The Ultimate Insider’s: How to Build a Compounding Machine

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 The Ultimate Insider’s: How to Build a Compounding Machine

Published by: Dividend Titan

Edited by: Willie Keng, CFA

Copyright 2023 by Dividend Titan. All rights reserved. No part of this guide may be commercially reproduced, scanned or

distributed in any printed or electronic form without permission. You may share it with friends and family for educational

purposes.

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 The Ultimate Insider’s: How to Build a Compounding Machine

“Do you know the only thing that gives me pleasure?

It’s to see my dividends coming in.”

--John D. Rockefeller,
American business magnate

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 The Ultimate Insider’s: How to Build a Compounding Machine

Welcome to My World

I’ve specially designed this insider’s guide for you. Picking high-quality stocks is just one of the two things

you need to invest successfully. The other key is actually building and managing that basket of stocks.

Howard Marks, a billionaire investor who co-founded one of the largest distressed investing firms, said: “I

spend a great deal of my personal time trying to figure out one thing, which is at a given point in time,

how should you balance aggressiveness and defensiveness in your portfolio.”

You’ve got to think of stock investing like a business. Your stocks are your inventory, the data software and

research tools are your assets, and you are the boss that builds the automated profit machine. You need to

know your investment blueprint, when to execute the trades, read management transcripts, analyze

financial statements and attend conference calls. The biggest mistakes I’ve seen is the lack of a proper

portfolio building strategy. That’s where many investors fall into a trap.

Think about this, you know how to pick the right stocks, at the right price, but how much should you

allocate to a stock, how many different stocks should you buy and what type of strategy should you use?

I’ve packed it all in here in your The Insider’s Guide: How to Build a Compounding Income

Machine. I hope this quick-start portfolio building guide will give you the answers you need to get started

accumulating the wealth you desire, and live that fulfilling rich retirement.

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What You Can Expect

This is not a “run-of-the-mill” Portfolio Management 101 theory book. It’s the practical guide to your

investing success. If you’re new to investing, or if you are already on your way to accumulating wealth, this

is a detailed step-by-step operating manual that will show you what to do so you don’t get stuck building

managing a stock portfolio.

Here’s a snapshot of what you’ll get by the end of this guide:

• You’ll have more clarity over building a portfolio

• You’ll learn how to diversify your portfolio

• You’ll learn how to better allocate your money

• You’ll learn when and why to sell a stock

• You’ll feel less stressed over portfolio “volatility”

• You’ll feel more confident managing a basket of stocks

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Contents

Why Warren Buffett is Wrong ..................................................................................................... 7

Put All Your Eggs in One Basket, Kills the Basket .................................................................. 8

Zero to Launch: Setting Up the Portfolio .................................................................................. 9

Build a Portfolio Using the “C+D+G” Method ........................................................................ 11

How to Choose the Right Passive Income Strategy .............................................................. 14

1. Income Growth Portfolio .................................................................................................. 14

2. High Yield Retire Portfolio ............................................................................................... 16

How to Buy Stocks for Your Portfolio ...................................................................................... 18

1. For Big Sums to Invest ....................................................................................................... 19

2. For Existing Portfolios ....................................................................................................... 20

3. For Too Big, Complex Portfolios ..................................................................................... 21

When to Sell Your Stock? ............................................................................................................ 22

1. Valuation-based Sell Rule ................................................................................................. 22

2. Fundamental Weakness .................................................................................................... 22

When Not to Sell a Stock .............................................................................................................. 22

Burning Questions & Answers ................................................................................................... 23

1. What If You Suddenly Need Cash?.................................................................................. 23

2. Scrip Dividends and Dividend Reinvestment Plans (DRIP) .................................... 23

Final Thoughts ................................................................................................................................ 25

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Why Warren Buffett is Wrong

Warren Buffett believes diversification makes little sense if a person doesn’t know what he or she is doing.

He rather puts all his eggs into one basket and watch that basket.

Well, I absolutely disagree.

Often, to the everyday investor, concentrating your portfolio in a handful of stocks is risky. I know from

experience we can’t survive with only a few stocks. That kind of risk and volatility could kill us. For many

years, I was picking small, risky stocks, which were considered “turnarounds” -- or special situations. These

stocks had few huge gains, lots of volatility and lots of churn. I would get my fair share of losses when my

stocks went horribly wrong. It was tiring. I had to often monitor the market too.

