investment planWhy You Need a Plan

I’m a big believer that creating an investment plan is a big step towards realizing your long term financial goals.

An investment plan allows you to lay out in a single document exactly what you are trying to do and how you will do it.  When it comes to investing, one of the single biggest things you can do to help you avoid mistakes is create and follow rules.

These rules will help guide you when it comes time to make critical investing decisions such as buying stock, reinvesting dividends and selling your stock shares.

Oftentimes, investors who haven’t created a plan end up making decisions by the seat of their pants.  These types of decisions sometimes are irrational and lead to mistakes that cost the investor money.

Without a set of rules in place, an investor may find himself purchasing shares of companies that don’t fit within his portfolio or investment goals.  An investor may find himself getting anxious and selling shares of companies when he would be better off holding.  There are many different types of mistakes investors make.

A plan will help you avoid many of these mistakes.  By creating an investment document that maps out your financial goals along with your investing rules, you will give yourself a higher chance of achieving investing success.

So get out your pen and paper or open up your Microsoft Word document.  Let’s get started creating your dividend growth investment plan!

Setting Your Goals

Part 1 of your investment planning document is where you want to lay out your goals of investing.

This is the part of the document you can read when you need a little motivation to stick with the plan.  This section of the plan will help inspire you to keep going on your financial journey.  You’ll be reminded of why exactly you are investing in the first place.

There are many goals of dividend growth investing.  In this section of your document, you’ll want to specify what exactly your goals are.

Be specific.  Make your goals measurable.  Give yourself a time frame where you expect to meet this goal.

For example, my main goal with dividend growth investing is to help me achieve financial independence.  To achieve this goal I want to create a dividend stream of passive income around $50,000/year.  If I expect my portfolio to have a total dividend yield of around 3.5%, then I need to create a portfolio of at least $1,428,571.  I would like to achieve this goal by the normal retirement age of 65.

With this goal in place, I can then map out a plan to make sure I am on target to reach my goal.  I can decide how much I need to save/invest each month/year in order to reach financial independence.

There are many goals you may have.

Like me, your goal may be financial independence.  You may eventually one day plan on living off of your dividend income.

Or your goal may be to use your dividend growth portfolio to help supplement other sources of income.  You may use a dividend growth portfolio in tandem with income from rental properties, income from a 401k or other retirement plan, income from a small business you own or possibly income from a pension.  In this case you will want to create your dividend growth investing plan as part of your overall plan bringing all of your investment strategies under one larger document.

Your goal may be to help teach your children or grandchildren the power of investing.  Help them learn about money.  Teach them about stock ownership and show them the power of dividend income and compounding income.

Your goal may be to build a portfolio that can eventually fund a scholarship fund or allow you to make annual donations to your favorite charity organization.

You may even have more than one goal you are trying to reach by following the dividend growth strategy.

Whatever your goal, it is important to use this section Part 1 of your investment planning document to lay everything out.

State exactly what your goal is.

Discuss the reasons achieving this goal is important to you.  Indicate when you would like to reach this goal or goals.  Identify your starting point and how you plan on reaching your goal.  How much should you invest each month?

Once you have this section of the investment planning document mapped out, you will be ready to move on to Part 2.

However, you are never completely done with your goals section.  You will want to review this section often.  This section can help give yourself inspiration and motivation.  This section can help make sure you stay on track to reach your goals.

Also, your goals don’t have to be set in stone.

Plans change.  People change.

You may set a goal and begin working towards that goal now.  Ten or twenty years from now, you may want to head in a different direction.  That is perfectly fine.  Update this section as needed however many times necessary while you are on your investing journey.

What Companies Will You Buy?

Part 2 of your dividend growth investment plan is where you need to lay out some of your investing rules.  In particular, you need to write down your rules for what kinds of companies you want to buy.  You need to detail out your buying rules.

