Strategy

Selection

For us to consider initiating or expanding a position in the FiveTwenty portfolio, a company must meet the target entry criteria:

• raised dividends for 15 consecutive years
• Yield >= 2.5%
• PE <= 20
• Payout ratio <= 60%

In addition to the target entry criteria, we use the following portfolio diversification rules to guide the build:

• If a company comprises more than 15% of the portfolio we cannot add to that position.
• If no company, outside or inside the portfolio, meets/is close to the target entry criteria then we can add to an existing position.
• If a company cuts its dividend, then we will evaluate if it warrants closing the position.

Finally, we analyze company fundamentals of companies that pass our screening criteria to select the ones to add to the FiveTwenty portfolio.

Mechanics

Every Wednesday, we establish a new position or add to an existing position. (The entire weekly amount to be invested, is allocated to a single stock.) We use $2,000 of new capital plus any dividends paid out in the previous week to fund the purchase.

If we make a decision to close out a position, we close out the position on the first Wednesday following the decision. We re-invest the proceeds of the sale back into the portfolio. In order to avoid over-indexing into a single position, we split the amount into $2,000 chunks and add them to the weekly investment capital until the entire amount has been re-invested.

Before submitting the purchase/sale order(s), we announce the stock selected for the weekly purchase and any other changes to the portfolio on the blog.

Benchmark

To quantify the effort put into building the FiveTwenty portfolio, we benchmark the portfolio against the easy-peasy portfolio. Easy-peasy consists of a single position: VT. Additionally, easy-peasy has automated dividend reinvestment turned on. Finally, we build easy-peasy over time by investing $2,000 of new capital every weekly over the same period as the FiveTwenty portfolio.

Benchmarking dimensions:

• total value (aka balance)
• most recent quarterly dividend payout
• lifetime dividend payout

Expectations

As January 2021 rolls around US equites have been a 10+ years long bull market. All major US indices are near their record high. COVID-19 is still having an outsized impact on our society and economy. It is quite likely that the US will see a significant market correction and a recession during the 5 year period of the FiveTwenty experiment. The experiment is neither a bet that stock prices will continue their great bull run, nor that they experience a major decline. It is instead a bet that investing in solid dividend paying companies for the long term will yield good returns irrespective of the economic cycle.