Put it this way, after testing out many strategies and learning the hard way, it wasn’t worth all that time and

effort. On the other hand, if we accumulate and maintain a diversified basket of great businesses that grow

its revenues, profits and produce strong free cash flow year after year, this portfolio of stocks will become a

remarkable store of wealth. This portfolio will probably last longer than you or me. It’s going to even benefit

your future generation for years to come.

I found the most optimum way to accumulate wealth is to build a diversified basket and

watch that basket instead.

Of course, you need resources – reputable brokers, investing tools and high-quality research to help you. No

one works alone. If done right, you can create a perpetual, compounding machine that could pay you income

for the rest of your life.

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Put All Your Eggs in One Basket, Kills the Basket

Typically, you want to have a good mix of stocks, bonds, property and commodities. Even within any asset

class, it makes sense to diversify well. That’s really part of building a rock-solid portfolio that can survive

and thrive – crisis or not. I manage my personal portfolio with my mom this way. I have stocks that spread

not only across sectors, but across different countries. And you should too.

When I cut my teeth as a young analyst, I saw the banks’ clients suffered huge losses because their money

was all invested in only three or four securities promising “high returns”. Remember how investors lost

their money and even their CPF savings betting on a single stock darling – Hyflux? Or remember investors

who lost money in “structured mini-bonds” during 2007?

Once, a banker brought me to a lunch meeting at a Japanese restaurant in Wisma Atria. When I sat down

across the client, opened his file, I was shocked. His $5 million investment portfolio was filled with nothing

but defaulted oil & gas “junk bonds”. You probably guessed it; my lunch didn’t taste great for the whole

meeting.

Next time, if someone tells you to just own four or five stocks to make money, run as far away as you can.

It’s too risky. By diversifying, you’ll always have some stocks outperforming. And another group of stocks

underperforming. Think about it, some of the best defensive stocks outperformed during the global

financial crisis, when bank stocks suffered big losses.

Conversely, as the COVID pandemic recovered in late 2020, bank stocks soared, outperforming defensive

stocks. This is because of the cyclical nature of stocks and the economy – some sectors get hot, some not.

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Important tip: I know it’s tempting to buy as many high dividend yield stocks. But that’s a likely

recipe for disaster. I mean, there’s nothing wrong with scattering a few of these high yield stocks into a

well-diversified portfolio to boost your yield. But if you only focused on buying high yield stocks with no

proper research, then you’re in for some potential trouble.

Zero to Launch: Setting Up the Portfolio

First things first. If you need most of your money in three years – to pay off a mortgage, to pay for your

children’s education or a big health expense, then I suggest to stop reading here. You should instead put

your money in a fixed deposit or government bond. Or even very strong corporate bonds that will mature in

three years. Don’t take much risk with it.

If you can invest these money without worrying about a major expense, there are two things you need to ask

yourself first.

1. Figure out how much you want to invest?

2. Do you need the dividend income today, or you can reinvest profits to grow wealth tomorrow?

Once you’ve decided whether you need the income today or try to accumulate wealth for tomorrow will

determine how to build your portfolio. You might need income today, so you keep those dividends as they

are paid. Or, if you are using dividends to accumulate wealth, then you reinvest those dividends.

The thing is, in an ideal world, we love to have Warren Buffett’s holding period – which is forever. Well, if

we can hold on to our investment forever, they should continue to produce growing income for us year after

year. But not everyone can be Warren Buffett.

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At that point, we want to sell down our portfolio to fund our retirement. Since we might want to take on less

risks with stocks and only hold cash, fixed deposits and government bonds. But if we can delay selling

for as long as possible, this will maximize our money, ensure we get the extra income when we need it, and

live a rich retirement.

I know some financial advisors may recommend the “4% withdrawal rule” – sell off shares for daily

spending. But you still need to preserve and grow the value of your money to sustain all the way till death --

20 to 30 years is a long time.

Important tip: Companies don’t pay dividends each month. Most of them either pay quarterly -- like

REITs -- or semi-annual, or annual. So don’t expect pay out every month. It will be lumpy. Plan out how

much income you need and track the schedule of each pay out. I suggest writing this down on a

spreadsheet to help forecast your cash inflows.

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Build a Portfolio Using the “C+D+G” Method

You want to pick the best stocks that offer the juiciest yield with the highest degree of safety and

opportunity for dividend growth. A passive income portfolio must have three things:

1. Capital growth/preservation

2. Dividend yield

3. Yield growth

This is what I call “C+D+G” method. And it forms the total returns for your portfolio. And dividends can be

critical to total returns. Over the last 90 years, dividends have contributed close to 40% of total returns in

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the stock markets. In fact, dividend growth stocks have outperformed the stock market over the last 30

years with a much lower volatility.

