How To Create An Investor Policy Statement (IPS) For Dividend Investing

Every investor should have an Investor Policy Statement (IPS). An IPS is a written statement on your goals, risk tolerance, asset allocation, investing philosophy, and other criteria that will guide your investing process.  

Having a clearly defined IPS will help you stay in a good mindset when a market crash or dip happens.  Do you remember how you felt in February-March 2020?  Has this year’s volatility and downturn caused you to stress out? Did you panic, worry, sell everything, or celebrate?  If you had a defined IPS, this market volatility would not mentally affect you because you could stick to your plan.  

The IPS can also keep you levelheaded when the market is booming, by sticking to your asset allocation, risk profile, and focusing on your long-term goals and not selling out in fear of a future crash.  Having an IPS takes some of the emotion out of investing.  

We are dividend growth investors, our timeline is very long, maybe multi-generational.  I could not imagine taking this journey without a roadmap!

Investor Policy Statement Design

Overview

 So, how do you set one up?

1. The IPS should be written down (typed or handwritten)

2. You should have it readily available for review (especially when times get tough)

3. You should include your spouse or significant other in your planning – no sense having a plan if you both are not onboard

4. Your IPS can change throughout the years (and probably should)

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What to Include in Your Investor Policy Statement

a. Objective –

i. Why are you investing?

b. Goals –

i. Pick short- and long-term goals – i.e. add $100 a month; have $6,000 in dividend income in 5 years, retire on dividend income in 20 years, etc.

c. Philosophy –

i. Dividend Growth Stocks, duh!  

ii. Are you looking for low yield, high dividend growth or high yield, low growth?  ETFs or individual stocks?  

d. Risk and Return Expectation

i. Set your expectations – are you looking to maximize your total return or focus on dividend income; do you want very low risk or shoot for the moon?

ii. Do you want to track the market, or do you want to have a certain dividend yield?

e. Outline investment selection criteria –

i. What stocks would you consider?

ii. What criteria does a company need to have before investing?  

iii. What happens if something about the company changes?

f. Asset Allocation –

i. How much of each company will you have in your portfolio?  

ii. Would you consider bonds, real estate, growth stocks, crypto (no), or gold in addition to dividend stocks?

g. Drawdown/not reinvesting dividend –

i. When and why would you start using the dividend income?  

ii. Would you sell any assets or only use the dividends?  

iii. This is the end point, when you need the money to live off of.

h. Other –

i. Rebalancing – Do you sell your winners and allocate to the stragglers or let the winners run?  

ii. Investing universe (what you are willing to invest in, or not invest in) – Are there certain industries, sectors, or individual companies that you want to stay away from?

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This is your plan, this is your roadmap.  The more you put into it, the better your outcome will be.  Without a roadmap, it will be hard to get to your destination.

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My Investor Policy Statement (IPS)

I have two Investor Policy Statements because I have accounts with different timelines and goals. These plans are personal to our situation but hopefully they can be useful to get ideas for your own. Click here for more information on our portfolio allocations that correspond to these IPS.

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Investor Policy Statement

Updated 12/2022

Operation F.I.R.E.D.

Primary Goal:

To create enough passive income to be work optional and not have to rely on employment and live off of dividends produced by June 2031 and fully retired by June 2036

Secondary Goal:

To create a generational wealth by only spending the dividend income produced by the portfolio

Strategies/Philosophy:

1. All holdings will pay a dividend
2. Weekly contributions into best values or positions that need to be increased
3. Allocation targets will be maintained for all holdings to ensure proper diversification and risk management 

Income Goal: 

Goal of $xxx,xxx in annual dividend income by June 2036

Funding Sources:  

1. Portfolio will be funded by earned income through employment, reinvestment of dividends, and options premiums received.  
2. Goal is to invest $xxx,xxx in new money a year into dividend paying companies/funds  
3. Funding goal will be revisited each December

Risk/Return Expectations:

1. Capital appreciation is to be expected but not the focus of this investment plan.  Market average returns will be adequate as focus is on dividend income 

Selecting Stocks (investment selection criteria):

1. Stocks should have paid a dividend for at least 5 years
2. ETFs and CEFs will be the primary focus
3. At time of purchase, stock should have a combined yield plus 5-year dividend CAGR equal to 10%.  12% or more is preferred.
4. Initial yield at purchase should be a minimum of 3%
5. Portfolio yield should be 4% or more

Number of Stocks / Diversification: 

1. Portfolio will be between 20-50 holdings.  
2. No single stock should be more than 5% of the portfolio.  
3. All sectors are considered except Energy and no investments in tobacco or prisons

Reinvesting Dividends:  

All dividends will be automatically reinvested into the company/fund that paid it

Portfolio Characteristics (asset allocation):

1. No more than 5% in any one holding
2. No more than 15% in any one sector
3. No bonds will be considered
4. ETFs and CEFs will be considered 

Options Process:

1. Covered calls and cash secured puts will be used to generate additional funding source
2. Goal of $xxx a month in premiums
3. All options premiums will be invested into dividend paying companies

Selling Guidelines:

Will sell holding if the dividend is suspended or canceled and reinvest proceeds in other dividend paying companies / funds.  

Drawdown:

Once the portfolio is used to live on, all dividends will be collected in cash and will transfer needed funds into a spending account.  All remaining dividends will be reinvested. 

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Operation Live Happy, Wild, and Free

Primary Goal:

To grow the income from this account to use in retirement for non-living expenses – fun money 

Secondary Goal:

Never use the principal and pass it on to our children

Strategies/Philosophy:

Income Goal – goal of $xxx,xxx a year in dividend income in retirement by 2041

Funding Sources:

1. These are our rollover IRAs and self-directed 401ks, no additional contributions will be made to the IRAs. The only funding for these accounts will come from options premiums and the reinvestment of dividends. Self-directed 401k will be funded by payroll deductions

Risk/Return Expectations:

1. Capital appreciation is to be expected but not the focus of this investment plan.  Market average returns will be adequate as focus is on dividend income

Selecting Stocks (investment selection criteria):

1. Stocks should have paid a dividend for at least 5 years before investing 
2. At time of purchase, stock should have a combined yield plus 5-year dividend CAGR equal to 10%.  12% or more is preferred.
3. Portfolio yield should be 4% or higher 

Number of Stocks / Diversification:

1. No limit on number of holdings 
2. Minimum of 20 holdings
3. No more than 5% in any one holding
4. All sectors are considered except Energy and no investments in tobacco or prisons

Reinvesting Dividends:

1. Dividends will be reinvested in holdings that are being built up
2. Once position is at size, dividend reinvestment will be turned off and funds will be collected in cash and deployed to underweight holdings

Portfolio Characteristics (asset allocation):

1. No more than 5% in any one holding
2. No more than 15% in any one sector
3. No bonds will be considered
4. ETFs and CEFs will be considered

Options Process:

4. Covered calls and cash secured puts will be used to generate additional funding source
5. Goal of $xxx a month in premiums
6. All options premiums will be invested into dividend paying companies

Selling Guidelines:

Will sell holding if the dividend is suspended or canceled and reinvest proceeds in other dividend paying companies / funds

Drawdown:

Funds in this account will be used as needed during retirement but it will be mainly used for extra enjoyment and donations to charities. 

Conclusion

Your Investor Policy Statement is crucial as an investor. This IPS will give you a roadmap on how to get to your final destination and keep you on track during the bumps in the financial road.