In this section of my investment plan document, I have laid out my ground rules for investing.  Discuss exactly what kinds of companies you want to own.

Discuss where you will find these companies?  Personally, I have a few lists of great dividend growth companies that I use when it comes time to find and research new investment opportunities.

Figure out your buying rules.

For example, in my document I have the rule that I will only invest in companies in which I have heard of and completely understand what type of business they are in and how that company makes their profits.  If I don’t completely understand a company, then I feel I have no business investing in it.

You also need to lay out the qualifications your companies must have.

Some qualities of companies to consider for your buying rules include:

  • How long does their dividend streak need to be?
  • Do you require a minimum dividend yield?
  • Do you require a minimum level of dividend growth?  Minimum earnings growth?
  • Do you only want to invest in companies that are under valued or will you consider fair/over valued companies?
  • Do you require earnings to be consistently trending upwards or can you handle erratic earnings? (I believe you should look elsewhere if earnings growth is erratic)
  • Do you prefer outstanding shares to be decreasing?  What if they are increasing?

This section of your document is where you lay out all of your rules when it comes to what companies you will invest in.  You should be able to review a company and compare it to your set of buying rules to determine if you should buy or pass.

Get as detailed as possible in this section.

Continue to add to it as you come across new scenarios when reviewing different companies.

This section will help you avoid buying companies that you will later come to regret.

Reinvesting Your Dividends

Managing your portfolio is very important and within Part 3 of your investment plan you should discuss exactly how you plan to operate your dividend growth investments portfolio.

You need to figure out and document your plans for reinvesting the dividends.

Are you going to simply reinvest back into whichever company paid the dividend?  Are you going to collect the cash dividends until you have a certain amount and then selectively choose a company to invest in?  Decide on your approach to reinvesting dividends and document the process.

Also, at first you will be reinvesting your dividends.  At some time however, you will switch to using the dividend income to cover your living expenses.  When will this shift occur?  How exactly will you make this shift?

Another thing you should discuss when it comes to managing your portfolio is diversification.  How many companies do you want to own?  How many industries do you want to have exposure to?  Are you going to limit your exposure to different industries?

Diversification is very important to help protect your portfolio from mistakes and economic slumps.

I have mapped out that I want to own at least 35 companies from a variety of industries.  What are your plans?

When to Sell

Part 4 of your plan is an important section.

You need to decide exactly when you will sell your securities/stocks.

In this part of your plan, you will lay out all of your rules for selling stocks.

Remember, one of the key aspects of dividend growth investing is that in order to achieve success you should be focusing on long term.  This means you aren’t buying and selling stocks in short term increments.  You are buying stocks with the intention of owning them forever.

However, sometimes things happen.  Sometimes companies falter and for one reason or another are unable to drive the profits that once made them a great company.

Sometimes the board of directors may decide it is in their best interest to cut the dividend rate.

Sometimes, something has come up in your own personal life and you need money.

Lay out all of the rules for why you may need to sell some of your stock.

My personal rules are quite simple:

  • I will immediately sell if a company cuts their dividend rate.
  • I will review and consider selling if a company freezes their dividend (fails to increase it after more than a full calendar year).
  • I will monitor the earnings trends and if growth becomes erratic or slows to an unacceptable rate I will review and possibly sell.
  • If a stock becomes extremely overvalued I will consider taking advantage by selling to lock in gains and waiting for valuations to become reasonable again before buying back in.
  • I may need to sell if I absolutely need the money.  But I try to plan to avoid this at all costs by relying on an emergency fund and smart long term planning.

That’s basically it for me.  Just 5 quick rules that guide the selling part of my plan.  By sticking to these rules and not allowing myself to get caught up in emotions/irrational thinking, I avoid making any selling mistakes in my investing.

Create your rules.  Avoid mistakes.

Execute Your Plan

These are the 4 main sections to your investment plan:

  1. What are your goals?
  2. What are your buying rules?  What types of companies will you invest in?
  3. How will you manage your portfolio?
  4. What are your selling rules?

