Dividend Growth Portfolio

My Crisis Investment Strategy

These are extraordinary times, because it feels like the economy is literally grinding to a hold. People are getting fired by the bushes, due to for instance the impact of social distancing as a solution to mitigate the spread of the coronavirus:

  • No dining in restaurants;
  • No haircut at the hairdresser;
  • No shopping in shopping malls;
  • Work from home: limited transportation;
  • Etcetera…

It reminds me about the Great Recession even though I just joined the workforce 3 years earlier. It was tough, many people were being let go, also in my close surroundings and unemployment rose sharply and especially youth unemployment.

Due to the bailouts and the increasing income inequality, people generally got angry at the banks and the occupy wall street movement reached almost every major city in the world in the fall of 2011. This was still in the aftermath of the financial crisis that started in 2008.

At the time it felt very surreal to me, because my job was safe and my career was having a strong boost. Besides that, I wasn’t really investing yet, other than a bit of stock speculation with a few hundred of Euros, so I never really felt the pain of the Great recession.

However, I was very conscious of what happened with the economy and the financial markets during that time, because I always had a strong interest in it. It’s just my analytical nature that triggers my interest in anything that has to do with numbers.

Remembering that, I believe that the current question is not about whether it will be a recession, but rather whether it will be a depression like in 1929. It just feels more severe this time.

As an example: in 2007-2009, the sector really in the blast zone and heavily impacted was the financial sector. While some of the sectors strongly recovered and made up most of their losses again (i.e. Information Technology), the financial sector kept on struggling until 2011.

Novel Investor Sector Returns TableSource: novelinvestor.com

Actually, this is the exact reason why I do think that it’s different this time. The coronavirus is the perfect black swan which is hitting multiple industries at once and on top of that we have an oil war playing out. The coronavirus doesn’t have it’s core in a certain sector, because it’s external to the economy and therefore I believe that the impact can be deeper and of longer duration.

In general I would say that any sector depending on the movement of people (except for core essentials like basic food supply (i.e. supermarkets, not restaurants)), together with oil related industries are currently within the blast zone. The graph below confirms that understanding, because the following sectors have been hit extremely hard:

  • Energy -60.6%
  • Consumer Discretionary -28.3%

And then the other industries are heavily impacted as well due to its cyclical nature:

  • Financials -38.2%
  • Industrials -34.1%
  • Materials -33.2%
source: yardeni.com, https://www.yardeni.com/pub/peacocksp546ytd.pdf

In comparison, the energy and consumer discretionary sector were still above the average performance back in 2008.

On another note, we are also already 25.8% down for the year (32% from all-time-high) and at the depth of the crisis in 2008 the S&P500 index was down 57%. It took the market 1 year and 3 months to get there and currently we are just 5 weeks into the decline. I don’t think that the speed of decline can be fully attributable to ETF’s and algorithmic trading.

What I do believe is that we still have a lot of room for further decline knowing that the US government is finding a 20% unemployment rate not unlikely (double the amount in 2009!). It just shows how scared our leaders are that have first hand insight into the data and the situation.

Unfortunately, nobody rings a bell at the bottom of a market so I might be totally wrong in my expectations.

So in summary:

  • Most sectors are severely impacted by this black swan event
  • Market is declining faster than in 2008
  • We are probably just on the way, still a lot of room to go

I try to make investment decisions based on some high-level historical data, like the indicators above, and then use my own approach for future investment decisions. Hence why the above context is so important to me.

My crisis investment strategy

Knowing all the above, I am actually very excited that I can finally get my war chest to work. I have been saving additional cash for the last few years for a moment like this while always having in mind that I found the stock market highly valued.

This has resulted in a decent war chest, because my cash position is pretty equal compared to my stock investments. So let’s say that I am currently 50% in cash.

