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Dividend growth investing, retirement
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As many know, I maintain a public demonstration Dividend Growth Portfolio (DGP). I keep it out here in the open so that people can see how one person (me) executes a dividend growth strategy and what its results are.

When I first got started in investing many years ago, I was appalled at how predictions and recommendations were made, but with no follow-up at a later time to let you know how the predictions did. My antidote to unaccountable punditry and expense-free index returns is to have an actual real-money real-time portfolio that shows what happens in real life.

I wish that I had created this portfolio earlier than 2008. But that's when I really got into dividend growth investing. The DGP now has 4½ years under its belt, and it reflects real-time decisions, not back-tested examples of what would have happened if you'd done such-and-so back in the day.

The DGP exists at E*Trade. In early 2008, I took an old aimless portfolio and retooled it to become the Dividend Growth Portfolio. As a result, it had a goofy starting value of $46,783 on June 1, 2008. You may recall that early 2008 was not a great time to start a new stock portfolio. Later in the year, or ideally April 2009, would have been a lot better. My bad, but it's turned out to have the educational advantage of showing how dividends help a portfolio recover from even a major market skid.

Income Performance

The primary goal of this portfolio is to produce ever-rising dividend streams. In 2012, the DGP's dividend stream increased by 11% to $2179, and its TTM (trailing twelve month) yield on my original investment - or "yield on cost" - increased from 4.2% to 4.7%.

Here's the year-by-year progress of the DGP's dividend growth:


Dividends Received

TTM Yield on Cost

% Increase

2008 (7 mos.)



















2013 (projected)




The 2013 projection is based on E*Trade's Income Estimator. That is a tool that assumes that all known information will continue unchanged throughout 2013. Thus it actually underestimates 2013's probable income for three reasons:

  • Companies will increase their dividends. Dividend increases to be declared during 2013 are not included yet in the Estimator's projections.
  • Additional shares purchased with reinvested dividends will pay dividends themselves. Until the new shares are purchased, the Estimator
    does not know about them.
  • Other changes may be made to the portfolio-such as swaps into higher-yielding stocks-that will increase the dividend stream. Again, the effects of these changes are not known to the Estimator until they are made.

I have a numerical goal for this portfolio: It is to be generating dividends of $4678 per year by the end of the tenth year (mid-2018). Sharp-eyed readers will note that is another way of stating that I want it to have a projected yield on cost of 10% within 10 years of its inception. The two forms of expressing the goal are mathematically equivalent.

Because this is a "closed" demonstration portfolio, no new money is added to the DGP except for incoming dividends. The three bullet points are the ways that this portfolio will progress from its first-year trailing yield of 2.1% to its goal of a 10% run rate at the end of 10 years.

Also, a note on nomenclature: The TTM yield on this portfolio in 2012 was 4.7%. That means that the DGP yielded 4.7% in 2012 based on its value at the beginning of 2012. Its run rate, on the other hand, as of the end of 2012 is 5.0% (i.e. what is expected to be received in 2013). I have stopped trying to distinguish between current yield and projected yield. The terms are not used consistently. Morningstar seems to change every year what they display. Going forward, I am simply using "yield" to refer to the portfolio's dividend run rate (expressed as a percentage), which is the same as its "projected" or "indicated" yield. I think that is what most people think of when they hear "yield": What the stock or portfolio is yielding if you buy it right now. It's like the APY on a CD in that respect: It reflects payments expected to be made.

Changes in 2012

On my website, I track this portfolio each month. Here is a summary of what happened in 2012.

(1) One holding (NYSE:TEF) cut its dividend in late 2011, and I decided to replace the stock. This sequence of events actually moved my dividend run rate backwards for a little while, as the stock's capital value had fallen, so I had less money to replace it with than I would have liked. Nevertheless, I felt it should be done to strengthen the portfolio for the long term. I used the proceeds from the sale to establish a position in Shaw Communications (NYSE:SJR).

(2) Under my portfolio maintenance practices, I accumulate dividends as cash. Then when the cash reaches $1000, I select a company for dividend reinvestment. I use the current edition of Top 40 Dividend Growth Stocks as my shopping list. The particular stock for reinvestment is selected based on current valuations, yields, company strength, and portfolio needs. The object is always to improve the DGP in some way, such as increase its yield or advance toward diversification goals. Last year, both dividend re-investments that I made went to purchase shares of Intel (NASDAQ:INTC), creating a new position in that stock.

It turns out that I could have purchased Intel at better prices and yields later in the year, but at the time of the purchases (in May and October), the stock looked well valued to me and I was satisfied with its yield. While I am not thrilled with the price decline since I bought it, long term, I believe that Intel is going to be a solid piece of this portfolio. I think that, as Mark Twain might say, rumors of the company's demise are greatly exaggerated.