Once you have your plan mapped out, it is extremely important to always follow this document!

Never stray!  By doing things that fall outside of your rules/plan, you open yourself up for mistakes.

Trust me!  I’ve strayed from my own plan a few times in the past usually to my own detriment.  In most cases I find myself regretting my decisions to go against my own rules.

By creating and following your plan, you will give yourself the best chance of achieving long term financial success.  You will give yourself the best chance of making fewer mistakes.  You will set yourself up for glory!

And remember, this plan is a work in progress.

It can/should be changed/adapted as you go through your investing journey.  You’ll come up with new ideas, learn better ways to evaluate companies.  Change your goals and rules to fit your current plan.  But always operate off of this main framework.

Get started today!  Create your plan!  Write out all of your rules!

Get on the road to investing success!

What do you think?  Did I cover the main parts of a dividend growth investing plan?  Are there any other sections that you would add to your plan?  Let’s hear your plans in the comments below!

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10 Responses to Create Your Dividend Growth Investment Plan

  1. It’s funny because coming up with a plan/strategy to get you to whatever your end goal is is very important, but I’ve never come up with a written plan. I think at this point my goals/strategy is fairly well ingrained that it’s not something I really worry about. Although I probably should work on setting up a formal list of rules with buy/sell although those are a more fluid aspect of the plan than my goals/strategy.

    • Dan Mac says:

      Hi JC-

      I agree my plan and goal is pretty ingrained in my mind. But I like having a document to come back to and review/inspire me. I’m also very open to editing and changing plans as my life changes.

      I do believe that laying out your buy and sell rules are the most important part about creating a plan. These rules can help keep you out of trouble!

  2. Great tips and I agree with all of them. One should view these rules for every purchase and sell. Now I am thinking I should print out my own plan and paste it on the wall to stay focused! I tend to modify too much and at times get sidetracked to the overall goal.

    Great post man !

    • Dan Mac says:

      Thanks Asset Grinder!

      Yes I find when I modify and stray from my rules I usually end up making mistakes I regret. And then I can point back exactly where I strayed and what I did wrong. My rules are in place to help protect me from mistakes and make me a better investor.

      And this plan is adaptable. If I grow/learn something new and believe a rule needs changed or added, then I go update the plan.

  3. Nicely put…I think you’ve covered the topic well. Regarding the goals, for me I have found it effective to have both short term and long term goals. It seems to force me to look further out into the future and/or possible to my end goal. I do agree with your idea that goals don’t have to be set in stone. Therefore, equally important is to periodically review and make necessary changes to your goals.

    Thanks for sharing…best wishes in your personal journey!

    • Dan Mac says:

      Thanks Frugal Family, I agree with setting both Short and Long term goals. It would be good to document them all out in your plan and then adjust as necessary!

  4. DivHut says:

    All great points but I think the hardest point is “when to sell.” As long term investors I don’t think I’d ever want to part with any of my dividend producers. I know that investments change over time and investment themes and thesis can change too but as long as my stock continues to pay me decade upon decade I don’t really see a need to sell.

    • Dan Mac says:

      I agree DivHut. I haven’t had to sell a company in over two years now. But if one of my rules is ever triggered, I won’t hesitate to make the move! My personal rules are set up so that I am rarely forced to sell.

  5. Martin says:

    I too am a strong believer in having a plan. It is however difficult to make one. Many times when I attempted to make a plan I did overdo it and made it complicated and impossible to follow.

    But after years of trying and polishing I finally have an idea what to do. Since I also trade options I also need to have a plan in case the trade goes against me.

    Good post and tips!

    • Dan Mac says:

      Hi Martin, I believe a plan is one of the most important first steps for investors when looking towards long term success. Definitely with options trading it gets more complicated. I would try to create an extra section to the plan in order to incorporate your options trading rules.

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