The Plan


With my wife’s home-based business, and my earlier-than-expected retirement, the phrase “I’m off to work” has always been spoken somewhat tongue-in-cheek, but the fact remains that between the two us we are trying to eke out a living doing what we know and love. I would never call into question her right to speak of her “business”, and she accepts that what I do is “my business”. And the magnitude of what we are attempting certainly requires a plan:

The Family Investment Plan

  1. Summary
    1. Objectives – The plan exists to ensure a reliable stream of income derived from high-quality, dividend producing stocks. Changes in economic conditions may require periodic reviews of the plan to ensure long-term success.
    2. Keys to Success – Selection of companies that have not only a history of raising dividends, but growing dividends at a rate meeting expectations is key to the success of the plan. Maintaining a portfolio DOGS selected on the basis of yield alone and rebalanced on the anniversary date contributes to “ease of use” and a rate of return that has (so far) exceeded markets, benchmarks and most mutual funds.
    3. Mission – The business strives to establish and maintain a quality-based investment methodology that mitigates risk in the portfolio while initially growing ‘the retirement funds’, and documents that methodology so that it may be followed and replicated, easily and accurately.
  2. Business Overview – The business manages the family assets consisting of self-directed RRSP funds, TFSA accounts and a non-registered trading account
    1. Business Strategies – Funds under management can best be described as registered and non-registered for the purposes of near-term strategies. The intent is to draw down on RRSP funds while growing non-registered funds in order to meet long-term income goals.
      1. RRSP – Presently, the RRSP holds both DOGS and non-DOGS stocks (65:35); as DOGS make up the core of the investment methodology and continue to turn in above-average growth, the non-DOGS will be drawn down first. Unless material changes affect non-DOGS holdings, no further changes will occur. DOGS holdings are evaluated during the first week of May, annually, and re-balanced. See 2.A.ii for details.
      2. DOGS – DOGS held in TFSA’s and non-registered trading account will be evaluated and rebalanced during the first week of November, annually. Candidate criteria are as Candidate criteria are as follow:
          ・member of TSX60
          ・exclude Income Trust conversions
          ・exclude gold miners
          ・top 6 yielding
          ・exclude top yielding

        Reasons being that candidates are the largest institutions in Canada, but not all are created equal. The top yielding candidate – especially if the yield differential is great – is frequently a company in trouble, avoid if you can. Income Trust conversions are a great source of dividends, but not capital appreciation; refer to the so-called Chowder Rule for a better understanding. Finally, by the nature of their business, gold miners seem to find themselves in trouble fairly often, and it seems that the very first course of action is to hack the dividend. Stay safe …

      3. Dividend Champions – The non-registered US-dollar trading account is home to the so-called Dividend Champions, institutions that have consistently raised dividends over a period of 25 years or more. Selection was based on earnings growth, yield, dividend growth and payout as a function of FCF. These stocks will be reviewed quarterly against dividend growth (>=7% over 5 years) and payout ratio (<60% of FCF). Re-balancing occurs annually with dividends re-invested equally where economically feasable.
  3. Methodology – The success of the plan depends on consistent application of a simple set of rules.
    1. Stock Selection
      1. RRSP – The RRSP account holds a 65:35 mix of DOGS and discretionary holdings; as discussed, the non-DOGS holdings will be drawn first before de-registering DOGS holdings, hence providing a period of growth. 5 DOGS are selected during the first week of May every year from the TSX60 index. Prepare a list sorted by yield, excluding recent Income Trust conversions and gold miners, selecting 5 companies from the top 6 yielding stocks (excluding the top-yielding stock). In this re-balancing process,sell any holdings not making the top-5 selection. Re-invest proceeds from sale and the previous years dividends across new selections and existing holdings. The net effect should be 5 holdings of almost equal weight. Individual weighting may be between 18 to 22%.
      2. DOGS – DOGS held in TFSA’s and non-registered trading account will be evaluated and rebalanced during the first week of November, annually.Follow the selection process from 3.A.i
      3. Dividend Champions – In selecting the so-called Dividend Champions for the non-registered US-dollar trading account particular attention is paid to dividend growth, but other criteria play also. Specifically:
          ∙ candidates yield > 3%
          ∙ candidates DGR > 7%
          ∙ candidates have grown dividends over the past 10 yrs
          ∙ candidates maintain a safe payout: <60% of FCF
          ∙ candidates' P/E should be within the 10 year average

        In selecting the Dividend Champions, please refer this spreadsheet for candidates and apply what is commonly called the Chowder Rule to get to a target Total Return of 12%, i.e.

        5-Yr CAGR + Yield = Total Return (12%)

        In practice, application of this rule should see a stock paying the minimum 3% dividend returning 9% growth over a period of 5 years.


7 thoughts on “The Plan

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  4. Hello. Regarding your Dividend Champions portfolio, is it a buy and hold portfolio or do you also rebalance it annually following the Dogs of the TSX plan/rules? Thanks!

    • Because the criteria are so different, I have to evaluate the Dividend Champion portfolio on a quarterly basis. Because the criteria are based on certain fundamentals, and because Mr. Market doesn’t necessarily care about fundamentals (what have you done for me lately?) it’s the portfolio that keeps me up at night. I tried to test for top-yielding, but there were two many ‘smaller’ companies…

      • When you say that you evaluate on a quarterly basis, what does that look like? are you buying and selling quarterly if the fundamentals change? i know simplicity is a criteria of your investment plan but that sounds like a lot of work AND worry! 🙂

      • Debra, once quarterly earnings are released, I plunk earnings, free cash flow and total return into a spreadsheet, and calculate the trailing twelve months (TTM) figures. It provides me with an overview, and hopefully and early warning. I won’t sell on a single quarter – I hung on to McDonalds and Coke for almost a year as their fundamentals deteriorated. Today, I’ve got Chevron and GE on a watch list as they’ve frozen their dividend increase…

        I’m still hoping to find that one metric to guide me, that one easy to calculate indicator, but if it could be that easy, everybody would be doing it.

        I’m curious: for a while I provided updates as quarterly earnings were released, and what I thought of them vis-a-vis my portfolio; is that of value (keeping in mind that I am not an investment professional)?

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