(3) The big transaction that I had plenty of time to prepare for was Abbott's (NYSE:ABT) split into two companies. They announced it about a year in advance. I waited and waited for them to say specific, soothing things about each new company's anticipated dividend policies, but they never said enough to assuage my uncertainty. While certainty is an impossibility in investing, some unknowns are more evident than others.

So I decided to sell. I stuck a trailing sell-stop about 7% underneath Abbott's price in April, then I tightened it by 1% per month. That gave me time to wait for further information. The information never came, but fortunately the price kept going up, so the stop was not triggered until September. I had purchased my Abbott stake in chunks. I had a blended gain of about 24% when I sold, so I was able to improve the portfolio's dividend stream by purchasing higher-yielding stocks than Abbott was at the time I sold it. I bought some more Intel, plus I started positions in Hasbro (NASDAQ:HAS) and BHP Billiton (NYSE:BBL).


I came to dividend growth investing from the value investing world, where I was convinced that better results across a portfolio would be more likely if I concentrated on my best ideas. I tried to be "well rounded," but I definitely held my number of positions down.

But in 2012, I came to understand that the different primary goal of dividend growth investing - increasing the income stream - makes wider diversification more desirable. If you focus on the dividend stream, you come to see that you can get basically the same results from a variety of stocks, so why not spread the risk of possible dividend cuts across more of them, simultaneously reducing the amount of income at risk from any one of them? I don't see it as trading risk for rewards, but rather as reducing risk without reducing the dividend rewards. I was greatly influenced in this conceptual shift by several writers and commenters here at Seeking Alpha.

So I began in 2012 to use my normal portfolio maintenance processes to add some diversity to the DGP. If you go through the changes in 2012, you will see that I added a net two stocks to the portfolio. I closed out two names but started positions in four. The DGP went from 10 stocks at the beginning of the year to 12 at the end.

Looking Ahead to 2013

I ran across the term "creative destruction" Sunday in the New York Times. I hadn't seen it in quite a while, but it rang true for my portfolio as I think about 2013. Investopedia defines the term as:

A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." … Creative destruction occurs when something new kills something older. … Schumpeter goes so far as to say that the "process of creative destruction is the essential fact about capitalism."

In layman's terms: Out with the old, in with the new. Also known as evolution. As I look forward to 2013, I think I will be doing some creative destruction on this portfolio as I continue to pursue more diversification and a little higher yield. As many of you know, I believe that dividend growth investing (any investing) is best done in a businesslike fashion. The DGP has what I call its Constitution, which I examine at least once a year and amend as I learn more. (You can read the portfolio's full Constitution here.)

I just finished this examination process, and it resulted in a couple of changes:

  • The target number of positions in the DGP was raised from 10-15 to 20-25.
  • The maximum position size was reduced from 20% to 15%.

It turns out that I have two positions that violate the second bullet point: McDonald's (NYSE:MCD) is about 16% of the portfolio, and PepsiCo (NYSE:PEP) is about 17%. As I scan the other positions, I see that the next level down for other positions is about 11-12% for Johnson & Johnson (NYSE:JNJ) and Realty Income (NYSE:O). I'm thinking that I may reduce MCD and PEP to about the 12% level, leaving a little space under the 15% maximum. That "rebalancing" would free up about $5500 for purchasing other stocks. I will probably select one or two new ones.

I will also make either two or three $1000 re-investments this year, which I can also use on new stocks as well as adding to current positions. I don't have a hard-and-fast goal, but I expect that by the end of the year, the portfolio will be up to 14 or 15 different holdings. Along the way, I would like to bring the portfolio's yield up from its current level of just under 4%, so I can use the incoming dividends and creative destruction to try to accomplish that too.

Current Portfolio

Here's what's in the DGP right now:


Percentage of Whole

Alliant Energy (NYSE:LNT)




BHP Billiton


Chevron (NYSE:CVX)






Johnson & Johnson


Kinder Morgan Energy Partners (NYSE:KMP)






Realty Income


Shaw Communications




Total Performance

As stated earlier, the mission for this portfolio is focused on income-in fact, it is focused on future income whose growth beats inflation. I accomplish this by collecting what I call "dividend rights." But I do track the total value by writing it down at the end of each week. The year-end total value of the portfolio was $59,107, or +26% since its inception. That value increased 5% in 2012, trailing the S&P 500's returns for the year.

The portfolio's current yield is just a hair under 4%. I'd like to bring that up a little. No particular reason, just "because."

I'll probably report on this portfolio again in April after the next Portfolio Review.

Disclosure: I am long LNT, T, BBL, CVX, HAS, INTC, JNJ, KMP, MCD, PEP, O, SJR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.