Wednesday, 25 June 2014

My Portfolio Goals and Investing Criteria!

    As I am just starting to build up my portfolio, I have a few goals and criterion for going about it.
My goals are:
1) To generate income; preferably monthly with stable dividends and distributions. Which is why if you look at my portfolio most of the holdings pay monthly, and the two ETF's I hold also pay monthly.

2) Maximize tax efficiency; currently all my holdings are Canadian tax eligible investments, which makes their dividends, distributions and any capital gains 100% tax free! The power of compounding returns, when combined with no having to pay taxes on your investment income is amazing! Not to mention it makes tax season less complicated!

3) Dividend growth; for the long term in order to keep pace with or beat value eroding inflation I look for companies who have a history of increasing their dividends. However, if management is reinvesting into the company in order to grow the business then so long as the company has a yield of 3%+ then I will discount the dividend growth in favour of a stronger business in the long term.


4) Learn and research! I am constantly trying to learn more about the companies I am invested in, their competitors and the market at large. As well as companies which I may be interested in purchasing. Reading about companies can be as easy as picking up, or clicking to a news papers finance, investing or business section. Or selectively searching for a companies media releases and history. Knowing what your businesses are doing can help you gauge their performance to help you make better investment decisions. For example, you hear in the news that company XYZ just raised their dividends, Great! However, you go to the XYZ's company website and see that they also just issues a few hundred million in bonds; perhaps that dividend increase was not so great in the end as they now have to service that new debt and try to pay their shareholders even more.

Criteria:
1) Dividend Yield between 3-5%; this falls in line with my inclination towards income. I primarily look at stocks which give me a decent yield and preferably with dividends increasing over time.

2) Low debt levels: I highly dislike companies who have high levels of debt in comparison to their revenue and/or assets. In particular I will completely avoid any company who appears to use debt financing in order to sustain their dividends, or use excessive stock issuance to fund their operations.

3) Consistent revenue growth; if there is one thing a company needs to do, it is to grow and sell more! I look to see whether or not a company's sales and revenue are growing quarter over quarter and year over year for at least 3-5years where information is available. Google finance makes finding this information very easily as you can check a companies performance through their income statement, balance sheet and cash flow. Do keep in mind that sometimes a company's revenue will decrease sharply, which is where researching comes in. Some companies will spin off or sell portions of their business, or had taken on a special short term project. To help your analysis of their revenue, take a look and compare the cost of revenue to help gauge the company's performance.

4) Portfolio diversity; since my portfolio is just getting started, I try to not worry too much about diversification, however I am taking care to not be overly heavy in any one sector. In particular with interest rates being nearly rock bottom, one needs to be careful with their allocation of interest sensitive assets. If the interest rates were to go up, you wouldn't want a large section of your portfolio to take a hit. Conversely, you could invest in companies which will do better and will see a jump in their value when rates do rise.

Phew! That more or less sums up my general approach to finding and monitoring investments. I also do take into consideration how I think a particular industry will perform, and how that company is doing within its own industry and my knowledge of their products. I rather do like Pizza Pizza's pizza, and its online ordering service is great with the in-depth customizations available to you that you just cant easily get over the phone or in the store. Let me know what you think about my approach. What's your approach? Do anything similar or different?

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