In my previous post I introduced my Dividend Dream and gave better insight into the topic of Enduring Value that I’ve adapted to create a long-term investing approach focused on value and dividends. This post will look inside my decision criteria for this group of stocks, what companies comprise the DivG portfolio and what decisions I made on how to construct and organize the portfolio.

To review the current organization of my portfolios:

• Short-term Cash/Savings comprise 17.5% of my invested assets and is held in a high interest savings account.
• RSP includes only Canadian bonds, international ETF’s, US equities and ADR’s of international companies. This maximizes the efficiency of taxes on foreign income (dividends) and interest bearing investments. My RSP comprises 25% of my invested assets.
• Dividend Growth is my non-registered dividend growth portfolio that comprises 57.5% of my invested assets and concentrates on Canadian dividend/income paying equities that are eligible for the Canadian dividend tax credit.

Remember that the intent for my Dividend Dream portfolio in the future will be where money provide me with flexibility to do the things I want, give me the ability to make decisions independent of finances and allow time to create that wealth for myself and my family.

When I initially decided to create a dividend growth portfolio I had a number of decisions to make that included how many stocks to hold, what stocks to target & buy, what sectors to include and how to increase efficiencies as best as possible.

I started out with a fairly simple list of requirements as a guideline for how the portfolio would be constructed.
These included:

• A cap of 25 total common equities held within the portfolio
• Each individual stock would represent only 3-5% of the overall portfolio to mitigate risk
• Targeted portfolio pre-tax yield of 50-100bp above the Government of Canada 10-year bond
• Stock selection method requiring Enduring Value
  Targeted dividend growth rate of 5-8% (per annum)
• Targeted CAGR of 8-10% (including re-invested dividends)
• Maximize tax efficiency and create a growing tax-efficient cashflow that outpaces inflation

Stock Selection:

This is one of the most difficult phases for any investor attempting to construct an equity portfolio. While ETF’s give you exposure to an entire market, sector or group of stocks there are advantages to owning individual equities. While an ETF (such as XIU or XDV) gives you broad exposure to a large number of stocks cost effectively you gain exposure to both the good/ bad and under/over-valued within that specific group.

As a value oriented investor I have a preference of owning stocks based on a collection of my own individual criteria. In an ETF the good stocks that are under-valued can be disproportionately represented to the bad stocks that are over-valued. This leads to some obvious problems for a portfolio of Canadian dividend paying equities that isn’t nearly as diverse as a US or International group.

Another issue presents itself if I were to target owning only the bluest of dividend payers; specifically all five major banks (BMO, BNS, CM, TD & RY), all the major insurers (GWO, MFC & SLF) and all the utilities/pipelines (ACO.X, CU, EMA, ENB, FTS, TA & TRP). If I took this approach I would already be over half way to my limit of 25 common stocks before I even started to look at anything else for the sake of diversification. What about consumer stocks, the railways, the grocers, telecoms or wealth management companies? Suddenly XDV doesn’t appear to be such a bad compromise, but you don’t gain equal exposure to the entire group.