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How to select a portfolio

How to select a portfolio
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How to select a portfolio

How to select a portfolio

Alpha Letter is a newsletter that gives readers investing ideas across different asset classes and strategies. The free version, which includes ideas that should just be viewed as starting points for your own research. To get out in-depth analysis on stocks we recommend, subscribe to our premium newsletter here.

In this edition of the Alpha Letter, we cover:

  • Stocks & Options: Retail traders have taken over – but it’s not the first time

  • Dividend Investing: How to find good dividend growth stocks

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Stocks & Options

Is anything really new in investing?

When you look at the 100+ year history of modern markets, you realize nothing is really new in investing.

As famous hedge fund manager Ray Dalio likes to say, just about everything in the market is “just another one of those”, meaning nearly everything that happens in markets is a variation on something that has already happened.

The media likes to create the impression that unusual events are unprecedented and pose some existential risk to the markets or humanity as a whole. This is almost always a massive over-exaggeration but it happens because it helps media companies sell ad space.

For example, the financial media likes to opine about the massive amount of “unprecedented” retail involvement in the market and debate daily how dangerous it is.

But check out this Forbes cover from 1998:

The only thing that really happens in markets is that human emotions of fear and greed interact with each other and cause prices to move up and down, sometimes in dramatic fashion.

In my experience, the only thing to really avoid in the market is to avoid getting sucked into an illogical vortex of greed or fear so powerful that you end up losing it all.

You just have to stay in the game. Steady gains are perfectly acceptable. Over a long period of time, you’ll do well.

If you’re going to be more aggressive, you need to stay in the game long enough to get the one 20-bagger you’ll need to make your decade (or even your entire investing career).

Dividend Investing

Let’s talk about investment selection. I found this informative piece on Seeking Alpha on narrowing down the potential opportunity field from the 7,500 available public companies to a reasonable field of potential investments to analyze.

For a dividend investing portfolio, the author’s first criteria was that potential target companies should yield more than the current dividend yield of the S&P 500, which is 1.5%.

Here are all the criteria:

While this list of criteria works well for dividend growth investing, this process can be applied to any investing strategy. If you’re looking to construct your own portfolio from scratch, I highly recommend using this process to build a list of potential investments to dig into.

There’s absolutely no way one person can have a firm grasp on all 7,500 publicly-traded companies. If you’re going to actively pick your own stocks, you likely need to focus on a type of strategy and one to three sectors.

If you’re worried about diversification, you can put half your portfolio into passive market index funds, and then actively manage the other half of your portfolio in one sector or industry that you really understand. Alternatively, you could also create a concentrated large cap portfolio and only invest in 10 to 20 large cap companies across a variety of industries.

Here’s an example for managing your own portfolio: Say you're a growth investor focused on software. You’d create a list like the one above that includes a minimum 5-year sales growth rate of 10%, a P/E ratio that’s either negative or above 20, and a market cap below $50 billion.

Now back to the dividend investing list above.

Using the criteria above, we get 393 companies.

That’s still way too many to analyze. To narrow it down, the author strips out companies without five years of dividend growth history.

After filtering the list a bit, the author creates a formula to measure and rank each remaining company. The formula includes current yield, dividend growth history, payout ratio, debt/equity ratio, EPS growth, and several other factors.

The author uses this formula to narrow the field down to 25 companies that rank highly in all the important dividend-related metrics.

I won’t give away their entire list here (check out the article for their full process and list of dividend growth companies), but here are a few of the ones that stood out to me:

  • Aflac (NYSE: AFL) $39 billion insurance company with a 2.30% dividend yield with a history of strong growth (the stock is up 39% over the last year and 66% over the last five years).

  • Clorox (NYSE: CLX) Consumer staple company with $22 billion market cap and a 2.59% yield.

  • Southern Copper Corporation (NYSE: SCCO) Mining company that has benefited greatly from the rise in commodity prices – it’s up 83% over the last year. Yielding 3.94%, which is great for an investor entering now given that the stock has already appreciated so much recently.

What we are reading

Alpha Thought

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The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

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alphaletter.co (“Alpha”) is a website owned and operated by Substack. Alpha is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Alpha in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Alpha is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Alpha does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Alpha does not verify the adequacy, accuracy or completeness of any information. Neither Alpha nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Alpha nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis

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Disclaimer:The publisher does not guarantee the accuracy or completeness of the information provided in this page.  All statements and expressions herein are the sole opinion of the author or paid advertiser.

Grit Capital Corporation is a publisher of financial information, not an investment advisor.  We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.  

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME.  THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.  INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.  

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable.  They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.  Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein.  The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities).  To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.

Gritcapital.substack.com (“Grit”) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.