Transitioning To A Dividend Growth Portfolio

by: Inzkeeper

Two years ago, I had nervously gathered the remaining balances of our fractured, managed, retirement savings into a discount brokerage account and was ready to begin. Nearly defeated by the four-figure balance, I was determined to learn and started madly researching. I read countless books on investing from the library and watched some popular investing TV shows. I chose a couple of stocks and waited for the magic to happen.

Thank goodness I was prepared for something much more realistic than magic. A quick peek at a chart will tell you that my first purchase, Ford Motor (NYSE:F) February 18th, 2011, was not magic at all. It was more like a painful lesson in patience. I had done my homework and firmly believed in the company's recovery story. I averaged down several times, with the last purchase at $9.14. But I gave up and sold two thirds of my shares last summer, at basically break-even. I'm glad I kept that last third. There were others I held for a few months, but mostly I was busy swing trading a host of other names with moderate success.

A year ago, Seeking Alpha was recommended to me and soon I discovered Dividend Growth Investing. Articles mention dividend growth investing helping to "sleep well at night", and I realized I was starting to exhibit stress symptoms, but I felt needed to press on for our family, despite the wild, daily swings in portfolio value. Authors discussed living off the dividends of your investments and I laughed, "There is no way this could be possible, for us, starting over at age 42." But, I kept reading. David Van Knapp wrote here about creating a plan and David Crosetti wrote here about creating a perfect investment portfolio. Tim McAleenan wrote here about how solid dividend stocks could go the distance over the long term and Bob Wells' articles discussed his sudden transition to managing for himself and how he chose DGI. I was soon hooked.

Six months ago, my portfolio had 6 stocks. Today it holds nearly three times as many, very different names. The beta is dramatically lower and the daily change in portfolio value rarely totals more than I would spend grocery shopping when I had the whole family home. Though the total portfolio value is up 50% over the six months (mostly due to contributions) the daily swings are approximately 5x smaller. With the with the exception of a few names, it's a totally new animal.

How did I get there?

1. As the swing trades were completed, my next purchases were popular DGI names, which I held onto. You know them. McDonald's, (NYSE:MCD), Coca-Cola (NYSE:KO). I wrote out a list of goals and plans and started thinking longer term and about future income instead of just total portfolio growth. This changed the type of stocks I was purchasing. I gradually became an investor, instead of a trader.

2. I created a spreadsheet that totaled up ambitious contributions, 4% in dividends and allowed for modest growth (4 or 5%) for the next 20+ years, and realized it actually could be possible for us to live on the dividends. This has inspired me to be even more frugal, and we are now living on approximately half of our income (investing 35%) and implementing a few other strategies to create more contributions.

3. I sold half of the some of the original positions which had grown to over 20% of the portfolio and redeployed the funds from each sale into several stocks in increments of $2500, the amount chosen in order to manage trading fees.

Where does the portfolio stand now?

The portfolio is currently still rough around the edges, especially in regards to allocation. A lower percent usually reflects the cash on hand I had at time of purchase. I try to ease into a stock, but sometimes another great buying opportunity doesn't materialize. The largest positions below were part of the 6 from last summer, excepting MCD. It hasn't seemed reasonable to sell more than half of what is now the largest positions as they will dwindle in percent to reasonable sizes over the next year as I hope to nearly double the portfolio again this year. I also plan to more than double the income from dividends, as I choose dividend stocks more wisely and use active management strategies.

My current plan is to allocate all new money entering the portfolio to go into new names, for diversification and further stabilization, until I reach 42 stocks - three in each of the 13 sectors/sub-sectors indicated below and a few more in the value and growth sections. As retirement, and living off of dividends as income, is still 20+ years away, I allow myself 10% of the portfolio in growth or value plays, and from the holdings below you will see that Legacy Oil and Gas (TSE:LEG) and Painted Pony Petroleum (PPY.V) which trades on the Canadian Venture Exchange, pay no dividend at all. These are both companies that trade near or below their NAV and have significant upside potential. Painted Pony is also considered a take-over target, especially since its acquisition in the Montney region in December. It is something I am willing to wait for. All others are dividend growth stocks.

(Please note that as a Canadian investor, many of my choices trade on the Toronto Stock Exchange. Some of these names do not trade on any US exchange, and some have ADRs. Those are prefixed with TSX: as that is how they are displayed in Google Finance. Yahoo Finance uses .TO after the ticker and F.A.S.T.Graphs just has a period after the ticker.)

