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The value of "buy and hold"

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April 27, 2014 – Comments (1) | RELATED TICKERS: PM , DORM , NFLX

Today I cashed my entire CAPS portfolio.  I'm going in a new direction and I want to watch what it does with CAPS.  Now, you might ask, "What are these two directions, the original and new?  Ken is a successful CAPS player, consistently in the top 10% of the field.  What has he done well, poorly and what direction might be an improvement in his opinion?"

The answers lie in Buy and Hold. I've continued to rack up CAPS points so that a beginning player may have difficulty catching me using something like my original playing strategy.  The strategy was as follows:  Look at interesting companies.  Look at their income, balance and cash flow.  Look at the company.  Make a judgement about whether or not the upcoming economy will be good to such a company.  Click up or down.  Then hold the company.  

For example, I've held LUV since 2007.  It's been a few points above  S&P 500 for most of this time.  (exception of much of '08 and '09.  It's still worth 28 points. 

Dorman Products (DORM)  has given me one third of my points.  Wish it was in my IRL portfolio. NFLX was in my IRL portfolio.  I bought it about $20 and sold about $430.  Buy and hold.

 The New Strategy

 I'm beginning to age and am examining the concept that retirement is around the corner.  I'd like to be able to retire a little early.  I'd like a consistent, reliable  and growing income stream at that point.  So, you probably know where this is headed:  Boring dividend stocks.  Yep.  

 Of several hundred stocks that I've examined and picked only two have become explosive growth stocks.  In a diverse portfolio, those are welcome but they are also diluted by the portfolio itself.  

In the future, I will be looking at stocks with a history of growing their dividends generating excellent dividends and provide room to continue to grow the company.  A basic metric I've chosen for screening a company is 5yr dividend growth added to current expected dividend yield.  These two percentages added should exceed 12%. 

 This metric is known, over at Seeking Alpha, as the "Chowder Number". Read Chowder's explaination for good details: http://seekingalpha.com/instablog/728729-chowder/2360292-the-chowder-rule.

 An example might be PM.  This company's dividend yield is 4.5% and the dividend has grown 10.1% during the last five years.  The Chowder Number is 14.6%.  The company is fairly priced at about $84.   I would like to see the payout ratio lower.  Now let's look at CAPS community.  Very few all stars show as under perform.  

Conclusion

I've ended all of my oldest picks and am seeking income, income growth, and capital growth.  My thesis is that companies that grow their dividend, pay good dividends, and keep their payout ratios under control will beat the market in the long term.  Perhaps they will not perform like NFLX and DORM, but will return consistent results.  Let's see if these picks keep me in the top 10% of Fools.  

 Fool on,

Ken

1 Comments – Post Your Own

#1) On April 27, 2014 at 11:11 AM, HarryCaraysGhost (99.71) wrote:

Cool, I added you to my favorites list, and will be very interested to see whats in your new Caps page. 

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