From time to time, I participate to the Seeking Alpha Dividends & Income Digest roundup. This is a weekly article gathering various authors where they are all asked the same question. Last week, I’ve been asked if I had any misfit stock in my portfolio. While my original answer is part of this post, I had more to say on the topic. In fact, I think this topic reaches more DIY investors than we think.
What is the point of having stocks that don’t fit your strategy?
Hum… it sounds like asking this question will lead to a simple answer: you should not have stocks in your portfolio that don’t fit your investing strategy. At first glance, it’s like saying you workout 5 days a week to lose weight while you have a burger & beer on Friday night. But, what if I tell you I can manage to lose weight and still have my burger & beer on Friday?
The way I see it, having one or two stocks in your portfolio that doesn’t fit your overall plan is not the end of the world. The most solid investing plan is filled with boring steps. I follow my 7 dividend growth investing principles religiously because they work and have made me a successful investor. However, each of those investing rules aren’t sexy and there is nothing exciting about buying shares of Starbucks (SBUX) and wait for a decade to benefit from the power of compounding interest.
However, once in a while, it is exciting to pick a company that is out of your strategy. This company may not be part of your holdings for the long run, but it could open up for stronger profit. In my own dividend growth strategy, I even let some room for riskier or more volatile plays. I call it the growth segment. I’ve made some successful trades in this part of my portfolio with companies such as Seagate Technology (STX), SNC Lavallin (SNC.TO), Chevron (CVX), Intel (INTC), Apple (AAPL etc.
I never intend to keep those companies in my portfolio for more than 18 to 24 months. The goal is to pick them at a moment I believe they are strongly undervalued by specific events. The Taiwan manufacture flood for STX, fraud allegation for SNC, Oil swings for CVX, the death of computers for INTC and the smartphone uncertain future for AAPL are good examples. I ended up keeping Apple in my portfolio because management is working on expanding their services and grows their product ecosystem. AAPL has also become a strong dividend growth stocks.
Having a few misfits here and there helps me keep a high interest toward my portfolio. It motivates me to follow each of my holding closely to make sure I’m on the right track. Since I’m willing to take a few chances outside of my strict rules, I must make sure all my other companies are on board for the right reasons.
But I do have one company that is completely off my strategy
When I pick a company outside my 7 rules, it is still a decent company paying a dividend. After all, I call myself The Dividend Guy. This year, I’ve made an exception in buying a non-paying dividend stock. I know… how ironic. But this decision resulted from a deep analysis of retail stores like Target (TGT) and Walmart (WMT). I’m well aware WMT declared that it expects a 40% growth rate for their online sales, but I’ll wait a few quarters before yelling that WMT is back to growth. After all, WMT stock price is up by 12% (as at October 11th, the day after it gained 4.50%) for the past 5 years. During the same period, WMT revenue grew by a total of 5.65% (not annualized, TOTAL), cash from operation grew by 2.61% and EPS are down -14.2%. TGT numbers are, obviously, way worse.
I came to the conclusion that Amazon (AMZN) would be a great fit for the future. While it doesn’t generate much profit and has been publicly traded for 20 years, this is the kind of company that is completely on the opposite of the dividend growth investing spectrum. This is the “anti-dividend” company. But I strongly believe that in 10 years from now, AMZN will be a dominant player in many industries (retail business, MRO’s, food, etc.). Back in 2009, Amazon’s revenue represented about 6% of Walmart’s. In 2016, AMZN revenue is now 28% of the retail giant’s. I am confident that in 10 years from now, AMZN will sell more than WMT and will show solid profits. At this point, who knows, it may even pay a dividend!
Don’t get caught by your enthusiasm
Based on my investment thesis around AMZN, I could easily go all-in and look to buy other companies like Netflix (NFLX), Tesla (TSLA) or Facebook (FB). But then, I would not take a small risk in my portfolio, I would completely destroy my investment strategy.
As much as I am enthusiast about AMZN’s growth potential, this must and it will remain the only non-paying dividend stock in my portfolio. There is a reason why I follow my 7 investing rules. This is because I can sleep at night when thinking of my portfolio. Sticking to your investment plan is the most important thing when it comes down to becoming a successful investor. Investment mistakes are often the result of emotional reactions. In this case, fear and enthusiasm are both very dangerous. This is why following a set of strict rules will help you avoid falling into either of those feelings.
Reader, what about you? Do you own any misfit stocks?
It can be easy to get caught up in media coverage or other interest in a company outside one’s investment strategy. There’s nothing really wrong with that, but I tend to stick to my dividend growth stock principles. I think of misfits in my portfolio as weaker companies and under performers. With markets hitting all time highs, it can be a good time to prune out those types of stocks from one’s portfolio. But that’s a little off point from the article. Tom
I used to have more misfits in my portfolio and realized they could become weaker positions. This is why I only have 1 now… and do not plan on adding more anytime soon!
I did the same here. My portfolio is compose of CAN and US dividend stock with the only exception of AMZN stock… I just couldn’t resist 🙂
I have one stock and few ETFs in my portfolio. Time to think about them