Current Portfolio
Industrial Ford Motor F 8.5% 3.23%
Canadian National Railway CNR or CNI 6.5% 1.72%
Pipeline Enbridge ENB 11.3% 2.81%
Inter Pipeline Fund TSE:IPL.UN 4.8% 4.78%
Energy Keyera Corp. TSE:KEY 13.4% 4.04%
Crescent Point Energy TSE:CPG 5.0% 7.16%
Metals & Mining Russel Metals TSE:RUS 3.4% 4.86%
Banks TD TD 5.4% 3.66%
Non-Bank Financials Direct Cash TSE:DCI 3.1% 5.7%
Restaurant McDonald's MCD 12.1% 3.27%
Consumer Coca-Cola KO 5.0% 2.7%
Phillip Morris PM 3.6% 3.65%
Healthcare no holding
Agriculture no holding
Technology no holding
Utilities Bell Media BCE 2.5% 5.17%
Telus TU 4.4% 3.68%
Altagas TSE:ALA 1.5% 4.15%
REIT no holding
Value Play Legacy Oil & Gas TSE:LEG 6.8% no
Growth Play Painted Pony Petroleum PPY.V 2.6% no

As you can see from the chart, most of these names have dividends above 3%, and the only name with a dividend below 2%, is Canadian National Railway (CNR or CNI). This stock has performed beautifully over the past few years and my only regret is not owning it earlier. Despite the lower yield of 1.72%, the dividend growth has been positive, with only one of the past 14 years lower than 10%. With a low payout ratio, reasonable debt, and good operating margins, the dividend will be able to grow for the foreseeable future. With pipelines at capacity, shipping oil should keep the company occupied for a number of years. The steady 3 year chart is totally different from the charts of stocks I formerly invested in when I was just trying to grab a 10-20% swing. My only concern is that it is becoming overvalued, with a PE of 16.3% compared to its normal 14.7%.


Industrial 3M MMM 2.47%
Pipeline no watch
Energy Suncor SU 1.65%
Precision Drilling PDS 2.34%
Metals & Mining Teck Resources TCK 2.84%
Banks Scotiabank BNS 3.81%
Royal Bank RY 3.75%
Non-Bank Financials Visa V 0.84%
Home Capital Group TSE:HCG 1.76%
H&R Block HRB 3.26%
Restaurant Tim Hortons THI 1.7%
Consumer General Electric GE 3.27%
Proctor & Gamble PG 2.92%
Healthcare Johnson & Johnson JNJ 3.17%
Walgreen WAG 2.64%
Agriculture Agrium AGU 1.83%
Potash POT 2.83%
Technology no watch
Utilities already have three
REIT Morguard REIT TSE:MRT.UN 5.06%
Rio Can REIT TSE:REI.UN 5.1%
Value Play Goldcorp GG 1.83%
Growth Play no watch

Where to now?

In the next month or so, I expect approximately $35,000 of new money entering this portfolio, including regular contributions, a tax refund windfall I created by large contributions to the retirement account last year, and a small annual transfer from the company matching program. Positions of approximately $3,500 give a nice balance between trading fees and diversification, so this affords me 10 new choices. It's time for some serious shopping!

The impatient part of me wants to run out and fill in all the holes with my favorites from the watchlist immediately, but the investor part of me, who understands this is a 20 year project, cautions that waiting a couple of months for some weakness or the possibility of a summer slump, might be very beneficial. The swing trader still left in me, agrees. Do you?

Currently at the top of my watchlist is Visa (NYSE:V). I have been waiting for a pullback, but it rarely even comes back to the 50 day moving average. An analyst recently commented that it's the kind of stock you just have to "hold your nose and plunge in," as there's rarely a time when it looks like a deal. I'm sure to be joining the party far too late, but I felt that way and heard similar thing about purchasing Enbridge (NYSE:ENB) two years ago. When I did my regular morning stock check in the morning in August of 2011, and saw that ENB had suddenly dropped, I bought, but felt panicky for days. Hindsight has proven that it was a marvelous decision, but a smaller February purchase with an addition in August would have been equally marvelous and far less stressful for a beginner like myself. So I'm planning to purchase Visa soon. Visa has an even smaller dividend than CNI, and it doesn't have a long history of dividend raises, but the ones it has had have been generous. No debt and a low payout ratio lead me to believe it's dividend growth history may be just beginning. The business model of earning fees on transactions, is something I think will continue. I doubt credit card use is going to dwindle. I use mine more and more, as I get cash back for using it and avoid the fees my banks charges. Of course, I'm also financially intelligent enough to pay the balance in full upon receipt of the bill.

I'm eager to discuss any of the names in my Holdings list or Watchlist, but I'd better quit now.

What is your favorite DGI name? What is the at the top of your watchlist? Is there something you'd strongly recommend to fill the holes in the holdings list? Have you recently sold any of these names?

I look forward to your input,


Disclosure: I am long F, CNI, ENB, OTC:KEYUF, CSCTF.PK, OTCPK:RUSMF, TD, OTC:DCTFF, MCD, KO, PM, BCE, TU, OTCPK:ATGFF, OTCPK:LEGPF, OTCPK:PDPYF, OTCPK:IPPLF, OTC:HMCBF. 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.

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