Graham's On Defensive Dividend Investing

Benjamin Graham's chapter titled "The Defensive Investor" in his classic work "The Intelligent Investor" provides much food for thought on conservative portfolio construction. Graham built his reputation by focusing on the "margin of safety" concept, and he flushed it out when he explained his four rules that should guide the investor's selection of common stocks. I have included his four rules in bold below, followed by my commentary on how they might affect your own portfolio decisions in today's market.

1. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.
2. Each company should have a long record of continuous dividend payments.
3. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.
4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period.

Source: Seeking Alpha

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