The following is a guest post written by Dan Mac of Dividend Growth Stock Investing. If you’d like to guest post on the Dividend Ninja, be sure to check out our Guest Posting Guidelines.
Do you have trouble taking the long-term view with your investment portfolio? Do you find yourself frequently reacting to short-term market swings and fluctuations? If so then it may be time to change your point of view. One way I have found to help me focus more on the long term with my investing portfolio is by viewing my investment portfolio as a business. In business it is all about the bottom line. Long term strategy and implementation is focused solely on increasing the companies after tax profits. This should be the same focus you have with your own portfolio.
When you are purchasing shares of stock, you are purchasing a portion of the companies after tax profits. By viewing your whole portfolio from a business perspective, your main concern should be on increasing your share of earnings of the entire portfolio. When I refer to your portion of the earnings I am not referring to your portfolios capital gains. I am referring to your share of the profits made by the company. Calculate this amount by taking the number of shares you own multiplied by the EPS of the company. Do this for each company owned in your portfolio and add all of them together to get the total earnings of your portfolio/company.
There are some great investment tracking software packages on the market, but to help me take the viewpoint of a business with my portfolio I have set up a spreadsheet. In this spreadsheet I have listed out each company I own in my portfolio and the number of shares owned. I pull in the latest EPS and dividend figures to help me calculate the stats that are most important to me as a business owner. You can calculate your share of each company after tax profits by taking the EPS figure multiplied by the number of shares you own. When you sum up these calculated profits from each of your companies in your portfolio, you will get your portfolios total share of profits earned by all your companies. This is the most important number for your business. This is the bottom line and the goal over time is to grow this bottom line.
As a dividend growth investor, I also like to keep track in my spreadsheet of my cash dividends earned. I take the number of shares I own multiplied by annual dividend rates to determine my cash dividends from each company. I add these dividends up to figure out my portfolios total dividends I expect to receive. As a dividend growth investor I believe this is the second most important number for my portfolio/business and I want this number to be growing over time.
These are the 2 most important figures I keep track of for my portfolio/business and my job is to grow these numbers as quickly as I can on a risk-adjusted basis. There are 3 ways I can increase my share of profits earned by companies in my portfolio and my dividends received
- Own companies that grow their earnings and dividend payments over time. I specifically seek companies with a history of increasing earnings and dividends year after year.
- Acquire additional ownership in my companies with new capital. I save my income from my job and use part of it to purchase more shares of companies I own or purchase shares in new companies. The more ownership in companies I have, the higher my share of the earnings and dividend payments.
- Reinvest my dividends received to acquire additional ownership in good companies. Here I am using already invested capital, which is earning me dividends, to help me grow my ownership in companies.
Along with my portfolios total share of profits and total dividend income, I also use my spreadsheet to monitor portfolio diversification. I want to make sure my business isn’t too risky. I look at each company in my portfolio and calculate the percentage of earnings and dividends contributed to the entire portfolio. I want to make sure I don’t have too much of my total portfolios earnings or my total portfolios dividend income coming from one individual company.
Focus on growing your portfolio/business profits. No matter what market prices are doing you know you are heading in the right direction as long as your income is increasing. Short-term market fluctuations should not be of concern. In fact, you should take advantage of short-term market swings to purchase more ownership in companies who over the long term will continue to increase their earnings. Over the long term, if you own companies who grow their earnings and dividends, your portfolio will perform very well.
7 thoughts on “Find Investment Success with a Business Point of View”
Thanx Dan! Great post. I also have been viewing my holdings as businesses and companies, rather than stocks. When you take this investment approach, it makes a big difference on how you view and manage your porfolio. You have just taken it a step further. 😉
Thanks for giving me the opportunity to write a post for your site Dividend Ninja! I enjoy reading your site and am pleased to be a part of it.
Valuation and monitoring are the keys to avoid most of the speculation.
Great post btw.
Thanks farcodev. I agree valuation is the most important when making buying and selling decisions with your stocks. Many people get upset when a company’s stock has a large decline even though earnings continue to be trending up. Lots of people can’t get over the stock price declining that they will bail when in fact the stock is becoming an even better value and what they should be doing is buying more.
Negative market fluctuations should only influence your selling decisions if there is a good reason for the decline such as a dividend cut for dividend growth investors.
I’m 100% agree with you.
When it’s time to sell for the others, it’s time to buy some bargain for us 😀
Thanks for your answer 🙂
Wow, what a great way to think of my portfolio. I’ve never considered it from that angle before. I still struggle a little with not over-reacting to market news, so I like this model of thinking like a business trying to increase its bottom line. Plus, I love spreadsheets! Thanks for the idea, I’m going to do some new calculations over the weekend now. 🙂
Thanks Rob I’m glad you liked the article! I think this approach really helps me take a long term view of my websites. In the short term markets are going to fluctuate up and down. There is no reason to let this market fluctuation dictate how we are going to run our portfolio. Don’t over react and sell if there isn’t a legitimate reason. As long as earnings keep going up you will be better off owning forever!
Glad you like the spreadsheet idea. I’m going to see if I can’t figure out how to post pictures of spreadsheets over on my site so I can give an example of how I have mine set up. Sometimes it’s difficult to explain spreadsheets with written words while a picture will help it all make sense!
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