Dividends4Life: Strategically Managing Your Dividend Portfolio In A Downturn

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The recent turbulence in the market has provided income investors first hand experience in managing their income portfolio in a declining market. For some, this may be their first significant and prolonged downturn. Here are some things that will help you succeed and thrive during this bear market:

I. Remember Why You Are An Income Investor

The goals of an income portfolio are different than those of a capital appreciation based portfolio. The good news is an income portfolio consisting of dividend stocks can not only succeed, but excel during a down market.

The goal of dividend investors is to build a steady stream of rising income from solid companies. While everyone else is panicked about their portfolio's decline, income investors see the downturn as an incredible buying opportunity.

II. When The Chips Are Down, Go For The Blue Ones

In what seems to be a perpetually declining market, one of the true bright spots is the ability to strategically pickup some bargains in the bluest of blue chip stocks. Normally, these stocks are difficult to buy due to a built in "safety" premium for times like these. Over-allocate safe stocks and save the risker investments for when they are needed (more later). Here are some traditional dividend stocks that that have a RQ rating of A3 or better with their buy below price:

  • Canadian National Railway (NYSE:CNI) - RQ: A2 - Buy Below: $38.78
  • Chevron Corp (CVX) - RQ: A3 - Buy Below: $72.91
  • Illinois Tool Works Inc (ITW) - RQ: A1 - Buy Below: $47.29
  • Johnson & Johnson (JNJ) - RQ: A1 - Buy Below: $67.70
  • Kimberly-Clark Corp (KMB) - RQ: A2 - Buy Below: $52.87
  • The Coca-Cola Company (KO) - RQ: A2 - Buy Below: $45.35
  • PepsiCo, Inc. (PEP) - RQ: A1 - Buy Below: $70.61
  • Procter & Gamble Co. (PG) - RQ: A1 - Buy Below: $59.70
  • Sysco Corp (SYY) - RQ: A1 - Buy Below: $24.91
  • United Technologies Corp (UTX) - RQ: A1 - Buy Below: $56.27
  • Wells Fargo & Co (WFC) - RQ: A2 - Buy Below: $26.44
III. Sometimes You Will Misfire

As hard as we may try to pick all winners, sometimes a good stock will go bad, cut its dividend, and we'll have to sell it. Often it is one of our higher yielding stocks, leaving a large void in our annual dividend income. How do we manage this? Here is what I do:
  1. First, when you suspect a stock might cut its dividend put it "On the Shelf" and don't make any future purchases, until you are convinced the dividend will not be cut.
  2. Manage the risk of a dividend cut by limiting your allocation to any single stock to a maximum of 5%.
  3. Keep some high risk/high yield allocation in reserve. As mentioned above, when the market goes south, we need to under-allocate high risk/high yield stocks. This will allow room in our allocation to selectively purchase these types of stocks when we choose to sell a past performer that is no longer meeting our expectations.
Over the last 2 months, I have had the opportunity to put the above principles into practice. For the year, I have sold five stocks after they cut their dividend. Fortunately, I was able to replace them without suffering a loss in income. As your income portfolio grows, you will not always be able to replace the lost income, but the above principles will help you minimize the decline.

IV. Don't Let Fear Derail Your Long-Term Plan

Someone once said, 'Your emotions are the best inverse indicator of what you should be doing in the market'. Many people are selling it all and walking away from the market. They'll be back though - when the market is reaching all time highs, only to get out when it begins to fall with no end in sight. This is a long-term recipe for disaster. For those of us who still have time before retirement, the market is presenting us with a golden opportunity; what are we going to do with it?

Full Disclosure: Long CNI, ITW, JNJ, KO, PEP, PG, SYY and UTX

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  1. Anonymous // November 25, 2008 at 8:25 AM

    Great post for a month that has many investors asking their doctor for prescriptions of Ativan!

    I think the best thing any investor can do in this environment is remain realistic. Not all your stocks will outperform over the short-term, but ensuring that you're making investment choices based on strong fundamentals and companies that will continue to grow is a great focus for a dividend investor at the moment.

    Not letting fear "derail your plan" is another great piece of advice D4L

  2. Anonymous // November 25, 2008 at 6:15 PM

    Nurseb911: The day will come when we are complaining about everything being over-priced.

    Best Wishes,

  3. R55 // January 12, 2009 at 12:04 AM

    After I read your article, I did an analysis of KMB.http://retireat55.blogspot.com/2008/12/kimberly-clark-corporation.html. It is a quite interesting company.

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