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In a previous article I explained how I am trying to develop and use my Keep It Simple, Stupid (K.I.S.S.) method to build my portfolio of dividend growth stocks. My purpose is to create a steam of income, which will continue to grow over the next 15-20 years, and hopefully fund my retirement. This will be the first in a series of articles I will write to show the stocks I own, to show the transactions I make, and to show the progress I am making towards my goals. I plan on posting these updates whenever I receive another pension contribution into my account (about every three months). At that time I will invest those funds, plus accumulated dividends, either in new stocks, or to buy more shares of the stocks I already own.

As a part time investor, with many other things going on in my life, I want to keep my investing research time as minimal as possible. And from reading many books, and articles, and from seeing the poor results that many professional money managers achieve, I have come to believe that more information does not necessarily lead to better results. I believe that using a few, basic but important criteria for choosing stocks will work just as well as more complicated systems, at least to achieve the goals that I personally am looking for. I have discussed my K.I.S.S. method in my prior articles, but here is a quick review.

BUY

  • Stock is on the CCC list
  • Pay out ratio under 60%
  • Chowder Rule - Yield + 5 year dividend growth rate over 12%
  • 10 year uptrend in earnings (as shown on the FAST graph)
  • Quality rating of A- or better from S&P. Originally I was planning on using the S&P star ratings, but then I was informed that this is a measure of value, where what I was really looking for was a measure of the quality of the company. The S&P Quality Rating measures stability of the earnings and the dividend, so this fits my needs better.
  • Stock appearing to be undervalued based on its FAST Graph.

David Fish (The CCC list), Chuck Carnevale (FAST Graphs) and S&P have already done a lot of hard work to evaluate dividend growth stocks. I see no reason for me to duplicate what they have already done. Plus, I'm sure they have done it a lot better then I could. By using their work and screening by the above criteria I can scan the entire 400+ stocks on the CCC list, and pick out qualifying stocks, in about an hour.

SELL - I only sell if the stock cuts, or freezes it's dividend.

Re-evaluating my Portfolio

I have been dividend investing for the last few years, but I was not a dedicated dividend GROWTH investor. As I have been reading SA over the past year I have come to see the light, so the first thing I had to do was review my portfolio and sell the positions that didn't fit my new DGI philosophy.

I bought CNOOC (NYSE:CEO) in June of 2012 based on its dividend history and yield, but this past October it cut its dividend. CNOOC paid a dividend of $5.78 in 2011, but only $4.99 in 2012, so I sold it.

In Jan 2011 I bought Total S.A. (NYSE:TOT). This was purchased as a replacement for BP plc (NYSE:BP), which I sold after the Deepwater Horizon spill. I bought TOT because of it's relatively high yield and to maintain a presence in the energy sector. But Total decreased its dividend in both 2010 and 2011. It increased it in 2012, but not as high as it had been in 2009. Now that I am firmly entrenched as a DGI investor I found this kind of dividend record unacceptable, so I sold it.

Previously, when setting up my portfolio, I wanted to maintain diversity by having exposure to mid caps, small caps, the European market, the Asian market, emerging markets and REITS. But I also wanted to make sure I collected dividends from everything I owned. Therefore I bought the following dividend paying ETFs in amounts that satisfied the percentage of my portfolio that I wanted in each sector.

Vanguard Emerging Markets (NYSEARCA:VWO)

Wisdom Tree Emerging Market (NYSEARCA:DEM)

Vanguard Mid-Cap (NYSEARCA:VO)

Vanguard Small Cap (NYSEARCA:VB)

Vanguard Pacific (NYSEARCA:VPL)

Vanguard REIT (NYSEARCA:VNQ)

Now that I am a DGI investor I have re-evaluated these positions and I decided that either the yield from these ETFs was too low or the dividend growth was too erratic. I felt I could do better by putting this money into individual stocks. So I sold them all.

