Becoming financially free by following a sound investment strategy has been at the forefront of my mind for as long as I can remember. Fortunately, many years ago I came to terms with my strengths and weaknesses as they relate to investing which enabled me to formulate 10 investment commandments for early financial freedom.
In this post I share my 10 Investment Commandments which helped me become financially free several years before the typical retirement age of 65+ years.
1.invest primarily in companies with a proven track record of paying quarterly dividends. I did, however, make exceptions to this rule when Visa (NYSE: V) went public and purchased several hundred shares. I also made an exception to the rule when Automatic Data Processing (NYSE: ADP) spun off Broadridge Financial Solutions (NYSE: BR) and CDK Global (NASDAQ: CDK); ADP shareholders received shares of these newly formed entities as part of the divestitures. I hung on to these shares and have them to this day; both companies instituted a dividend shortly after becoming stand alone legal entities.
2. not purchase bonds or asset backed securities, invest in mortgages or privately owned companies.
3. spread our funds across the five main economic sectors:
• Manufacturing and Industry
• Resources and Commodities (I don’t invest in mining companies regardless of market cap!)
4. avoid acquiring stocks when they are in the media limelight (eg. Valeant a few years ago or marijuana companies which are now in the limelight) as I find they tend to get overpriced.
5. invest in companies with operations in several countries (geographic diversification) as this reduces their risk to localized downturns. Many of the companies in which we invest are Canadian and US based multi nationals but we also own some American Deposit Receipts (ADRs).
6. I will only invest in companies in the Technology sector which maintain huge cash balances because rapid advances in Technology are such that I have no idea what new technology will be developed thus rendering current technology obsolete. Companies that fall in this select list include Microsoft, Cisco, Apple, Intel, and Taiwan Semiconductor (ADR). We currently own Cisco and sold Intel a few months ago when we had to withdraw funds from the RESP we had established to fund our daughter’s education.
7. I will NOT automatically sell an investment if the company cuts its dividend. In the case of General Electric (GE), I actually acquired additional shares during the economic crisis when I learned GE turned to Berkshire Hathaway in October 2008 for financial assistance. Berkshire invested USD $3B billion in General Electric in return for preferred stock and warrants on GE. GE paid Berkshire a 10% dividend on the preferred shares, and Berkshire got the right to buy $3 billion in GE stock for $22.25 per share at any time over the ensuing five years. Eventually, General Electric repaid the $3 billion plus a 10% premium for the preferred shares in 2011, and Berkshire ended up taking $260 million in General Electric shares in lieu of exercising its warrants.
My rationale for acquiring additional GE shares in the low teens was that Warren Buffett and Charlie Munger would likely not invest Berkshire Hathaway funds if they knew GE was going to go under. I might be wrong but I don’t think they would have invested in GE even if the rate had been 20% instead of 10% if they had any inkling that GE would not be able to repay the loan.
8. Not invest in mutual funds. Generally, I do not find the rates of return generated by the vast majority of funds consistently outperform their benchmark. I also don’t like paying fees for something I can do myself.
9. I will, on a very rare occasion, purchase an Exchange Traded Fund (ETF). I only have a 30 units in one ETF in our portfolio and it is an Energy sector related ETF which I purchased many years ago.
10. I will occasional use a prudent amount of leverage (debt) to purchase shares in companies that meet my requirements if conditions are appropriate (ie. major market correction or an overvalued company has become more reasonably valued). I also want to be in a position where the dividends received from the investments purchased through the use of leverage cover at least 50% of my interest carrying cost. I generally automatically reinvest all dividends to acquire additional shares of the company so I need to ensure I am in a position to service and repay the debt using other sources of funds.
Please refer to the following spreadsheet which lists the companies in our portfolio as at early December 2016 so you can see the types of companies in which we are prepared to invest.
I also regularly track the dividends we receive in our various investment accounts. I include below a copy of the spreadsheet which reflects just a few of recently received dividends . I have been tracking the incoming stream of dividends since 2007 and my actual file contains a worksheet for each calendar year; each worksheet for the last few years has contained roughly 240 line items.
On a couple of occasions I deviated from this “I shall” list much to my chagrin. Fortunately, I only invested a very negligible amount in speculative companies. In two cases I broke even and on the third I lost a bit of money.
Dividend Kings and Dividend Aristocrats
Dividend Kings are companies which have increased their dividends for 50 consecutive years.
Dividend Aristocrats are companies which have increased their dividends for 25 consecutive years.
If the criteria I use appeals to you and you think the lists of Dividend Kings and Dividend Aristocrats might be a good starting point to conduct your search for possible companies in which to invest, you may wish to check out:
** I will be coming out shortly with another post related to things I do and avoid from an investment perspective.**
Please drop me a line and let me know your thoughts on this post.