A Financial Experiment

So, I've set up this experiment in finance, having to do with one of my IRAs and a model for investing that relies on dividend income as opposed to capital gains. Since this experiment is occurring in a non-taxable account, taxes are not an issue just yet. There are a few more years before I can begin to withdraw from this account.

I started the experiment earlier this year, and sold everything in this portfolio in the January February time frame, and began to purchase stocks that 1) had a significant dividend yield, 2) had a significant dividend payout ratio, 3) had a history of dividend increases and no dividend cuts, and 4) had the fundamentals to continue those dividend increases into the foreseeable future. I took out seven positions in different companies, two of which where financial institutions. The idea is that I won't need to touch this portfolio for several years to come, except to reinvest the dividends that have been earned.

The theory is that just because a market can evaluate the price of a share of stock, on a daily if not an hourly basis, doesn't mean that information is terribly useful to any one holder of that stock. The question that shareholders should ask is, "what kind of cash return is this company making for me." By focusing on the dividend and not on capital gains, the focused is placed not on the day to day vagaries of the market place, but on the fundamental operation of the company in question, and the even simpler question of whether or not the company will make its quarterly dividend. As shareholders, we become less speculators and more owners.

So how is it all working out, given the recent turmoil in the stock markets. Not bad, but there continue to be some rough spots, particularly in the banks that I have shares in. But, so far, no one company has cut their dividend, one company has increased a dividend slightly, and the portfolio is generating about 4.5% in cash on an annual basis. Still, this experiment is not yet complete. I will update this post some time in December to check on the performance of this new portfolio style.