What’s your investment philosophy?

I recently had a chance to chat with Kanwal from Simply Investing and share my thoughts on a range of investing topics. This is the full interview.

 

Kanwal: Tell me a little bit about yourself and your blog.

Financially Integrated: I’m really a finance guy through and through. I’ve had the good fortune to work in a variety of finance roles and get a formal financial education. I’ve always loved the idea of managing my own money and being in control of my own decisions. I’ve been investing in equities for the better part of the last 14 years. My initial forays into the stock markets were largely unsuccessful.

It was the time of the dot.com bust when I started, only the actual “bust” hadn’t taken place as yet, and speculative stocks with no real business models were achieving crazy valuations. Of course, like all things with no solid basis, the dot.com bust came to an end. I felt there had to be a better way than chasing these stocks. I then embarked on a journey down the path of dividend investing and was able to achieve results I’ve been very happy with.

Financiallyintegrated is the blog I maintain that really tells the story of all the parts of my financial journey that I’ve been able to meld together and shares what I’ve learnt, what I’m trying now and what I hope to achieve in the future.

Kanwal: What is your approach to investing?

Financially Integrated: I’m primarily a dividend investor, which means I focus on companies that pay steadily increasing dividends over time. I look to identify those dividend paying companies that have the strongest competitive advantages and robust barriers to entry that can serve to keep competitors at bay.

The core of my portfolio is made up with what I call classic dividend payers, which are mature well established companies that are growing at 7-10% annually and which pay ever increasing amounts of cash to shareholders. This is the “core” of my portfolio.

Around this core, I’ve started to deploy a few “satellites” which may be smaller dividend paying companies that are growing more rapidly, or larger growth companies that offer a fairly small yield, and even a few growth companies that don’t pay any dividends but which still achieve rapid revenue and earnings growth.

My satellites help round out a more complete approach to total return. Sometimes the best businesses don’t pay out meaningful dividends. That doesn’t mean I want to neglect having them in my portfolio.

Kanwal: Why do you feel your approach is the best?

Financially Integrated: Having a focus on dividend paying companies generally means the selection of companies with solid, sustainable business models that are “cash generating”. That’s important, because it minimizes the risk of a total capital loss through insolvency. If a company is generating and paying out cash, that generally augers well for the company to be a going concern. The risk of business failure is reduced.

You can have some very stellar returns and stocks that hit it out of the park, but a couple of failures will really hurt your overall performance. Capital loss is what I am most keen to avoid, and dividend stocks help greatly mitigate this risk.

However, at the end of the day, I still want to achieve returns that are at least competitive with the market. Otherwise I’d probably be better off just sticking my money in a low cost index fund. While my dividend stocks generally outperform the market anyway, sometimes adding a little “alpha” through some higher growth stocks can lead to a dramatic boost to total return. Interestingly enough, the stability that my core dividend stocks provide is what actually allows me the freedom to chase a little more risk in the few satellites that I do have.

In the end I have the best of both worlds with stability, cash generation and low volatility at the core of my portfolio, and a little bit of risk and the potential for above average total return in the outer rings!

Kanwal: What advice do you have for someone just starting to invest?

Financially Integrated: Whatever you do, just get started!. Having money invested in the market and working for you is much better than sitting on the sidelines waiting to invest. There can be fear and trepidation about taking that first move, but once you’ve done it, you’ll never look back. Managing and making your own investments isn’t hard provided you don’t treat the stock market like a casino and expect to get rich overnight.

Start with companies that you know and whose business models you understand. You’re much more likely to sleep happy and contented that way. And of course, if direct investing is too much for a new investor, there is no reason why they just couldn’t start out with a low cost index fund, and move to a direct investment approach in individual equities as they build up more confidence.

Kanwal: Any stocks that look interesting to you right now and why.

Financially Integrated: While market valuations are generally fairly high right now, I feel the market has left behind the two stocks that I consider bottom drawer, core portfolio positions. These are Coca Cola and McDonalds. Talk about proven performers. Both have made their shareholders wealthy over extended period of period, and I don’t believe either are done yet. These are companies with strong barriers to entry and great business models which are simple and transparent to understand.

I believe any investor, new or experienced would be well served having these companies as cornerstone positions. Both are at attractive prices right now. In fact, these stocks look so interesting to me that I have recently added positions in each, around the prices that they are currently trading at!. I’ve got no doubt both investments will pay off handsomely in 10 years time.

My thanks to Kanwal for allowing me to provide my views on a range of investing topics. I encourage all of you to take a look at the Simply Investing blog that Kanwal has here.

 

Comments

  1. moneycone says:

    “Whatever you do, just get started!.” Best advice!

    • Integrator says:

      The way I look at this is, 10% of $0 will always be zero. If you aren’t in the markets, you’ve got negligible opportunity to benefit from long term market returns, in spite of the volatility.

  2. Jon says:

    Just picked up a chunk of KO, MCD, GE, PM, ULVR and DGE recently. Keeping an eye on PG as it approaches 3% yield.

  3. Nice interview Integrator. I just found your blog because of Roadmap2Retire, but I can tell I’m going to like it. The best financial advice I can offer is to save some money, so that you have money to invest. That being said, I allow cash to accumulate until I see what I think is a good opportunity….then I pounce. I love to read and learn, which helps. I do very little trading. The core of my long term portfolio has many of the same stocks you talk about, like Coke, General Mills, Proctor & Gamble, Chevron. I just picked up Unilever for the first time today.

    One of the comments above was absolutely right, “just do it”. To which I would add, make a plan and stick with it. People will be glad they did.
    -Bryan

    • Integrator says:

      FW, Thanks for stopping by! That’s a nice set of core portfolio stocks you have. I’d love to add more consumer staples to the core of my portfolio as well. I’m looking for opportunities to further consolidate McKormick, Church & Dwight among others.
      Very true about the plan. It’s very important to have something to keep you anchored when times get tough and your stocks are getting belted, which will happen at some point no matter what you own. Not having a plan will probably cause you to jump ship at the first sign of trouble.

  4. Marvin says:

    I agree, getting started is the key. I focus primarily on dividend investing because in retirement I want to replace my working income with dividend income. It is my belief that not enough retirees take this into account. Instead of withdrawing from the principal of my account I plan to only take out the dividends I need.

    • Integrator says:

      Marvin, I agree. The beauty with dividend stocks is precisely that you don’t need to dip into the capital base to fund retirement. It doesn’t matter if the markets have a rough year, you still continue on your retirement journey unaffected. It’s a plan I’d love to put into action myself some day, to be able to live off the income which my capital assets throw off.

  5. That’s the key as your purchases are for the next 10 years and not 10 months. I do like your dividend porfolo.

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