relates to the investment policies of the firm, mentioned above.
  • A global presence in all major markets with brands and/or products that are # 1 or # 2 in their categories.

There isn’t a large number of such companies, and among these few, many are not domestic in origin.  However, there is a somewhat larger number of such companies if one or two of the above sets of variables is relaxed a little.  This latter group of companies allows for the creation of a representative diversified set of companies, which then creates a low risk income stream that can grow at 8 % - 10 % per year.

 Data Analysis

Each group of variables is subject to various statistical manipulations that attempt to create valid measures that can predict dividend growth, and the reliability of this growth.  This research is ongoing and subject to revision over time.

 Portfolios 

Various portfolios have been created using this philosophy, and in the beginning of the development of this philosophy, these portfolios did not perform well.  As more was learned, and as the relevant variables were identified, the portfolios improved, and they are now producing very stable incomes that are growing at 8% to 10% per year.

 

Subscribe Now!