Our Checklist for Building a Rock-Solid Income Portfolio
Introducing Our YSL (Yield, Stability, Linearity) Framework for Quality Income
Welcome back. In our last discussion, we introduced our second portfolio, designed with one primary goal in mind: generating consistent, reliable income. This strategy isn't about chasing fleeting market highs; it's about building a steady stream of cash flow.
Last week, we put this philosophy into practice by revealing our first pick for the portfolio. That company is the first of what will be a concentrated portfolio of 6 to 10 best-in-class businesses. Every single one of them, including our first pick, must pass the rigorous, three-part test we're outlining today.
Think of this as our non-negotiable quality control checklist. Let's dive in.
✅ 1. Yield: The Starting Point
What's an income portfolio without a juicy dividend? The dividend yield is our first and most straightforward filter. This percentage represents the annual dividend per share divided by the stock's current price. It's the return you get just for holding the stock.
We're looking for yields that are both attractive and sustainable. A yield that's too high can sometimes be a red flag, signaling that the market believes a dividend cut might be coming. Our goal is to find a healthy sweet spot—a meaningful payout that the company can comfortably afford now and in the future.
✅ 2. Stability: The Non-Negotiable Foundation
Income investing is the opposite of a roller coaster ride. We want stability in the business, its dividend, and its stock price. This is where we separate the truly reliable income generators from the pretenders. Our stability checklist includes four key points:
Steady Business Model: We invest in established companies with predictable revenue streams and a strong competitive position. Think of businesses that provide essential goods or services, making them less susceptible to economic fads.
Dividend Growth: A stable dividend isn't enough; we need one that grows. We require a minimum annual dividend growth rate of 5%. This not only increases our income stream over time but also helps it outpace inflation.
Revenue Growth: A growing dividend must be supported by a growing business. We look for companies with consistent annual revenue growth of at least 5%. This demonstrates that the company isn't just cutting a bigger piece of a shrinking pie but is fundamentally healthy and expanding.
Price Resilience: While we aren't chasing capital gains, we want to avoid significant capital losses. We favor stocks that exhibit lower volatility and have a history of weathering market downturns without catastrophic crashes.
✅ 3. Linearity: The Calm River
Finally, we look for linearity. If you were to chart our income stream over time, it should look less like a stormy ocean and more like a calm, steadily flowing river. 🌊
This principle is the natural outcome of focusing on yield and stability. By selecting companies with predictable earnings and a firm commitment to growing their dividends, we ensure our income isn't erratic or subject to wild swings. This predictability is the ultimate goal, allowing you to count on this portfolio for consistent cash flow, quarter after quarter.
By ensuring every potential investment passes this three-part test, we can confidently build a portfolio designed to deliver what it promises: stable, growing, and linear income.