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Author: psamtani One star, 50 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8751  
Subject: Re: My DG Portfolio - Work in Progress Date: 2/22/2013 2:13 PM
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BruceM, thanks much for your thoughtful response. I'd be happy to hear more of your thoughts and prescriptive insertions :) Especially coming from someone who's been successfully following a DGI strategy for 13 years!

I understand that each of us have different circumstances and goals, so what's right for me may not necessarily work for others; but it's great to have a forum like this where we can learn from each other and fine tune our strategy to best fit our needs.

In my situation, I'm fortunate that I've had a good run of 20 plus years of owning my own business which has allowed me to build a nest egg such that I hopefully will not need to draw down my investment capital in retirement; provided of course I have an investment strategy that, in my case, will give me a yield of 3% to 4% at present and will grow over time to keep ahead of inflation. I still have my business and although I've slowly handed over the reigns to others and am taking a less active role, I don't anticipate my income stream from the business to stop overnight. That said, I'm planning my DG strategy with no future business income in mind (as a worse case scenario); the likelihood is that I will continue to receive some profit from the business for a few more years if not more.

A few years ago, before I started seriously considering an early retirement, and before I discovered DGI on this board, I thought that when it came time to eventually thinking about retirement, I would probably start switching over from stocks to municipal bonds as the primary vehicle for preserving my nest egg and giving me income.

When I discovered this board and started reading some more, a light bulb when on in my head :) I thought a DGI strategy sounds perfect for me. I was familiar with dividend stocks and own several in my portfolio, but I never bought a stock because of its dividend, and I never considered dividend growth at all. That was the magic ticket for me. Not so much the dividend itself, but the fact that it could grow to keep pace with, if not exceed, the rate of inflation!

Then I had to wrap my head around preserving my nest egg value so that it could continue to generate income for the rest of my life. I've been investing in stocks for over 15 years (up until recently, I had over a 100 stocks in my portfolio; but I'm gradually selling some off to make room for DG stocks). Before discovering DGI, I thought municipal bonds would be the safest means for me to preserve my capital. My thoughts were that I would build a ladder of municipal bonds and my capital would be safe because I would be holding the bonds to maturity and collecting the interest all the while. I vaguely thought about inflation, but never gave it much serious thought at the time.

Fast forward to last year when I started doing some more research on this and learning about DGI. I knew from my investment experience with stocks, that if you learn to have the temperament to hold for long periods of time, that a basket of well diversified stocks will fair well over time (sure, some will do poorly; but your winners will hopefully far make up for those). That's been my experience (mostly with the help of MF). So when I learned that there are stocks that have consistently paid and GROWN their dividends for decades, and that many of these are household names, I thought why not just hold a basket of these for the rest of my life. If I did my due diligence up front and picked a basket of 20 to 25 DG stocks, with names like Coke, Pepsi, J&J, PG, McD's, etc., I can't imagine that most of these businesses will not be around in 10, 20 or even 30 years (and most likely will have grown my nest egg on top of the growing dividends I'd be getting every year)! Maybe a few of them will do poorly (and one or two may even go out of business or suspend their dividend for some reason or the other; I've been through this with PFE and I've still come out ahead). On the average, I believe this methodology should be sound?

This goes to your question Bruce about monitoring my DG portfolio. I'm sure I'll keep tabs on the portfolio, but my aim is to have minimal management. I've learned that when you react to news re a company, that news is already reflected in the stock price, so when a company announces that it will suspend its dividend for example, the stock price will react accordingly. If you hold a basket of 20 plus DG stocks, hopefully one or two dividend cuts will not materially affect your average yield. And if you've picked good companies upfront, hopefully the business will bounce back over time. This is why I'm focusing on quality over yield. I'm happy to invest in businesses with decades long track records of paying and growing dividends, rather than take a risk on a high yield REIT or other investment that I would have to monitor more carefully. A big part of my goal is avoiding very active management, and I understand I will have to accept a smaller yield up front to achieve this.

That said, I agree that keeping tabs on the income stream is very important, and if I needed a more aggressive yield up front, this would probably be more critical for me. I know I still need to be wary, even with the most conservative of DG portfolios, and I appreciate your point re this.

Another very important benefit for me of a DGI strategy is the favorable tax rate offered to dividends vs. other forms of income (I understand there are exceptions for MLP's, although these can still have some tax benefits over REIT's).

This post has already gone on far too long and I see that I haven't addressed all of the points you raised, so I'll make the rest of this quick (since much of reasoning is provided above):

Liquidity: I suppose this is more important for me from a psychological perspective. Plus, I may want to splurge on something down the road. I figure there's little need for me to lock in my funds when I can achieve my goals with a diversified basket of DG stocks.

Portfolio Sustainability and Growth: Although I'm hoping to simply live off the income generated by my DG portfolio, psychologically no one wants to see their nest egg drop in value over time. So, it is important to me to preserve my principal and to grow it modestly over time. To achieve this goal, I plan to take a long term view of the portfolio (at least 10 years, and ideally longer). Time and a diversified basket of stocks should minimize long term capital risk. At least that's my hope (from past experience).

Okay, I better end now! If you've read this far, please feel free to poke holes at my methodology, comment, criticize, share, challenge my assumptions, etc. I want to make sure I'm thinking through this soundly before diving in, and I figure there's no better place for this than here!

Thanks again for listening.

psamtani
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