Micro Blog #13: How Do I Define A Core Stock?

Before I go and share my own definition or rules for a core stock position, I want to share how some of the most popular and very respected DGI investors on SA define core stock positions in their portfolios.

I have followed these investors for years on SA and tried to learn from their DGI investment wisdom.

ChowderA core company has to be a leader in its industry, the big dog. It has to be considered so safe to own that he would have no intention of trimming shares. (If he needs to generate cash, he would trim non-core holdings.) A core holding is a company he wish to keep building; he doesn't mind if it exceeds 10% of the portfolio value, when others are kept at 3% or 4%. With a core holding, a 50% price correction is a buying opportunity, not a selling event.
Nicholas WardEvery equity position comes with risks, this is unavoidable, but he spends very little time worrying about company-specific risks for his core positions. He is completely comfortable with the business models, management teams, product/services outlook and moats, as well as the balance sheets of his core positions. He is completely comfortable that these companies will meet or even exceed his long-term goals in the market.
Dividend HouseCore positions have long streaks of increasing dividends and credit ratings of A- or better. They have relatively low payout ratios, debt-to-equity ratios and betas. Dividend House is near retirement, and they expect their core companies to generate at least 50% of their portfolio's income.
Bob WellsA core position must be 'recession proven,' meaning it braved the last recession without cutting the dividend. The core holdings are either Dividend Aristocrats, Champions or Contenders. Nearly 70% are in defensive sectors.
Rose NoseStocks must pass the plan criteria to just enter the Rose portfolio. But core holdings are held to a higher quality standard and must have an S&P credit rating of BBB or higher and Value Line Safety rating of 1 or 2. She owns stocks in 10 sectors (none in Materials), and considers at least two stocks in each sector to be core.

And here is how I've defined my own core and non-core rules. I actually have three categories when it comes to defining the types of positions: Core, Core -1, and Core -2.

Mr. ATM's Core Stock Rules
Core
Best of the Best Stocks that I would never want to sell - each position can be as high as 5% CB of PV, 10% MV
of PV, 5% of Total Income.
Rule 1Must have at least 10 years of consecutive dividend growth history and recession proof dividend (no div cut during last recession).
Rule 2Must have a S&P credit rating of at least BBB+.
Rule 3Dividend must be covered by earnings or FCF in the last three years.
Rule 4Must be in Amazon proof business i.e. No middle-man type of businesses.
Rule 5Must be a SWAN stock. This is a subjective rule and depends on how I feel about the stock and company's business. It can override any other rules.
Core -1Good solid stocks with potential to becoming the core - limit each position to less than 3% CB of PV
Rule 1Must have at least 5 years of consecutive dividend growth history.
Rule 2Must have a S&P credit rating of at least BBB.
Rule 3Dividend must be covered by earnings or FCF in the past and current year.
Rule 4Must have a good growth potential for dividend and stock price.
Core - 2Turnaround Story and somewhat speculative and risky - limit each position to less than 2% CB of PV till they become Core-1
Rule 1Must have at least 3 years of consecutive dividend growth history
Rule 2Must have a S&P credit rating of at least BBB-
Rule 3Dividend must be covered by earnings or FCF in the current year
Rule 4Must have a good turnaround story and competent management (+ve ROIC).
KeysCB: Cost Basis, MV: Market Value. PV: Portfolio Value, SWAN: Sleep Well At Night

These are not perfect rules, but something I try to follow when it comes to making decisions about my own stock position sizes and helps me manage risk in my portfolio, while meeting the objectives of generating dependable, predictable, and growing income from my stocks.

Comments

  1. good one, but hard to read with green letters in black background.

    ReplyDelete
  2. Thanks for sharing this Mr. ATM. Good thoughts to consider for the DG investor. Tom

    ReplyDelete

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