Every investor has his own strategy when it comes down to investing. One of the most heard ‘rules’ is: ‘stick to what you know‘ from Warren Buffet, especially for investors who are just starting.
We follow the basic principles of value investing and dividend growth investing (DGI) and combine them with the core-satellite strategy. As we take the freedom of don’t follow 1 vast strategy, but mix them up. We do the same with evaluating companies. There are certain KPI’s we look at while we evaluating a company, but don’t have a list of metrics each stock has to meet. We value every company in their own specific segment and market. The most important aspect for us: the growth potential for the long term.
Because we are long term investors and focus on growth of wealth we started reading into dividend investing and value investing. Following the style of key investors in the likes of Benjamin Graham, we soon focused towards dividend stocks and companies which were undervalued. In order to implement some more diversification we took some elements of the core-satellite strategy and made it fit with our wishes of portfolio management.
What is the core-satellite strategy?
The core-satellite strategy is a method to minimize certain risks, like costs and volatility, but also providing an opportunity to outperform the market as a whole. The fundament in this method is the core, like solid dividend champions. Then, additional positions are added to the portfolio, known as satellites. These satellites are more actively managed investments and also include more risk.
We liked the idea of having a split in the portfolio between more ‘safe’ investment and to have the possibility to take on some more risks with the satellites. Because we use a more active approach to our portfolio as a whole, by buying only stocks as investments, we altered this method in order to fit with our needs.
So for us, the core exists of solid company stocks that pay dividend for a long time, for example Johnson and Johnson (NYSE: JNJ). And for the satellites, we choose companies which are a little of the grid, but gives us more upwards potential on the long term. This could be a company which only pays dividend for 1 year, a company who operates in a very volatile market or companies that are not too well known midcaps. When performed right these satellites will outperform the market and give you high returns back.
Our best example of a satellite is a company named BE Semiconductors (AMS: BESI), which is a Dutch company (local) operating in a volatile market (higher risks) and is a small cap company. The company involves more risk. Still it has given us the highest return of all companies in our portfolio.
Because we measure and evaluate each (new) company differently, we don’t use a vast set of metrics. But because we like to have some focus, we did set up some guidelines we follow when it comes down to selecting stocks:
- Fundamental analysis is more important than technical analysis
the cornerstone of long term profit is investing in fundamentally good companies. Timing the market (where you would use technical analysis) is just not possible. Instead of buying high and selling low, we focus on Dollar Cost Average. With DCA we minimize the downside risk.
- A company must be at fair value or undervalued before we buy
Although we don’t time the market, we also don’t want to overpay for a company. When we find on a possible buy, we analyze the finances, fundamentals en upward potential of the company. If the company is still interesting we try to set a fair value price for the company. If the market price is under fair value, we buy it. Otherwise we wait until the market price becomes more interesting.
- A company must be financially strong
With strong we mean a company is able to withstand a more difficult time without grasping directly to cutting back on costs or even worse, dividend. So in order to define if a company has a strong financial position we focus among others on debt ratio, dividend pay out ratio, income growth, book to value and earnings per share. These key ratios are compared to the industry averages.
- Dividend growth is more important than dividend yield
Although a high dividend yield sounds very attractive. A high dividend growth is even more appealing. The companies with higher yield are mostly stable and solid which have a long track record of paying out dividend, and are most often favorite of dividend investors. But the growth of dividend will be always more attractive because it gives us more upside potential on the long term.
- We leave room into our portfolio for new and experimenting opportunities
This is where the satellites are coming in. Sometimes we come across companies which are very interesting, but they don’t really fit in with the ‘rules’ for DGI most people use. If we find such an opportunity we take more time to scrutinize the company and follow it for a while, just to see how it performs on the market. When everything seems positive and we believe the company has a solid growth potential for the long term, we will buy it. This also means we are very careful. If we see only 1 ratio or element that is ‘off’, we simply let the opportunity slide by.