Six Exits, Seven Replacements: Applying the Rulebook to a Book That Skipped the Screens
The Income Growth Strategy is the compounding book — lower yield today in exchange for dividend growth that doubles the paycheck every nine years or so. When I founded this portfolio in January, I entered 19 positions in a single session. What I did not do, and what I should have done, was run each name through the written entry screens on buy day. An audit in June reconstructed that founding book against the rulebook: roughly one-third of the capital sat in names that failed payout, growth, or both. The track record was measuring a different strategy than the one on the prospectus.
This Q3 rebalance does not retro-edit January. It applies the rulebook going forward — six full exits, two drift trims, seven replacements, and a new Quality Exit policy adopted in the open. I'm also building Income Growth v2 (portfolio 1827) as a screen-enforced founding book with a real execution-date inception, but 766 stays live and inspectable: every trade below is SQL-audited, every figure pulled from the same data file as the condensed report. Head to Dividend-Wealth.com for the full article, every trade, and every chart.
Just want the numbers? Read the condensed rebalance report
Every trade, weight, and sector exhibit — marked to market from the live position file.
Accountability first
The scoreboard: trailing VIG, and owning why
Since the January 2 founding, this book is up +2.9% on a price-only basis — $102,035 against a $99,181 cost basis. Over the same window, VIG returned +12.0% price-only, a gap of roughly 9 percentage points. I'm not benchmark-shopping mid-rebalance: VIG stays the yardstick. The gap is partly composition (this book holds more rate-sensitive and defensive names than a broad dividend-growth ETF) and partly the drag of carrying six positions that should never have cleared the screens.
Price-only gap vs. VIG: roughly 9 percentage points. DRIP is on for this book, so the price-only line understates total return — but the benchmark comparison stays apples-to-apples on capital appreciation.
Pre-trade, the book blended a 1.8% forward yield against a 2.0% target and a 9.7% weighted 5-year dividend CAGR — growth is fine; yield is thin because several verdict-C names were diluting the flywheel with payout ratios north of 90%.
The audit
What the SQL said before a single share traded
I ran every holding through the same screens the prospectus promises: 7%+ 5-year dividend CAGR, FCF payout under 60%, 7-year raise streak, 0.5% minimum yield. The verdict mix was brutal: 11 clean keeps (60.1% of the book), 5 on watchlist, and 3 mandate exits. Verdict C alone was 16.5% of capital sitting in names that failed the growth mandate on live data — TXN at 192% FCF payout, BLK at 94%, LMT with decelerating growth.
Only 60% of the founding book passed every screen clean. The 17% in verdict C and three quality exits from verdict B are what forced this rotation — not a mood, a spreadsheet.
The policy amendment this quarter: holdings that fail two or more screens, or fail payout and growth deceleration together, rotate out mid-year. That turned three verdict-B names into exits — HD, CL, and AMGN — rather than waiting for January and pretending the book was fine.
The trades
8 adjustments: 6 exits, 2 trims
Every trade below was triggered by a written rule. The mandate exits are straightforward: TXN, BLK, and LMT failed the quantitative screens. The quality exits — HD, CL, and AMGN — failed payout or growth floors under the new mid-year policy. UNH and CAT were drift trims: UNH breached the 7% hard cap at 7.5% weight; CAT ran to 6.8%.
| Ticker | Why | Shares | Est. $ |
|---|---|---|---|
| TXN | Verdict C — FCF payout 192%, 3y CAGR 4.9% | −26 | −$7,759 |
| BLK | Verdict C — FCF payout 94%, 3y CAGR 3.5% | −5 | −$4,902 |
| LMT | Verdict C — 5y CAGR 6.4%, 3y CAGR 5.0% | −8 | −$4,175 |
| HD | Quality exit — FCF payout 72.4% | −15 | −$5,263 |
| CL | Quality exit — 5y CAGR 3.3% (never met 7% floor) | −56 | −$5,195 |
| AMGN | Quality exit — FCF payout 63.3% | −14 | −$5,059 |
| UNH | Drift 7.52% + over 7% hard cap — trim 5 sh | −5 | −$2,133 |
| CAT | Drift 6.80% — trim 1 sh | −1 | −$991 |
| ACN | ADD band — top up from 3.21% | +13 | +$1,705 |
| ABT | Healthcare replacement | +26 | +$4,238 |
| AVGO | Technology replacement | +11 | +$4,158 |
| WM | Industrials replacement | +19 | +$4,256 |
| CTAS | Industrials compounder | +25 | +$4,350 |
| MCO | Financials · replaces BLK | +9 | +$4,212 |
| PH | Industrial tech | +4 | +$3,856 |
| ZTS | Healthcare · 20th name | +61 | +$4,392 |
| ACN | Residual deploy — balance session to ~$0 | +33 | +$4,327 |
Sells raised $35,475; buys deployed $35,494 — session net $19 (balanced to ~$0). All sells and buys entered the same day; manual portfolios do not track cash, so unmatched sells read as withdrawals and corrupt NAV.
New positions
Seven replacements + an ACN top-up
Each replacement had to clear the same screens on execution day. The book restores 20 names at roughly 5% equal weight, with wider drift bands than the Income Strategy (trim above 6.25%, add below 3.75%) so compounders can run.
~2.7% yield · 10.4% 5y CAGR
Replaces AMGN — passes all screens; medtech diversification, 55.7% FCF payout.
~0.7% yield · 12.6% 5y CAGR
~1.1% yield · 13.9% 5y CAGR
Uniform-services oligopoly; streak verified via raw rows (metrics artifact on R1).
~0.9% yield · 10.9% 5y CAGR
~0.8% yield · 14.8% 5y CAGR
Industrial tech — 26% payout; reinvestment flywheel intact.
~2.9% yield · 20.1% 5y CAGR
Animal-health compounder — restores 20th name; fills Healthcare sleeve.
AVGO replacing TXN will raise eyebrows — yes, the yield is under 1%, but the FCF payout is 41% versus TXN at 192%, and the 5-year dividend CAGR is 12.6%. This is a growth mandate; AVGO belongs here in a way it never belonged in the Income book. ACN was topped up to 46 shares total (13-share ADD-band top-up plus a 33-share residual deploy to zero the session). CTAS carries a streak verified from raw dividend rows after a metrics artifact on the screener — documented in the runbook, not hand-waved.
Sector balance
Pre-trade sleeves vs. targets
Industrials at 25% target is the widest sleeve — that's where compounders like ADP, CAT (pre-trim), and the new WM / CTAS / PH cluster live. Technology at 20% absorbs AVGO and the ACN top-up. No sector amendment this quarter; the repair was stock-level, not a rewrite of the allocation map.
Post-trade
What the book looks like after July 1
Post-execution: forward yield about 1.8%, weighted 5-year CAGR 9.7%, six exits, two trims, seven replacements + acn top-up (46 sh total). session balanced — no cash residual.
This is a growth mandate — yield is deliberately modest at 1.8%. The exits fired on payout and CAGR failures, not because income was too low.
The top five payers still carry 42% of forward income — acceptable in a growth book where the objective is CAGR, not paycheck balance. The exits removed the payout offenders; the replacements restore reinvestment capacity.
Looking ahead
Q4 and the v2 sandbox
Four items are already on the agenda: watch GD on the B-list (5y CAGR 6.5%, just under the 7% floor); confirm CTAS streak data stays clean in production; January growth audit on any name below 5% 3-year CAGR; and the parallel Income Growth v2 book (1827) as the screen-enforced successor with DGRO as mandate benchmark. 766 is not being retro-edited — it is being run honestly from here. If you want the condensed trade ledger, read the condensed rebalance report.