Learn and evolve

8 weeks have passed since the start of the FiveTwenty experiment. We have established positions in 8 dividend paying companies. We have spend numerous hours pouring over The Dividend Champions List. Furthermore, we have scrutinized financial data on numerous companies. All that has lead us to conclude that it is time for a strategy update.

The changes outlined below go into effect starting with the week of 02/28/2021 to 03/06/2021.

Minimal entry criteria

We developed the minimal entry criteria to narrow down the universe of companies we would consider for inclusion into the FiveTwenty portfolio. For the first 8 weeks we adhered to the criteria with one notable exception.

With every passing week, our conviction that the minimal entry criteria are too strict has grown. So today we are making 2 changes to these criteria:

  • change minimal entry criteria to target entry criteria
  • decrease the dividend raise streak requirement from 25 years to 15 years

Why target entry criteria?

The minimal entry criteria are hard boundaries. If a company meets 3 of them and even just barely fails the 4th (e.g. payout ration of 61%), then we cannot add it to the portfolio. This strictness has become counter productive. We had to pass on a number of high quality dividend paying companies, because of small deviations on a single criteria. At the same time, we considered adding companies to the portfolio that we did not believe had good future prospects.

Target entry criteria, other than being a name change, also changes how we will apply the criteria. We will no longer treat them as hard boundaries. Deviating from either one or more of the criteria when selecting a company is now OK. However, each deviation will be accompanied with an explanation of our thinking for allowing such deviation from the entry criteria.

Why decrease the dividend streak to 15 years?

The main reason for the dividend raise streak criteria was for us to gain confidence that the companies business model and dividend strategy can withstand economic downturns.

We feel that a 15 year+ streak meets this requirement. To sustain a 15 year+ streak, a company would have had to successfully navigate the Great Recession (2007-2009) and the COVID-19 pandemic in 2020.

Diversification rules

Our goal is to build a well diversified portfolio. Therefore, we expect the FiveTwenty portfolio to include somewhere between 20-30 individual companies. We devised the diversification rules to help us get there as fast as possible.

However, over the last 2 months we have come to the conclusion that attempting to open positions into 20 companies before adding to an existing position is not the best strategy. Therefore, we are changing this rule to the following:

  • If a company comprises more that 15% of the portfolio we cannot add to that position.

Why not stick to the 20 open position rule?

The new 15% rule gives us more flexibility. We can add to a position if an attractive opportunity arises sooner than under the old rule. It expands our options for the weekly capital allocation. That in turn makes it easier to for better opportunities to open positions in companies on our short list.

Photo by Johannes Plenio on Unsplash