Purchases

Following these sales I still held about 35 stocks in my portfolio. But based on the discussions here on SA I felt that I would be more comfortable with, and could handle, 50 or more. My article about diversification explains my reasoning. So I ran my K.I.S.S. screen looking for stocks that I could add to my portfolio. The following stocks passed my criteria. Using the funds from my sales, and the cash that had accumulated in my account, I bought these stocks.

Becton Dickinson (NYSE:BDX)

Quality Rating - A

Yield + DGR = 2.53 + 13.5 = 16.03

Payout ratio 37%

Cracker Barrel (NASDAQ:CBRL)

Quality Rating - A-

Yield + DGR = 3.11 + 18.5 = 21.61

Payout ratio 46%

CSX Corp. (NYSE:CSX)

Quality Rating - A

Yield + DGR = 2.84 + 24.6 = 27.44

Payout ratio 31%

Darden Restaurants (NYSE:DRI)

Quality Rating - A

Yield + DGR = 4.44 + 25.8 = 30.24

Payout ratio 57%

First of Long Island Corp (NASDAQ:FLIC)

Quality Rating - A

Yield + DGR = 3.53 + 10.6 = 14.13

Payout ratio 44.6%

Hasbro (NASDAQ:HAS)

Quality Rating - A

Yield + DGR = 4.01 + 18.1 = 22.11

Payout ratio 55%

L-3 Communications (NYSE:LLL)

Quality Rating - A+

Yield + DGR = 2.61 + 14.9 = 17.51

Payout ratio 23.6%

Lockheed Martin (NYSE:LMT)

Quality Rating - A-

Yield + DGR = 4.98 + 22.2 = 27.12

Payout ratio 52.5%

Norfolk Southern (NYSE:NSC)

Quality Rating - A

Yield + DGR = 3.23 + 15.1 = 18.33

Payout ratio 36%

Raytheon (NYSE:RTN)

Quality Rating - A-

Yield + DGR = 3.47 + 13.9 = 17.37

Payout ratio 34%

Walgreen (NYSE:WAG)

Quality Rating - A

Yield + DGR = 2.97 + 23.7 = 26.67

Payout ratio 49%

Walmart (NYSE:WMT)

Quality Rating - A+

Yield + DGR = 2.33 + 13.5 = 15.83

Payout ratio 32%

Once I made these choices, and calculated how much of each of these stocks I expected to buy, I figured out what the yield would be for my entire portfolio. As discussed in another one of my articles I have targeted a total yield of 4%. Looking at the stocks I owned I realized that I would not achieve that yield unless I bought some higher yielding entities such as MLPs or REITS. I already owned Kinder Morgan (NYSE:KMP), Annaly (NYSE:NLY) and Pimco Corporate Bond Fund (NYSE:PTY) but I wanted (needed) to add more. To be honest, I have not yet settled on a set of criteria for buying these types of stocks, so I simply went to the CCC list, looked for stocks with high yields and a history of dividend growth that was consistent, and that satisfied the Chowder Rule. The consistency was very important to me. These are the three choices I settled on, and the criteria I used to pick them.

Buckeye Partners (NYSE:BPL)

Yield - 9.14

1, 3 and 5 year dividend growth rates - 3.1, 4.6, 5.2

Years of consecutive increases -- 17

Amerigas Partners (NYSE:APU)

Yield - 8.26

1, 3 and 5 year dividend growth rates - 8.1, 6.1, 5.6

Years of consecutive increases -- 8

Omega Healthcare Investors (NYSE:OHI)

Yield - 7.38

1, 3 and 5 year dividend growth rates - 9.0, 12.1, 9.4

Years of consecutive increases -- 10

My Portfolio

Now that I have made my purchases here is the full composition of my portfolio:

Company

Shares

Price

Value

Yield (%)

Expected Div.

