With the beginning of the new year it is time to set the targets for 2020. I like setting challenging but achievable goals based on the strategy that I plan to deploy. I realized that for 2019 my savings goal was not clearly defined and I actually put more money to work than I expected. For this year I want to draw a clear plan on how to push my dividend growth portfolio.
Additionally, I also want to focus on non-financial targets to ensure my roadmap is clear and gives me the right checking criteria to navigate through more volatile markets.
Assumptions
I think it is best to state first some assumptions on how I have come up with the goals.
A: Recurring capital deposits of €2,000 per month (€24,000 in 2020)
I believe that with my personal situation this is really a stretched target. At the current exchange rate of about 1.12 EUR/USD this translates to $2,240 and $26,880 for the month and year respectively.
B: Reinvest dividends, on average at least $340 per month (at least $4,100 in 2020)
My Projected Annual Dividend Income (PADI) now stands at $4,096 (depending on the exchange rates), which equates to a projected monthly income of about $341. Let’s round it to a better number, I think averaging $340 per month in 2019 is a reasonable value.
C: Retain and invest options income (goal is $5,000 for 2020)
Throughout 2019, I experienced with options but was limited to European companies due to the broker I used. I am currently shifting my portfolio to a new broker which will allow me to take full advantage of the options to boost my income.
In 2019 I earned options income totaling about $2,000. Towards the end of the year I closed some positions with losses but did not roll them forward as I removed funds from the brokerage account to the new one. I now start with a clear slade in 2020. (I still hold a small position in the old account which is so far out of the money that there is no market to close it right now. I will have to wait until June.)
Targeting $5,000 for 2020 seems like a stretched goal but I am working on focusing my efforts to bring in more quality companies into my portfolio and these are on average relatively expensive. With short-term and large margin to current price options I should be able to choose to have them exercised come the day or roll forward. Options income depends largely on what the market does and, of course, on volatility.
D: Assume initial yield on cost (YoC) averaging 3.0%
In 2019 I acquired quite a lot of higher dividend paying stocks so that my average yield is above 5%. However, for 2020 I will focus on buying higher-quality dividend growth stocks, which often offer more modest yields. I believe I’ll be able to average an initial YoC of 3.0%, though.
E: Assume an annual dividend growth rate of 5.0%
Given my current portfolio I think an effective dividend growth rate of 5.0% is reasonable for 2020. In the future this number should go up by investing in more quality stocks that have a higher dividend growth rate.
Financial Targets 2020
- Hit $100k of portfolio value!
With a current portfolio value of about $75k I should reach this goal easily given the fresh money coming in plus the base dividend income, options income and dividend growth. I still do not want to set a higher target as it is such an important milestone and the markets may turn sour in 2020 and there is actually a decline of my current portfolio value.
- Increase projected annual dividend income (PADI) to $5,400
There are several layers to the increase of my PADI in 2020.
Fresh capital invested $26.880 x 3% = $806 (A,D)
Options income invested $5.000 x 3% = $150 (C,D)
Dividends reinvested $4.100 x 3% = $123 (B,D)
PADI dividend growth $4.100 x 5% = $205 (B,E)
This all adds up to adding $1,284 to my PADI of currently $4,096 and leaving me with $5,380. Let’s make this a more manageable number of $5,400.
- Earn $4,750 in dividend income
I count as a basis the $4,096 PADI at the end of 2019 plus half of the projected increase of the PADI for 2020 as the investments and increases come in gradually during the full length of the year. With my dividend income of $3,046 in 2019 this would make for an increase of 55%.
- Collect and retain $5,000 in options income
I did not set a goal for 2019 and took on excessive risk on the options front. I want to contain this with new rules:
- Only expose up to 30% of the available margin
- Only sell puts of stocks I am actually willing to buy
- Only sell covered calls
The target for my portfolio is stretched but I believe that now being able to sell options for US stocks will broaden my options field to chose from. We will see along the year how reaching this target is progressing.
- Taxes clearance at the end of the year from checking account
The retentions from dividends are to be deducted from my investment account straight away. However, for the year-end tax declaration of the percentage gap and the options and stock sell gains will be covered from my checking account.
Non-financial Targets 2020
- Employ the dividend stock screener before investing
As mentioned before, in 2019 I took on some unwanted additional risk and also invested in companies that looking to the long run I may not have invested in the first place (actually shifting my portfolio from one broker to another has helped me to clean up and eliminate quite a few stocks from my portfolio making room for more dividend growth-oriented companies). The rules are simple and will help me stay disciplined.
- Invest only in fair or undervalued stocks
- Check FastGraphs
- Check P/E ratio (preferably below 15 but depending sector and stock type)
- Check dividend growth history
- Check dividend yield history
- Payout preferably <60%
- Stick to the option rules
For options I have already stated what my rules are going to be for 2020 and it should really help me to stay focused on not taking too much risk. Nevertheless, because these rules are so important I will lay them out again.
- Only expose up to 30% of the available margin
- Only sell puts of stocks I am actually willing to buy
- Only sell covered calls
- Set up proper portfolio tracking
I have been struggling to come up with a reasonable tracking for my portfolio including all: stock valuation, dividends, dividend growth, options income. I want to keep it simple and have a robust system.
I have seen and already tested a bit the open source software Portfolio Performance. It is relatively easy to use but I will need to explore this further.
If it doesn’t work I will go back to good old Excel, but this time really set up a robust model.
- Maintain the blog with value articles
My target is to write regular dividend income and portfolio updates, but also add 12 stock analysis articles during the year. These will be focused on stocks that I hold or have on my shortlist.
Additionally, I think would be great to add a complete portfolio review once a quarter. This should help me to employ a course correction, when progress is not sufficient.
- Explore Interactive Brokers platform to full use
This is the new brokerage firm I will be using from now on and still need to explore how their platform works to make full use of it.
Conclusion
It is the first time I set such a detailed target plan for my dividend growth journey. I am happy to see the progress I am planning to achieve in 2020. Happy investing!