Now, you want as high a yield as possible, but without taking too much risk. Plus, to have safety and growth

of dividends. For example, I rather pick a stock with a dividend yield of 4% and grow this yield at 10% a

year, than picking one that’s yielding at 6% with no growth.

Let’s say you own 1,000 shares of a $10 stock that pays $0.40 per share of dividends (see table below). This

is a 4% yield. In the first year, you collect $400. As the company grows dividends at 10% a year, you’ll

passively collect more dividends each year. Compounding is all about momentum.

The first few years, it doesn’t seem like much is happening, but the magic comes after a few more years. If

I’m growing my dividend yield of 4% at 10% growth rate a year, this growth rate will double from 4% to 8%

in just over seven years.

By Year 10, this stock would have grown to 9.4% yield. That’s why dividend growth is far more important

than just the current yield. If you have the time horizon, always try to compound your growth rate.

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Dividend Annual Yield

Year
Per Share Income on Cost
1 $ 0.40 $ 400 4%
2 $ 0.44 $ 440 4.4%
3 $ 0.48 $ 484 4.8%
4 $ 0.53 $ 532 5.3%
5 $ 0.59 $ 586 5.9%
6 $ 0.64 $ 644 6.4%
7 $ 0.71 $ 709 7.1%
8 $ 0.78 $ 779 7.8%
9 $ 0.86 $ 857 8.6%
10 $ 0.94 $ 943 9.4%
11 $ 1.04 $ 1,037 10.4%
12 $ 1.14 $ 1,141 11.4%
13 $ 1.26 $ 1,255 12.6%
14 $ 1.38 $ 1,381 13.8%
15 $ 1.52 $ 1,519 15.2%
16 $ 1.67 $ 1,671 16.7%
17 $ 1.84 $ 1,838 18.4%
18 $ 2.02 $ 2,022 20.2%
19 $ 2.22 $ 2,224 22.2%
20 $ 2.45 $ 2,446 24.5%

You see, many companies don’t raise their dividends by the same percentage each year. But some

companies have a target growth rate for dividends. Over a long period, companies have averaged a 10%

increase over say the last ten to 20 years. Some years might increase by 5%, some years by 15% or even

20%. That’s why we want to have as long a runway as possible.

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How to Choose the Right Passive Income Strategy

I’ve helped managed one of Singapore’s largest money market funds, built multi-million-dollar bond

portfolios and advised my private clients’ on their personal funds. I’ve also built stock portfolios for my

mom and my family. In Diligence, I’ve created two different types of portfolios. Both use the “C+D+G”

concept. First is the Income Growth Portfolio, suitable for investors who don’t need the income today and

wish to reinvest dividends to grow their portfolios. Second is the High Yield Retire Portfolio. This also uses

the “C+D+G” concept of investing, and needs to extract income today. I’ve explained in detail below.

1. Income Growth Portfolio

If you have at least five to seven years to go in retirement, and don’t need the income today

or tomorrow, you can always put off and reinvest your dividends to produce the returns you probably

thought was impossible. This allows time to compound your wealth hard and fast – continuously put your

salary to work, grow capital, grow dividends. The yield on the portfolio grows over time.

When retirement comes, you can live off these carefully constructed high yields to achieve your desired

wealth goals.

Focus on growing BOTH capital and dividends. The longer you can go without touching your

capital, the better. This is how you create massive wealth.

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Table 1: Income Growth Portfolio

Income Growth Portfolio

Singapore 5.2%
Singapore 4.5%
Singapore 3.5%
Singapore 5.1%
Singapore 4.5%
Hong Kong 9.7%
Hong Kong 5.8%
Hong Kong 9.3%
US 3.6%
US 5.8%
Average Yield 5.7%

Table 1: Income Growth Portfolio with 10 starting Singapore, Hong Kong and US stocks

Example: Income Growth Portfolio

Date of Share Price and Dividend Yield: 14 Feb 2023

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2. High Yield Retire Portfolio

If you’re already in retirement, or you need the income today, then you want to build a portfolio that you

can immediately extract predictable, safe income to enjoy your rich retirement. This is for investors who

needs a high level of income today. You don’t mind sacrificing huge capital gains for higher yield.

Focus on preserving capital and collect high dividends.