Exp. Income

AFLAC Inc. (NYSE:AFL)

217

$53.06

$11,514.02

2.64

$1.40

$303.80

Air Products (NYSE:APD)

99

$88.73

$8,784.27

2.93

$2.56

$253.44

Amerigas Partners L P

339

$44.20

$14,983.80

7.39

$3.20

$764.80

Annaly Cap Mngt

1860

$14.85

$27,621.00

12.1

$1.80

$3,348.00

Becton Dickinson

137

$85.15

$11,665.55

2.36

$1.98

$271.26

BHP Billiton PLC (NYSE:BBL)

150

$69.79

$10,468.50

3.26

$2.28

$342.00

Boeing Co (NYSE:BA)

153

$74.87

$11,455.11

2.63

$1.94

$296.82

Buckeye Partners, L. P.

280

$52.53

$14,708.40

7.88

$4.15

$788.50

Cincinnati Financial Corp (NASDAQ:CINF)

279

$43.50

$12,136.50

3.84

$1.63

$454.77

Conocophillips Com (NYSE:COP)

197

$58.82

$11,587.54

4.55

$2.64

$520.08

Cracker Barrel Old Country.

180

$65.50

$11,790.00

3.09

$2.00

$360.00

CSX Corp

546

$21.92

$11,968.32

2.54

$0.56

$305.76

Darden Restaurants, Inc.

285

$46.84

$13,349.40

4.3

$2.00

$570.00

Deere & CO (NYSE:DE)

98

$94.65

$9,275.70

1.96

$1.84

$180.32

Diageo plc ADS (NYSE:DEO)

62

$119.91

$7,434.42

2.41

$3.45

$213.90

Dominion Resources (NYSE:D)

219

$54.17

$11,863.23

4.16

$2.11

$462.09

Emerson Elec Co (NYSE:EMR)

161

$58.08

$9,350.88

2.86

$1.64

$264.04

First Long Island Corp

384

$29.40

$11,289.60

3.43

$1.00

$384.00

General Dynamics Corp (NYSE:GD)

162

$65.88

$10,672.56

3.08

$2.04

$330.48

General Electric (NYSE:GE)

301

$22.62

$6,808.62

3.4

$0.76

$228.76

Harris Corp Del (NYSE:HRS)

231

$46.28

$10,690.68

3.2

$1.48

$341.88

Hasbro Inc

300

$37.65

$11,295.00

3.85

$1.44

$432.00

Illinois Tool Works Inc (NYSE:ITW)

157

$62.90

$9,875.30

2.42

$1.52

$238.64

Johnson & Johnson (NYSE:JNJ)

159

$74.18

$11,794.62

3.3

$2.44

$387.96

Kinder Morgan

160

$88.92

$14,227.20

5.8

$5.16

$825.60

L-3 Communications

146

$75.22

$10,982.12

2.63

$2.00

$292.00

Lockheed Martin Corp

137

$87.22

$11,949.14

5.3

$4.60

$630.20

McDonalds Corp (NYSE:MCD)

98

$95.95

$9,403.10

3.23

$3.08

$301.84

Medtronic Inc (NYSE:MDT)

261

$46.92

$12,246.12

2.23

$1.04

$271.44

Microsoft Corporation (NASDAQ:MSFT)

472

$27.93

$13,182.96

3.35

$0.92

$434.24

Nike Inc. Class B (NYSE:NKE)

143

$53.70

$7,679.10

1.55

$0.84

$120.12

Nokia (NYSE:NOK)

1452

$4.00

$5,808.00

0

$0.00

$0.00

Norfolk Southern Corp

174

$69.60

$12,110.40

2.9

$2.00

$348.00

Novartis AG ADS (NYSE:NVS)

200

$68.00

$13,600.00

3.11

$2.48

$496.00

Omega Healthcare

383

$25.87

$9,908.21

7.04

$1.80

$689.40

Paychex Inc (NASDAQ:PAYX)

438

$32.86

$14,392.68

4.04

$1.32

$578.16

Pepsico Inc (NYSE:PEP)

162

$72.67

$11,772.54

2.95

$2.15

$348.30

Phillips 66 (NYSE:PSX)

39

$62.75

$2,447.25

1.65

$1.00

$39.00

Pimco Corporate & Income

715

$20.41

$14,593.15

7.68

$1.38

$986.70

Plains All American Pipeline (NYSE:PAA)

276

$52.55

$14,503.80

4.27

$2.25

$621.00

Procter & Gamble Co (NYSE:PG)

166

$75.92

$12,602.72

2.99

$2.25

$373.50

Qualcomm Incorporated (NASDAQ:QCOM)

143

$66.73

$9,542.39

1.51

$1.00

$143.00

Raytheon Co.