A) Investment principles

I want to spend this money wisely, because this is hard-earned money and probably my once-in-a-decade opportunity. To do so, I am firstly going to list my personal principles which I believe should prevent me from making “stupid” mistakes:

  • I invest for income, not growth
  • I don’t know when there will be a market bottom, so no need to speculate on it
  • I only invest after analysing the company first to prevent impulse buying (i.e. balance sheet, payout ratios, fair value estimation, dividend safety)
  • I invest in companies that aren’t in the blast zone first (staples, healthcare, utilities)
  • I only consider investing in companies in the remaining sectors after their next quarterly earnings update to check how severe the earnings have been impacted
  • I invest in companies that should do better 10 years from now than today and will focus in particular on Tier-1 and Tier-2 stocks (ref: allocation strategy), because they ought to form the foundation of my portfolio
  • I invest maximum 40% of my war chest this calendar year. This is hitting the real economy and the bear market is in my opinion therefore very likely to roll-over into 2021.

Without the context of the crisis and looking at these principles in isolation, it could be as easily my regular approach to investing:

I invest in quality companies, with safe dividends, with a margin of safety and not all at once.

There’s just so much more to choose from than a year ago ๐Ÿค”

B) Investment Goal

A strategy without a goal is not really a strategy. As I am a dividend growth investor, my goal in allocating funds from the war chest will be the following:

Achieve a 3,75% average yield on cost for every Euro invested

I am talking here about an average, because a lot of the yield depends on payout ratios. In some cases I might get a 4% starting yield and in other cases 3%. The accumulation of purchases should provide me approximately with a 3.75% dividend yield.

Now, you might argue here that I’m chasing yield. In my opinion this is not the case, because you need to see it in conjunction with the principles above. Usually my preferred average yield on cost is 3.00%, but because of this crisis situation I believe that there will be ample opportunities to achieve even more than 3,75%.

In the end I would like to use this opportunity to reach FIRE earlier than under normal circumstances. An improved yield on cost may just bring financial independence a year earlier for me. I would be starting with more dividend income which will get reinvested and can therefore compound from a higher basis.

C) My approach to reach that goal

The approach to reach my goal will be increased dollar cost averaging during the upcoming 2 years in combination with value investing. I am already investing approximately 50% of my monthly income, but I will top-it up with distributions out of my war chest.

1๏ธโƒฃ Dollar cost averaging

For people not familiar with Dollar Cost Averaging, hereby the definition:

Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.
Source: https://www.investopedia.com/terms/d/dollarcostaveraging.asp

To explain my approach, I will use an imaginary amount of 100.000 Euro in cash. Based on above assumptions, this calendar year I will only invest 40.000 Euro to avoid spending all at once. This means, that I will invest an additional 4000 Euro every month or 1000 Euro per week. Or in other words:

I will invest 1% of my war chest every week into the stock market.

What is important to know in this context, the Great Recession took approximately 4,5 years to recover back to the level of October 2007.

source: finance.yahoo.com

The dot.com crisis took approximately 7 years to recover to the level of August 2000. And from there we went straight into the Great Recession. No wonder they call 2000-2010 the lost decade from a stock market point of view.

Knowing this, I think it’s prudent to assume that a recovery to recent all-time highs will probably span a few years. Off course, we don’t know, so if it recovers already within the next 3 months (i.e. a cure / vaccination is found) then I will just keep the additional money from the war chest in my pocket.

Yes, I might feel then sometimes that I missed out on a great buying opportunity, but that’s easier said afterwards than while being in the “eye of the storm“.

2๏ธโƒฃ Tier-1 & Tier-2 stock accumulation

Now that we know that I will be distributing 1% every week into dividend growing stocks, I will focus the upcoming 4 weeks in accumulating stocks from the before mentioned sectors: consumer staples, healthcare and utilities. Companies that qualify for that from my allocation strategy are the following:

  • Johnson & Johnson
  • Roche Holding
  • Unilever
  • Pepsico
  • Medtronic
  • Koninklijke Ahold Delhaize
  • Procter & Gamble
  • Danone SA
  • Enagas SA

I do not aim to add any Tier-3 or Tier-4 stocks yet, because I haven’t had a good chance in the last few years to really build up strong Tier-1 & 2 positions in my portfolio. Besides that, Tier-3 and 4 are usually easier to accumulate under normal market circumstances or to exchange with other DGI stocks in my portfolio. Therefore I will have to be laser focused on the foundation of my portfolio in the upcoming months.

