Monday, July 20, 2009

Diversification, Dollar Cost Averaging, Dividends Paid in Cash, Portfolio Watching, and Tracking Monthly Dividend Stocks

My investment strategy with high yield monthly dividend stocks incorporates a variety of investing principles I have learned over time along with the capability to produce and maximize returns.

First is dollar cost averaging because it is important as it relates to market timing, which is really anybody's guess. I find some of the freely available analysis stuff to be interesting for sure, and I receive a bunch of the free ones in my email. However, whatever the analysis stuff says the market is going to do, rarely does my portfolio follow it. There are a number of good reasons for this, with the primary one being that the securities I have invested in are mostly removed from the securities which make up the major market indices. In addition, volatility is still high right now, though not as bad as it was earlier this year, and thus any one security can quickly rise or fall rather inexplicably. That is, money is still being moved around a lot, and if I start to think I can follow those movements, chances are I'm going to be wrong. Thus the need for dollar cost averaging, or incremental investing. Rather than trying to time a a market bottom, I simply incrementally add to my positions over regular time intervals as cash becomes available to do so regardless of what the market is doing at the time. I also tend to add to my positions twice a month - once when mid-month dividends roll in and again when end-of-month dividends are paid - in order to accelerate the portfolio growth with bi-weekly compounding (26 compounding periods per year). However, I do not just buy blindly, but instead I do my best to make the best buying decision based on portfolio watching and tracking monthly dividend stocks.

Portfolio watching is of importance to me because it lets me know how much cash I have on hand to buy additional securities, and it alerts me to when securities I already own are good buys. For example, if I buy a certain security at a certain price which I thought was a good price, and it later drops by say 30% or 40% or 50% of the price I bought it at to begin with, then it comes onto my radar for consideration for buying additional holdings of that security. If I have cash available to add to my portfolio, I would consider adding to one of these I already own while it is such a good deal. However, I would also research it a bit and make sure I'm not buying something which seems to be, for example, on the verge of bankruptcy (though sometimes I may take that risk anyways hoping for significant reward). Along these lines, I recently added to my holdings of Harvest Energy Trust (HTE) after the price dropped by about 50% below what I originally paid for it because HTE is a great long term buy right now, in my opinion. If everything in my existing portfolio is looking good, then I would leave it alone and instead acquire new positions in other securities, for which tracking monthly dividend stocks becomes important.

I track about 150 high yield monthly dividend stocks (securities), of which I own 28 at the time of writing this. Each of the monthly dividend paying securities I own was deemed to be the best buy available to me at the time I purchased it based on my proprietary formula involving highest price in last five years, highest regular monthly dividend paid out in last five years, current price, and current dividend (or last dividend paid). I have developed an automated way to keep this list current so that at a quick glance at any given time, including during the trading day, I can easily see what my next best buying decision would be. Then I go on my online trading account, fund it if needed, place a limit order, and it's done. This is quick and easy and has so far yielded really great results for me. However, I only buy about $200 or so of each security at a time in order to stay well diversified and because it correlates approximately with my ability to make regular cash infusions from my income from my computer service business.

Diversification is necessary here because high yield monthly dividend payers are by their nature more risky, sometimes even with outrageously high yields that can't possibly be sustainable, because they pay out capital as dividends first and foremost. As a result they have less capital to work with for activities which make the security more valuable such as buying back shares, reducing debt, accumulating cash, and so on. Therefore they are not as strong as companies that sit on piles of cash, for example, and their market price often moves more based on demand and less based on performance of underlying securities and assets. As such, to a degree, they are all speculative, and some more than others. Therefore that inherent risk needs to be spread out, hence smaller positions in many securities. This way, if one of my holdings goes all the way to zero, the overall impact on my entire portfolio would be minimal. It also helps if I buy securities which are themselves holders of diversified securities for a compounding diversification effect to further reduce risk. In addition, when stocks are moving up in general over the long-term bull market, this diversification helps ensure portfolio appreciation from that rally, and when inflation starts skyrocketing, the diversification will help the portfolio keep pace with it.

Finally, getting dividends paid in cash is really great for added flexibility and increased diversification. Instead of reinvesting dividends to add to my current positions, I can choose how and where I want to reinvest my dividends, for which I am consistently acquiring new positions. I can also choose to keep some of them, for example, to pay income taxes on all the dividends I have received. In addition, receiving cash dividends significantly maximizes my return over the long run even in bad scenarios. For example, maybe the price of a certain security I own goes bankrupt in five years from now. However, during the five years up until that time, I was paid out a total of 120% of my original investment in cash dividends. So now five years later it is only worth almost nothing, but I have been reinvesting the dividends on a monthly compounded basis for five years in other securities, and now my overall return is well over 200% of the original investment just on that one security despite it going bankrupt. In fact, I may even consider that to be buying opportunity to add to my position in that security, or I could sell low and take the losses to offset some of my dividend income for tax purposes.

For more information on Tony Farrell's High Yield Monthly Dividend Stocks go to

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