Adopt A Stock Project Is Back

By | May 10, 2020
Adopt a stock project

In March 2019, I decided to take on another project that I called the Adopt A Stock project. The idea was that every month, I would adopt one stock from my portfolio and contribute enough money to purchase at least one share of that stock. To me, it was a fun way and slightly more active way to invest in the stock market. This is an update to that post and this project. It will be somewhat of a long post, so I apologize in advance. I’ve updated the rules and I finally have what I need to get the project started. You heard that right! The Adopt A Stock Project is back!

Adopt A Stock Project

Each month, I will adopt one stock in my portfolio. Then, over the course of that month, I will make a contribution to that stock. As I wrote in my previous post, my initial thoughts was to choose an arbitrary amount like $50 per month. But, to keep things interesting, I’ve decided to contribute enough to that stock to purchase at least one share!

My portfolio has changed since the last time I made a post about adopting a stock. At the time of this writing, I now have 22 stocks in my dividend portfolio. I may add three more to get to 25 or just keep the stocks as is. Should any company cut its dividend, I will evaluate whether I should sell that stock.

However, as of right now, the cheapest stock in my portfolio is AT&T (T) trading at $29.79 per share. The most expensive is Lockheed Martin (LMT) trading at $378.40. Ouch! Regardless of the stock price, the goal will be to purchase at least one share!

Updated Rules For The Adopt A Stock Project

To ensure accountability, I will adhere to the following rules:

1. Maintain the Minimum Contribution to Dividend Portfolio

As of right now, the minimum contribution to dividend portfolio is $500 per month. Every month, I will deposit $500 to my M1 Finance account. M1 Finance will then buy stocks according to my target allocation utilizing its dynamic re-balancing feature. I wrote an M1 Finance review back in 2018 that discusses its dynamic re-balancing feature. I will have to write an updated review at some point in the future.

Over the course of time, I may increase the minimum contribution my dividend portfolio. If I do, I will ensure that this rule is maintained before any stock is adopted for the project.

2. Adopt Only The Most Undervalued Stock

This has been the most significant change since I created the Adopt A Stock project. Initially, I had a no stock left behind policy where I pledged that if I adopted a stock one month, it would not be eligible for adoption until I’ve adopted all the remaining stocks. I will adhere to that policy but with a very important caveat.

At present, I’ve assessed that Exxon Mobile (XOM) is the most undervalued company in my portfolio. I will officially start this project beginning the 15th day of May 2020. If Exxon Mobile still remains the most undervalued company, I will adopt XOM from May 15th to June 15th. If it remains the most undervalued company for the next 6 months, it will be adopted for the next 6 months. I think this approach will be better for me in the long run. It takes the emotions out of it, as whether a stock is the most undervalued is strictly based on math.

And The Caveat

The caveat is this, however. Once a stock reaches 100 shares, it won’t be eligible for adoption until I have 100 shares in all remaining stocks. At that point, the process starts over, where the next investment break will be at the 200 shares mark. That way, the entire portfolio will grow, about 100 shares at a time per adopted stock.

MAY 16, 2020 EDIT: It has been pointed out that having equal shares in the portfolio will cause the stocks with the highest prices to be over weighted. I’ve given that some thought and am considering using a dollar amount instead. So, for example, I would invest in the adopted stock until it reaches $2000. Then, once reached, that stock would be ineligible for adoption until all remaining stocks reach $2000. Then the process starts over again.

Wait, Won’t This Conflict With M1 Finance Dynamic Re-balancing?

Kind of. M1 Finance has a feature called dynamic re-balancing. For each stock in your portfolio, M1 Finance allows you to set target allocations. I’ll take two stocks for example: JNJ and KO. I could tell M1 Finance that I want 50% of my money in JNJ and 50% in KO.

Based on market conditions, JNJ could rise to 60% of my portfolio while KO falls to 40%. What M1 Finance will do is take new money I contribute to my portfolio and allocate it in such a way that brings my stocks back to their target allocation. So, more of my contribution would go to KO to bring it back to 50% and less would go to JNJ to bring it down to 50%. By practicing Dynamic Re-balancing, I buy more shares when the stock is low and less shares when the stock is high. To learn more, visit M1 Finance explanation on Dynamic Re-balancing.

So, if I adopt a stock, such as XOM and I contribute a lot of money to it, that will affect how much I’ve exceeded my target allocation in M1 Finance. That means that when I contribute my minimum contribution, less money (if any) would go to that stock because the allocation would be out of sync. Eventually, though, I don’t think it will make much of a difference. I think it evens out in the end. It’s also good that M1 Finance allows me to invest in a particular stock rather than just the entire portfolio.

Why Not Just Increase The Minimum Contribution Level?

I could. I’ve decided to take the lazy approach to investing. To that extent, money automatically gets taken from my bank account, goes into my investment account and then automatically used to purchase stocks. I only had to set up the transfers once and that’s it.

Then, all that’s left to do is monitor the companies to ensure they didn’t cut dividends or that there’s nothing fundamentally wrong with the companies. The other thing that’s left to do is automatically collect and automatically re-invest my dividends to compound their growth. No wonder I love dividend growth investing so much!

But, with the Adopt A Stock project, I would take a more active approach. Once I’ve identified the most undervalued stock (more on that later), I would have to manually log into my M1 Finance account and purchase additional shares of the adopted stock. It’s not too much work, it keeps things interesting, and I think I will be better off for it in the long run.

Waste Less Money

In addition to being more fun, a byproduct of this approach is that I will be wasting less money on a monthly basis.

I’ve really improved on my cooking skills (more on this in future posts) and so I don’t eat out as much everyday like I used to. So, with the savings I get from buying groceries, I should be able to put more into the stock market over and above the minimum contribution.

