How to get your Minions working for you – Part 2

In part 1 of ‘How to get you Minions working for you’ we reviewed the value component of the Dividend Geek dividend growth stock investment strategy, where we prefer to buy dividend growth stocks near the 20% discount to fair value for a margin of safety.

However, with the market at all time highs it is difficult to find undervalued quality stocks. In fact it is natural for high quality stocks (think JNJ, KMB, WMT) to be selling at a premium to the rest of the market.

Here are three strategies on balancing both value and the income side of putting your Minions (money) to work. You’ll want to find a strategy that works for you. It may be one of these or combining elements of them to make your own. Once you develop your buying strategy you should stick to it, and only allow minor tweaks if necessary.

These strategies work best if you are automatically making monthly contributions to your Roth IRA (which I highly recommend). For example, if your maximum annual allowable Roth IRA contribution amount is say $5000, then you simply divide that by 12 ($416.66) and contribute that much each month through payroll direct deposit or automatic bank account withdrawal.

Strategy 1 – Dollar Cost Averaging

This is the easiest strategy to apply and the most true to a long-term income investor. Add cash to your Roth IRA portfolio until you have saved up your minimum investment amount usually between $1000 to $2000. Mark your calendar every 3 months on a specific date say the first of the month, and on that date buy stock.

Use the Dividend Geek portfolio tools to determine which sectors you are under weight. Preferably buy stock within those under-weight sectors to build a balanced portfolio, but you are not locked in here. Discount to fair value (good deal) trumps diversification (at least until you have 5 or more stocks from different sectors). Eventually the sectors will rotate as we move through the business cycle and you’ll be able to buy stocks on sale in the sectors that are currently over valued.

Next look for the highest quality stock that is currently under value. Never buy a stock that is overvalued (this is highlighted in red on our ‘Check for Undervalued Stocks’ page). Choose quality over value. For example, if YUM is trading at an 18% discount to fair value and MCD is trading at a 12% discount buy MCD! McDonald’s has increased dividends 37 years compared to YUM’s 11, has stronger competitive advantages, a higher dividend yield, and a higher dividend growth rate. Think in terms of which company would you prefer to own for 20-30 years.

By purchasing stock on a regular bases (every 2-3 months) you utilize the dollar cost average strategy of buying fewer shares at high prices when the market is up and more shares at lower prices when the market is down.

Strategy 2 – Buy on Dips

This strategy requires more time and discipline to execute. It includes elements of both market timing and dollar cost averaging in spite of the name. Here’s how it works.

When the market pulls back to within 20% of near term lows you make a stock purchase. If the market doesn’t pull back you continue to accumulate cash in your Roth IRA up to 15% of your portfolio. However, cash above 15% should be invested as soon as you have an additional full investment amount ($1000). This allows you to continue putting money to work generating income, as well the ability to capture better value on market dips. When you do invest continue to choose the stock based on the same process on the website steps (highest quality stock, below fair value for your under weighted sectors). Note: I will show you how to determine 20% above near term market lows (a dip) in an upcoming Dividend Geek blog post.

Strategy 3 – Buy at a specific discount to fair value

Technically this strategy is easy to setup using our email Watch List Alert tool. However, emotionally is it more difficult to execute, especially in a bull market where prices continue to climb leaving you out of the market.

In this strategy you simply determine which stocks you want to buy and at what percentage below fair value you are willing to purchase the stock. Use the Watch List Alert tool to set your % below fair value price and wait to be notified via email when the stock comes down to your price. You can choose a flat 20% below fair value for all stocks, or allow a smaller margin of safety (10% to 15%) for higher quality blue chip stocks. Remember since you are contributing monthly you will have cash for future opportunities to buy more if the stock drops to even better values. The key here is to act (buy) when your stock does drops and you receive a notification. Don’t get greedy and reset you notification level to a lower price. Set a plan with a defined process and stick to it!

These three strategies work. The key is to choose the one that best suites your investment objectives, ability and disposition. Then stick to the rules and execute your predetermined process. As you do so you will become better at it, and build greater confidence in your ability to follow your plan to put more Minions to work with a margin of safety.

Filed in: Dividend Growth Investing