Table 2: High Yield Retire Portfolio

High Yield Retire Portfolio

Singapore 8.00%
Singapore 7.60%
Singapore 6.68%
Singapore 11.28%
Singapore 8.00%
Hong Kong 6.93%
Hong Kong 9.20%
Hong Kong 9.66%
Hong Kong 9.26%
Hong Kong 10.0%
Average Yield 8.7%

Table 2: High Yield Retire Portfolio with 10 starting Singapore and Hong Kong stocks

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Example: High Yield Retire Portfolio

Date of Share Price and Dividend Yield: 14 Feb 2023

Important tip: Along the way, you might want to do these:

1. Set up a separate bank account – track cash flow, including dividends.

2. Have one to two well-established brokers –not those that are newly set up but those that have

been around for a very long time.

3. Have a portfolio tracker tool

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How to Buy Stocks for Your Portfolio

The process of building a high-quality dividend portfolio does not need to be complex. I’ve laid out some

simple rules you can follow if you’re just starting out.

As a guide, each month take 5-20% of your portfolio and pick the top stock ideas in my Diligence Stock

Watchlist or Diligence Research Report, where you would own the smallest dollar amount from the list. For

example, if you’re looking for high quality, high yield stocks, pick from Dividend Dominators. If you want

more capital with dividend growth, pick from Capital-Efficient Businesses.

When you sell a stock, you may redeploy proceeds to my top stock ideas you owned the least. Reinvest

dividends in the same way.

With this simple allocation strategy, you can quickly build up a portfolio of diversified stocks. Note – there’s

no perfect stock portfolio. But I suggest starting off with 10 stocks, then increasing to 20 stocks. Eventually

you want to own a diversified portfolio of 20 to 30 stocks. This is what I prefer. This simple process of

building a diversified portfolio of high-quality dividend stocks will last over a period of 5-12 months.

By accumulating the best stock ideas over time, you’ll eventually build a solid position of the highest-quality

stocks for your wealth accumulation.

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1. For Big Sums to Invest

For example, if you started out with no stocks like Portfolio A, you could follow my favourite stock ideas

for the month – in this case, I would pick both TSMC and IREIT Global. This depends on your capital

budget.

Portfolio A

Security Name Ticker Amount

TSMC TSM $ 5,000

Alphabet GOOGL $ -

Vtech Holdings 0303.HK $ -

IREIT Global UD1U $ 5,000

AIMS APAC REIT OR5U $ -

Netlink Trust CLJU $ -

Frasers Centprepoint Trust J69U $ -

CICT C38U $ -

ICBC 1398 $ -

DBS Group D05 $ -

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2. For Existing Portfolios

Next, for example, if you have already an existing portfolio, like Portfolio B, I would pick IREIT Global

and Frasers Centrepoint Trust.

Since both stocks are currently stocks in my Diligence Stock Watchlist that I owned the least.

Portfolio B

Security Name Ticker Amount

TSMC TSM $ 10,000

Alphabet GOOGL $ 10,000

Vtech Holdings 0303.HK $ 9,080

IREIT Global UD1U $ 2,800

AIMS APAC REIT OR5U $ 13,400

Netlink Trust CLJU $ 8,550

Frasers Centprepoint Trust J69U $ 6,600

CICT C38U $ 12,840

ICBC 1398 $ 9,984

DBS Group D05 $ 17,850

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3. For Too Big, Complex Portfolios

What happens if your portfolio is too big that you cannot manage comfortably? For instance, you might

have over 40 stocks – which could happen as you keep adding stocks into your portfolio. I suggest selling

stocks that have the lowest yield, and little yield growth. Then reinvest proceeds into the top stock ideas you

least own until it reaches 5-10% of your portfolio. Then add to the next top stock ideas you owned the least.

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When to Sell Your Stock?

1. Valuation-based Sell Rule

The stock’s valuation gets too expensive (overvalued). This means, when the price goes up and the yield gets

too low, you want to sell the stock, take profits and reinvest into a higher yielding stock. This is called a

“yield pick-up”.

2. Fundamental Weakness

This is crucial. Sell if a company’s fundamentals weaken in successive periods – continuous fall in revenues

and profits due to changes in economic conditions, changes in dividend policies, cut dividends, or eliminate

dividends. Management is not confident of the company’s future anymore. Also, if the company starts to

borrow debt to fund dividends and continuously pay more dividends than making profits. That’s why, never

ever fall in love with a stock.

When Not to Sell a Stock

Sometimes, it can be situational. If you’ve been compounding your income for a while, achieved a great

yield, you actually don’t need to sell straightaway. Check whether the company is just getting things right.

Or it might face temporary hiccup – like the pandemic in 2020. Companies resume their operations very

fast if it’s a resilient, highly predictable business. They might temporarily reduce dividends and quickly

resume it after one or two years. This is not a big problem.