If I’m finding that I will be contributing too much to one particular stock on a regular basis, then it may come time for me to re-evaluate the minimum contribution and raise it if necessary.

I still have to remain somewhat conservative over the next couple of months, but I’m committed to the success of this project.

Accountability

Accountability is a huge factor for me. I could have just done this privately without announcing it. But, by making this post, it will help keep me accountable and that can only help my portfolio grow.

When I initiated the Adopt A Stock project in the past, I only stuck with it for a month or two. Life got crazy, but it’s ok. If at first you don’t succeed, try, try and try again, right?

It’s going to take some time to rebuild my portfolio. I hope you stick with me along the way.

How To Choose The Most Undervalued Stock

Honestly, this has been one of the most important impediments to getting the Adopt A Stock project off the ground. I could either do so alphabetically or at random. But I wanted a more mathematical approach.

I’m just a small investor. I don’t have a mega-portfolio and I am not an expert in the stock market or with investing. So, I am still learning. One of the challenging things for me to figure out was how to figure out if a stock is undervalued or overvalued.

There are many approaches to this. One of the approaches I was intrigued by and that I wrote about is called the Dividend Yield Theory. An article that have helped me understand this approach was written back in 2014 by Dividend Diplomats entitled, Why I Compare Current Dividend Yield To 5 Year Average. It’s a good read, and that’s the approach I will be taking to picking the most undervalued stock.

Winner: PAAY Formula

Two articles that have really helped me develop my Adopt A Stock chart are Seeking Alpha’s Using Average Dividend Yield For Dividend Growth Stock Valuation and the Percent Above Average Yield (PAAY) formula as described by the Part-time Investor in The Most Undervalued and Overvalued Dividend Champions – April 2020.

Basically, what the above resources show is that one metric that can be used to assess whether a stock is overvalued or undervalued is by comparing the current stock yield to the average 5-year dividend yield. You can use any time period, but the average 5-year dividend yield is what I’ll be using for this project.

Essentially, if the current yield is higher than the average 5-year dividend yield, the stock is said to be undervalued. If the current yield is lower than the average 5-year dividend yield, the stock is said to be overvalued. With the Percent Above Average Yield formula, the Part-time Investor writes that you “take the present yield, subtract the historical average yield, and divide the result by the historical average yield (and multiply by 100 to turn it into a percent) to come up with the PAAY. The higher the PAAY, the more undervalued the stock may be. The lower the PAAY, the more overvalued it may be.”

The higher the PAAY, the more undervalued the stock may be. The lower the PAAY, the more overvalued it may be.”

This is the formula that I will use to adopt a stock. I will adopt the stock that has the highest PAAY according to the above formula. If two or more stocks are equal to the highest PAAY, then they will be adopted for that month equally.

When Will The Adopt A Stock Project Start?

The project will officially be re-started May 15, 2020. There are a number of reasons for this.

First, the beginning of the month is reserved for the dividend income monthly reports. That’s when I report on the dividends I received on a monthly basis. I could have reported on the amount contributed to the adopted stock then, but I wanted this to stand out and be its own thing.

Second, I get paid twice a month. From a practical stand point, I won’t have any extra money to adopt a stock with my first paycheck. But that changes with my second paycheck on the 15th. So, it makes sense to do this around the 15th of every month.

Finally, by having this dedicated project, I will be required to post at least twice per month. Once for the monthly dividend income report and once to report on the adopt a stock project. Regarding the latter, as of right now, I simply plan on identifying which stock was adopted, and how many additional shares of that stock was purchased. This creates an interesting dilemma.

Do I report on how many shares of the previous month’s stock I purchased or do I announce which stock will be purchased over the next month? I think it makes sense to do a little bit of both.

Beginning May 15, 2020, I will identify which stock will be adopted from May 15 to June 15 2020. Then on June 15, 2020, I will report on the number of shares bought the previous month AND identify the next stock to be adopted, and so on and so forth.

Tracking the Adopt a Stock Project

I have already created a chart to identify the most undervalued stock. You can check out my newly created Projects page for a detailed look at the chart. I will be using a table to track the undervalued stocks, much like I do for the dividends.

Over time, it will be interesting to see how frequently a particular stock makes the list. I might even do a comparison yearly to see which stocks make the list compared to the years prior.

Are There Any Other Projects You Are Working On?

I’m glad you asked. I am working on re-starting the inspirational quote of the month project and the 52 weeks money challenge project.

I figure we could all use a little motivation right now. Also, the 52 week money challenge is just another way to help me get money into my portfolio.

But, although I can walk and chew gum at the same time, I’ll be focusing on the Adopt A Stock Project for now.

Final Thoughts

There’s an old saying that it’s better late than never. Despite announcing that I was going to start the Adopt A Stock project, I never really did anything with it. Life has changed tremendously since then. I had to liquidate my dividend portfolio because I bought a condo, I’m in the process of relocating, and, oh yea, there’s a global pandemic going on that has effectively caused a world shutdown.

But, I’m a huge believer and fan of the dividend growth investing strategy. I created this blog to track my dividend portfolio. Since I liquidated the account, I’m now on a mission to rebuild my portfolio as fast as possible and stronger than ever before. It will take time, but I promise you that I’m in this for the long haul.

The Adopt A Stock project will help in that effort. Not only will I be contributing to my entire portfolio on a monthly basis, I will adopt the most undervalued stock in my portfolio. Before, when I started this project, I had a philosophy of no stock left behind. Now, my philosophy is that the weakest stock will not be left behind!

What do you think of this approach? Any suggestions for improvements? Let me know your thoughts by commenting below.

One thought on “Adopt A Stock Project Is Back

  1. Pingback: $100 Annual Dividend Income Milestone Reached - Dividend Portfolio

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