My goal is to gradually build a small portfolio of Dividend Kings and I hope you’ll follow right along. My intent is to acquire a core of 10 or 11 stocks over the next three months that together, represent a diversified1 portfolio with low expected volatility and a significant dividend yield. I may have narrowed the universe of stocks to Dividend Kings, but that in no way means we cannot achieve diversification. After that I will add to those positions or add additional stocks subject to some forthcoming limitations/constraints.
There are 44 Dividend Kings, all of whom have impressive histories, by default. Going forward, some of these companies could struggle, some could thrive. One thing we can reasonably rely on is that the dividends will keep coming in and that those dividends will increase each year. There are no guarantees. However, it is reasonable to believe that no CEO is willing to destroy such a legacy willy-nilly. They will take reasonable measures to counter or avoid any material threats to the dividend program.
Margin of Safety
All this is to say, that despite their dividend records, not all 44 Dividend Kings represent good buys right now. We will be looking to buy only those who are trading at, or lower than, their estimated fair value. When a stock is trading well below a conservatively estimated fair value, we refer to the discount as a ‘margin of safety’. Legendary value investor, Benjamin Graham, coined this term and it is at the heart of value investing.
There is good news. At the time of this writing, all the major stock indices are down significantly this year. There are Dividend Kings with very attractive prices. That would not have been true a year ago. I think it is better to acquire stocks gradually and not build out the portfolio in one fell swoop. Let’s face it, we might not be at the very bottom of this bear market. The pain of higher (and still rising) inflation and the promise of more Federal rate hikes may not be fully reflected in stock prices. The market could decline further – perhaps as much as another 20%. So rather than try to time the market, I’ll start picking off the low-hanging fruit and maybe some fruit will even fall to the ground in the next few weeks.
The next post will reveal the first acquisition for this new portfolio.
1From page 213 of the 10th Edition of Investment Analysis and Portfolio Management by Frank Reilly and Keith Brown: “One set of studies examined the average standard deviation for numerous portfolios of randomly selected stocks of different sample sizes. Evans and Archer (1968) and Tole (1982) computed the standard deviation for portfolios of increasing size up to 20 stocks. The results indicated that the major benefits of diversification were achieved rather quickly, with about 90 percent of the maximum benefit of diversification derived from portfolios of 12 to 18 stocks.“