If a stock can continue to produce good returns, though it didn’t raise dividends and if your yield is good

enough, keep the stock. On the other hand, if the dividend is no longer secured, and may be cut

permanently, then sell and look elsewhere. Don’t forget, you can still make tons of money reinvesting

dividends in a stock price that goes nowhere. I mean if you’re enjoying a 10% yield, the company is doing

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well and this is just a temporary period -- company may not grow dividends, but the pay-out is reasonable

and the company is still going strong with good leases and management is sound, then I wouldn’t panic.

If you can learn not to get affected by every little hiccup in the business, the way the media and the market

freak out, then you’ll hold on to your stocks more easily, and compounding dividends to work for you. But

most importantly, use judgment and assess whether a company is worth keeping, and healthy to continue

going.

Burning Questions & Answers

1. What If You Suddenly Need Cash?

Sometimes, you need money because of emergency. But I highly recommend not to interrupt the

compounding machine. If possible, get some money from your spouse or family first. It’s worth avoiding

interrupting your compounding machine. I mean, since you’ve already put in the hard work, make sure you

achieve your financial goals.

2. Scrip Dividends and Dividend Reinvestment Plans (DRIP)

For most of Singapore REITs, there’s a dividend reinvestment plan, or what’s called a DRIP. It’s a

convenient way to reinvest your dividends paid out of the REIT and buy more of the REIT shares. Doing

this helps take away your fees charged by brokers, and often you can buy these scrip dividends at a

discount.

Choosing scrip dividends helps when you want to reinvest your proceeds into the same stock and build up a

stock position. You don’t have to time the market and you can avoid paying fees to your brokers. This is best

when you also don’t need the dividend straightaway. More crucially, this forces you to automatically

reinvest your dividends, and DRIP is guaranteed to put at least some money to work, whether at the market
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bottom or not. This is useful because if the stock market faces another meltdown like the global financial

crisis, or the COVID pandemic.

Not many of us have the guts to re-deploy dividends back into the market. Having a DRIP takes away that

emotional fear. Long-term investing comes from investing in high quality stocks and then most of the time,

doing nothing. DRIP allows dividends to compound every year, and that leads to wealth accumulation.

The bad thing is you might end up with fractional lot sizes that may take longer time to sell. This depends

on whether your broker can easily sell those fractional lots for you – do call your broker on this.

I typically opt for cash dividends than a DRIP. This is because in the near future, my mom is starting to

collect dividends out of my personal portfolio. I need dividend income more than reinvesting these

dividends.

There’s no one size fit all – remember to consult your investment advisor on your income needs before

launching a DRIP.

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Final Thoughts

There’s a quote I really love that I found from a long-term value-based UK fund manager, Terry Smith. I

like his investing principles. And his fund continues to apply a simple three step strategy:

1. Buy good companies

2. Don’t overpay

3. Do nothing

I think this mantra serves me very well and I hope it does for you.

Investing is an ongoing journey. You don’t succeed just by attending an investing course or take advice from

your brokers. You have to treat your stock portfolio like a business. Your stocks are your inventory, the data

software and research tools are your assets, and you are the boss that builds the automated profit machine.

You need to know your investment blueprint, when to execute the trades, read management transcripts,

analyze financial statements and attend conference calls. You need resources to help you.

With this simple portfolio building guide, I hope you’ll have a complete blueprint of creating a passive

income machine that will benefit you, even your future generation for years to come.

To good investing,

Willie Keng, CFA

P.S. When in doubt, feel free to drop me an email at willie@dividendtitan.com or attend one of my live

private coaching monthly webinars.

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Disclaimer

Dividend Titan, a financial publication of Willie Keng & Associates Pte Ltd does not act as a professional financial adviser, and
nothing presented here is intended to constitute as specific investment advice. Willie Keng and his team may own or have positions
in securities discussed in this newsletter. In other words, we often put our money where our mouth is. It’s also a good idea to seek
an investment professional before purchasing any securities. These are Willie Keng and his team’s personal opinions and are
meant to be taken as educational and informational only. Nothing in this newsletter should be taken as a recommendation to follow
any investment strategy or allocation.

Any forward-looking statements or forecasts are based on our own assumptions and actual results are expected to vary.

Information within this newsletter is thoroughly researched and believed to be correct. But errors can occur. While Dividend Titan
used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy,
reliability or completeness of third-party information presented herein. Investors should conduct their own due diligence before
making stock purchases.

No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss
from an investment in securities. Past performance is not a guarantee of future performance.

This is copyrighted material for the sole use of the individual who purchased it. Distribution for commercial purposes is strictly
prohibited.
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