Rules of Engagement

IMG_20150319_164814638A bit military sounding, but in the end when you are talking rules it’s better to be strict rather than loose..

These are the rules that I will try to follow when buying/selling positions in the stocks out there:

1. A company must have a track record of at least 5 years dividend payments, increasing or at least stable for Europe and the UK. When buying stocks in the US this time-span is extended to 10 years.

2. A company that cuts dividend might still be on the portfolio, but only after a very detailed scrutiny of the reasons why they are cutting dividends. Needless to say that if dividends are stopped positions will be closed immediately.

3. If falling more than 10% the stock will enter a “dollar cost averaging” zone, reassessment of the stock will be needed here. If the position is already quite important, the threshold must be increased to 20% and even 30% to start considering a DCA movement. Coming Ex-dividend dates must also be taken into account to maximize a move in a falling asset.

4. Total Beta PF must be under 1

5. Special attention needs to be paid to lower dividend yielding stocks, mostly for tax reasons, net YOC should be close to 2%

6. Companies must have a clear competitive advantage, market leaders where possible or anyhow working in a market where high entry barriers are present.

7. A P/E of above 20 can be considered but generally the P/E ratio should fall below this mark.

8. 10% of the dividend income must be destined to a “market crash fund”, useful to invest more money after a major market correction (where normally bargains are to be found).

9. If a stock records a capital gain of 5 times the value of the dividend an automatic sell order must be set just in case the stock price falls. A repurchase order must be entered later for a lower price. If stock goes ex-div in 30 days the automatic sale order should not be entered to avoid loosing the dividend.

9 thoughts on “Rules of Engagement

  1. You have a good start. As you progress you may find your rules a little rigid. Examples:

    1. What about spinoffs or IPOs?
    2. Perhaps it will be resumed. Unless BK is imminent, you’ve probably already absorbed the loss. Waiting may recover some of the loss.
    5. I use Total Return rather than YOC for low yield scenarios.
    6. Or have a convincing path to an M&A scenario or strategic partnership.
    9. I let them run unless they tilt the portfolio out of balance usually about 7%. This is where you really see the benefits of compounding.


    1. Ciao SR,
      Thanks for stopping by! Actually you point out a lot of issues with my rules that I have already encountered during this journey, as a matter of fact I should update them as I am already behaving differently… Anyways to reply to your points:

      1. IPOs will get the inheritance of the previous companies, although you might have to check if policy towards dividend is changed…
      2.I have already “broken” this rule by not selling BBEP when they stopped the dividend in October. As a matter of fact that was a “bet” investment and I should have offloaded it immediately, but I didn’t. The other companies that I have are much more “solid” (or they appear to be at least) and keeping them at lower dividend income (or none if they suspend) it’s not a tragedy if the business is just having a bad period (see BLT).
      5. The point here is that I can get 1.5% with a saving account in Italy. Total returns is a metric that I keep with the “index fund” but the core of the PF has to be dividends. I have added Disney and plan to add Starbucks as “lower dividend/potential growth” stocks, but I am not going to add many more than them.
      6. Yes I agree
      9. Actually I have dropped this rule altogether. I have run some “tests” on the recent market situation and when there is a market crash/retrace it’s better for me to increase the core holdings than buyback the stocks that I sold at a gain before… For example I sold Stanley B&D at +15%, and could have gone back into it two weeks ago at the same initial price, but I used that money to average down Wells Fargo and 3M.

      Thanks for the comment anyhow, I need to revamp this section with the new findings,

      Ciao ciao



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