198

$52.67

$10,428.66

3.8

$2.00

$396.00

Realty Income Corporation (NYSE:O)

327

$43.40

$14,191.80

4.97

$2.17

$709.59

Sysco Corp (NYSE:SYY)

372

$32.09

$11,937.48

3.53

$1.12

$416.64

Target Corp. (NYSE:TGT)

191

$61.15

$11,679.65

2.38

$1.44

$275.04

United Technologies Corp (NYSE:UTX)

108

$89.84

$9,702.72

2.44

$2.14

$231.12

Wal-Mart Stores Inc (WMAT)

166

$70.49

$11,701.34

2.27

$1.59

$263.94

Walgreen Co

294

$40.31

$11,851.14

2.75

$1.10

$323.40

Wells Fargo (NYSE:WFC)

200

$35.13

$7,026.00

2.3

$1.59

$318.00

CASH

$3,808.54

Portfolio Totals

$575,661.23

3.90%

$22,475.53

A few comments about some of my stocks:

Many of these stocks were bought a few years ago, and would not have met my KISS criteria if I were looking to buy them today, since they are not on the CCC list. GE and WFC are two examples. However, since a dividend cut or freeze is my main criteria for selling, and they have been increasing their dividends ever since I have owned them, I decided to continue holding them. If they do cut their dividend, I will sell them.

Annaly and Pimco Corporate have had dividend cuts over the past year or two, but they have performed very well for me over the past few years, and I believe they will continue to be strong dividend payers in the future, so I decided to hold on to them. Plus, their high yields help me reach my 4% total portfolio yield. I haven't settled on specific criteria yet for buying and selling REITs, MPLs, and bond funds, but when I do I may have to re-evaluate these positions. It does concern me that NLY contributes such a large portion of my income, but this is a problem I will address as I rebalance my portfolio over the coming year.

Nokia just cut its dividend to zero, so it does not belong in a DGI portfolio. However I bought it anyway for two reasons. One, SDS has made the argument here on SA that when a company cuts a dividend it is often an excellent time to take a position in it. Secondly, my position in NOK is only about 1% of my portfolio and I'm using this small amount to take a chance on a good company that has had it's stock beaten down. Nokia seems to be making moves to better position itself in the smart phone market, and it has a very strong partner in Microsoft . Basically I'm considering this to be play money that I'm using to gamble on NOK. It is a special situation that I would not recommend doing very often.

I received PSX when it was spun off from COP. It has performed very well since that time, so I wanted to keep it. But since it does not have a dividend growth history yet I wasn't comfortable adding to the position. For now I will keep the spun off shares I own, and as (NYSEMKT:IF) it proves itself to be a good DGI stock I will add more.

Goals

Last year I took in about $14,000 in dividends. This year I am projected to receive over $22,400. This increase is due to reinvesting the dividends I collected last year, the growth of the dividend payments from the stock I already owned, investing my 2012 pension contributions, and targeting higher yielding stocks to raise the over all portfolio yield. I will continue to reinvest my dividends throughout the year, and there should be (hopefully) many dividend increases as the year goes on. So I expect my actual dividend income for 2013 to be even higher then my projection.

I will continue to post updates about every three months to show how my portfolio is progressing.

Thank you for reading my article. I welcome your comments (and criticisms)

Source: My K.I.S.S. Dividend Portfolio

Additional disclosure: I am not a financial advisor. Nothing I mention in any of my articles should be considered to be investment advice. I am only discussing my own portfolio.