From the midst of April I will start considering stocks from the other sectors again, but only after their quarterly earning reports. I am doing this for self-protection, because i.e. Starbucks looks so attractive now, but I know that this is based on TTM Earnings. Starbucks stock declined 70% during the Great Recession and that was without closing their stores.

I know that without this rule I would just buy it on the spot due to impulsive behavior. I just need a conservative and a planned approach. I don’t need to be a stock market hero ๐Ÿฆธโ€โ™€๏ธ . I just want to reach my bigger life goal of financial independence a little bit earlier and therefore dividend safety is of utmost importance to me.

3๏ธโƒฃ Value Investing

This topic might sound awkward or a no-brainer, but I haven’t done a recent analysis of several of the stocks from the watchlist (allocation strategy). Usually I do about two stock analysis per month and then I reassess my case after annual reports or certain big events (i.e. a lawsuit like for Bayer).

As an example, I haven’t done a recent analysis of Medtronic, so that’s the first company that I will assess in the upcoming week, just to make sure that I’m still accumulating stocks from a quality company.

When talking about value investing, I aim to:

Accumulate quality companies when they are below my fair value calculation, preferably with a 20% margin of safety

I am on purpose saying “preferably”, because sometimes I will just want to add a high quality company at a fair price, i.e. JNJ.

Having said that, I am aiming to double my effort and analyse one company per week. Analyzing one company takes me approximately 5 hours of time, so I have agreed with my wife that I will spend some additional time on this. She’s very supportive, because she also sees that this is the opportunity that we have been looking forward for.

It doesn’t mean that I can promise to publish every analysis on this blog, because it simply costs me 4 hours additional to write such analysis down in a readable format. One of the reasons is that English is not my natural language, so I typically lose a lot of time on grammar correction. But I will do my best to keep you informed on my journey during these volatile times.

Summary

So to sum it up, my strategy is the following:

  • Invest based on my principles to avoid impulsive behavior
  • The goal is to achieve a 3,75% yield on cost
  • Invest 1% of my war chest on a weekly basis
  • Focus on accumulating Tier-1 and Tier-2 foundation stocks
  • Use a value investing approach with a margin of safety

Final Thoughts

Afbeeldingsresultaat voor stick to the plan

I know from myself that I am highly analytical and easily distracted by all the noise around me. That’s why it is so important for me to write all my thoughts and strategy down so that I have a plan. I know from my own experience that sticking to a plan has done me well in the past, so I am very motivated to start executing it now. That’s actually one of the reasons that after six years I am still following the same Dividend Growth Investment strategy.

Having said that: you are my witnesses on this journey, so please keep me honest and challenge me when you see me deriving from my plan. It’s not that I can’t change the plan, because it might need to be adjusted from time to time based on new information, but generally I know that most often a change is not needed at all ๐Ÿ˜‰

Have a good weekend!

Yours Truly,

European Dividend Growth Investor


What is your strategy during this bear market? Do you have any cash on hand that you are willing to invest? What would you suggest me to change in my strategy? Feedback is a gift!


Are you wondering what stocks I own and how many of them?

Sign-up to my mailing list and receive a link with an overview of my full portfolio!

Processingโ€ฆ
Success! You're on the list.

0 comments on “My Crisis Investment Strategy

  1. Nice strategy and I fully recognise your statement on blogging and writing down your plan.
    I also do the same sort of thing: I buy stocks for โ‚ฌ200-โ‚ฌ400 per week. Although I am worried about the dividends, now is the time to take the opportunity to invest. The markets may go down even more, but spreading the investments helps averaging.

    • Hi mr. Groeigeld,
      Thatโ€™s some nice cash that you are investing every week. Consistency is key, weโ€™ll get there with determination ๐Ÿ’ช

      I hear what you say about the dividends. Letโ€™s see how it will be, because generally I have been conservative in my approach when purchasing companies. I guess the main question for my portfolio is if the oil majors would cut their dividends. That would most hurt my portfolio, but I believe that they are generally the strongest in their whole sector.

      I did clean up my portfolio already 2 years ago after the GE debacle, so I sold for instance Tupperware at the time.

      Letโ€™s cross fingers and keep on humming!

Leave a Reply

%d bloggers like this: