In my post about “Most Common Investment Strategies” I mentioned, that defining and sticking to a clear and well-thought-out investment strategy is a key factor for success. It is like planning your destinations for a long standing roadtrip. You need to define and quantify targets that you would like to achieve, because it will help you to stay focused, motivated and to control your emotions in every market environment. Of course, you do not yet know where your journey will end, but at least you have a plan that you can follow.
The economic environment that we are currently facing in 2020 motivated me to review my personal investment strategy and to rebalance my portfolio. In the following you will find an overview about my personal long-term investment strategy, incl. some background information on which my strategy is based on.
This strategy and the targets that I defined, are the basis for my dividend growth stock portfolio, which I am going to reveal at a later stage.
In general, the idea of my dividend growth stock portfolio is to gather passive income via dividend payments and to reduce the overal portfolio risk and volatility. The dividend payments will be reinvested to benefit from compounding interest and to grow my net worth long-term. Cashflow is my main priority, because as soon as my portfolio has grown to a specific value, I can stop further investing and just benefit from the monthly payments provided.
Therefore, my first long-term target is to amass a portfolio value of €100,000 until 2030. My second long-term target is to increase my portfolio value to €180,000 until 2035. To stay motivated, I defined an intermediate target for my portfolio of €30,000 by 2023.
- Mid-term target: €30,000 by 2023 (3 years)
- Long-term target 1: €100,000 by 2030 (10 years)
- Long-term target 2: €180,000 by 2035 (15 years)
What is the background for these targets? My goal is to achieve an annual average rate of return of 5-7% with my portfolio, which is lower compared to the annual average rate of return of 10% of the S&P 500 over the last 100 years. By keeping my target rather low, I can focus to invest in less-risky companies, that have proven to pay stable or even increasing dividends long-term.
To achieve the targets mentioned above, I will need to invest €600 in the stock market every month during the next 15 years, considering an annual average rate of return of only 5%. In terms of dividend payments, my target is to achieve a dividend yield of 4% on my investments.
What about cashflow? Based on a dividend yield of 4% and the targets mentioned above, I can expect following dividend payments from my portfolio in the future:
- Mid-term target (€30,000): Dividends €1,200 annually or €100 monthly
- Long-term target 1 (€100,000): Dividends €4,000 annually or €330 monthly
- Long-term target 2 (€180,000): Dividends €7,200 annually or €600 monthly
I think it is clear in which direction this is going. As soon as I have achieved my mid-term target, I will be paid around €100 every month from my portfolio. These €100 will be used to reinvest in stocks to even accelerate the growth of my portfolio. But in 15 years from now, I will be able to maintain my defined monthly investment rate of €600 only by reinvesting the dividends, that will be paid from my portfolio. And just in case I do not want to further invest in my portfolio at that time anymore, I will receive €600 of dividend payments every single month until the end of my life passively. This is the main advantage of a dividend paying portfolio, I will not be forced to sell any of my stocks, to earn money from it.
From that point on, it will be easy to maintain further growth of my portfolio and to benefit from the power of compounding interest. Just to give you an idea, in case I will continue to further investment at the same rate until 2045 (30 years), my portfolio value will grow to approx. €500,000, while I have only invested around €215,000 of my own money into it.
Of course, what needs to be considered are taxes on dividend payments and inflation that reduces my buying power. But, increasing dividend payments will partly compensate that.
Following that, my personal investment strategy is a long-term buy and hold strategy. Thereby, I mainly invest in big corporations, with sustainable business models and good equity capital. Overall, before I invest in a new stock, I always ask myself if the company will still be around 10 years from now. A dividend yield of 4% can be easily achieved by the conservative approach that I follow, but the portfolio growth will be limited. Thus, I do not only invest in dividend paying stocks. Roughly 30% of my portfolio is invested in growth stocks currently and I am planning to maintain this ratio. I follow this approach, because I still believe in further growth and outperformance of these companies in the long-term.
A bigger allocation to dividend paying stocks can be interpreted as a hedge against a mid-term downtrend in the markets. At the moment, I do not believe in such a scenario, but if we will enter a bearish market phase, my portfolio will still constantly provide dividend payments to me. This will help to cut the drawdown of my portfolio or even support the recovery of my portfolio. Volatility of my portfolio will be less compared to a growth stock portfolio and cashflow will be maintained. Unfortunately, dividend payments are not guaranteed, and companies are able to cut their dividend payments. This is a risk that remains, and I will need to review my portfolio again in this case.
Moreover, I am also trying to invest in undervalued companies, which might benefit from a broader recovery of the economy as soon as a vaccine against the pandemic is available.
Considering the different investment strategies, that I explained in my post about “Most Common Investment Strategies“, I would summarize, that my portfolio is based on the idea of value and dividend growth investing, including a bigger allocation to growth stocks. In the following you will find a short summary of my portfolio strategy:
- Long-term buy and hold strategy
- Focus on big corporations with sustainable business models
- Dividend yield target of 4% (on costs)
- Annual average rate of return target of 5-7%
- 70% portfolio allocation to dividend paying stocks
- 30% portfolio allocation to growth stocks
- Combination of value and dividend growth investing, with a bigger allocation to growth stocks
In our current market environment, it is more important than ever to diversify your portfolio, to avoid big losses in case a specific market sector struggles. To do so, I invest in companies from all kinds of market sectors:
- Information technology
- Real estate
- Financial services
- Consumer staples
- Health care
- Telecommunication services
- and more
In addition, it is also important to diversify geographically. Currently, my portfolio is mainly concentrated on stocks from North America and Europe. But I am planning to add more stocks from Asia, especially China. My long-term ETF-Portfolio already includes an ETF, replicating the emerging markets in Asia.
And finally, also different asset classes should be considered to diversify. This will not be part of my dividend growth stock portfolio review but investing in gold or cryptocurrencies as a hedge against inflation are a necessity in my opinion. Investing 5-10% of your net worth into these asset classes can be considered as a reasonable amount.
Moreover, I take into account that none of my positions exceeds a portfolio weight above 5%, to not overweight any company in my portfolio.
Investing in trends
Besides building a cashflow and income-oriented portfolio, I also consider investing in major future trends. Identifying such trends is not difficult but investing in respective companies always accompanies with higher risks, due to the potential of failure and bankruptcy. Therefore, it is important to do proper research and choose the right companies to invest in. Trends that I invest in long-term are:
- Mobility transformation and growth of the electric vehicle market
- Renewable energy (e.g. hydrogen and photovoltaic industry)
- Digitalization and artificial intelligence
If you would like to know, why I believe in further stock market growth, please check out My Outlook On The Stock Market. What do you think about my strategy? Do you follow a different investment approach? Let me know in the comments.