Seeking Alpha
Long only, long-term horizon, dividend investing, value
Profile| Send Message|
( followers)  

On February. 11th I posted my K.I.S.S. dividend growth portfolio. It showed the stocks I owned and in what amounts, the criteria I used to buy them, and the criteria I will be using when deciding whether or not to sell them. Here is the first in my series of quarterly updates to show how my portfolio has done the past two months, and how I will evaluate either new stocks to add to my portfolio, or how to reinvest the dividends I have collected.

First, here is the composition of my portfolio as of March 29th, and how it has performed since my last posting.

NameSharesPrice 2/1/13Price 3/29/13Market Value($)Estimated Ann Inc ($)Curr Yield%PortReturn
AFLAC Inc. (NYSE:AFL)217$53.06$52.02$11,288.34$303.802.691.84%-1.96%
Air Products & Chemicals Inc (NYSE:APD)99$88.73$87.12$8,624.88$281.163.261.40%-1.81%
Amerigas Partners L P (NYSE:APU)339$44.20$44.93$15,231.27$1,084.807.122.48%1.65%
Annaly Capital Management (NYSE:NLY)1905.19$14.85$15.89$30,273.47$3,429.3411.334.93%7.00%
Becton Dickinson & Co. (NYSE:BDX)137$85.15$95.61$13,098.57$271.262.072.13%12.28%
BHP Billiton PLC (NYSE:BBL)150$69.79$58.06$8,709.00$342.003.931.42%-16.81%
Boeing Co. (NYSE:BA)153$74.87$85.85$13,135.05$296.822.262.14%14.67%
Buckeye Partners, L. P. (NYSE:BPL)280$52.53$61.16$17,124.80$1,162.006.792.79%16.43%
Cincinnati Financial Corp. (NASDAQ:CINF)279$43.50$47.22$13,174.38$454.773.452.14%8.55%
ConocoPhillips (NYSE:COP)197$58.82$60.10$11,839.70$520.084.391.93%2.18%
Cracker Barrel Old Country State Inc. (NASDAQ:CBRL)180$65.50$80.85$14,553.00$360.002.472.37%23.44%
CSX Corp. (NYSE:CSX)546$21.92$24.63$13,447.98$305.762.272.19%12.36%
Darden Restaurants, Inc. (NYSE:DRI)285$46.84$51.68$14,728.80$570.003.872.40%10.33%
Deere & Co. (NYSE:DE)98$94.65$85.98$8,426.04$199.922.371.37%-9.16%
Diageo plc (NYSE:DEO)62$119.91$125.84$7,802.08$176.732.271.27%4.95%
Dominion Resources (NYSE:D)219$54.17$58.18$12,741.42$492.753.872.07%7.40%
Emerson Elec. Co. (NYSE:EMR)161$58.08$55.87$8,995.07$264.042.941.46%-3.81%
First Long Island Corp. (NASDAQ:FLIC)384$29.40$29.65$11,385.60$384.003.371.85%0.85%
General Dynamics Corp. (NYSE:GD)162$65.88$70.51$11,422.62$362.883.181.86%7.03%
General Electric (NYSE:GE)301.14$22.62$23.12$6,962.36$228.873.31.13%2.21%
Harris Corp. (NYSE:HRS)231$46.28$46.34$10,704.54$341.883.191.74%0.13%
Hasbro Inc. (NASDAQ:HAS)300$37.65$43.94$13,182.00$480.003.642.15%16.71%
Illinois Tool Works Inc. (NYSE:ITW)157$62.90$60.94$9,567.58$238.642.491.56%-3.12%
Johnson & Johnson (NYSE:JNJ)159$74.18$81.53$12,963.27$387.962.992.11%9.91%
Kinder Morgan Energy Partners L.P. (NYSE:KMP)160$88.92$89.77$14,363.20$825.605.752.34%0.96%
L-3 Communications Holdings Inc. (NYSE:LLL)146$75.22$80.92$11,814.32$321.202.721.92%7.58%
Lockheed Martin Corp. (NYSE:LMT)137$87.22$96.52$13,223.24$630.204.772.15%10.66%
McDonald's Corp. (NYSE:MCD)98$95.95$99.69$9,769.62$301.843.091.59%3.90%
Medtronic Inc. (NYSE:MDT)261$46.92$46.96$12,256.56$271.442.212.00%0.09%
Microsoft Corporation (NASDAQ:MSFT)472$27.93$28.60$13,499.20$434.243.222.20%2.40%
Nike Inc. (NYSE:NKE)143$53.70$59.01$8,438.43$120.121.421.37%9.89%
Norfolk Southern Corp. (NYSE:NSC)174$69.60$77.08$13,411.92$348.002.592.18%10.75%
Nokia (NYSE:NOK)1452$4.00$3.28$4,762.56$0.0000.78%-18.00%
Novartis AG ADS (NYSE:NVS)200$68.00$71.24$14,248.00$429.103.012.32%4.76%
Omega Healthcare (NYSE:OHI)383$25.87$30.36$11,627.88$689.405.931.89%17.36%
Paychex Inc. (NASDAQ:PAYX)438$32.86$35.06$15,356.28$578.163.762.50%6.70%
PepsiCo Inc. (NYSE:PEP)162$72.67$79.11$12,815.82$348.302.722.09%8.86%
Phillips 66 (NYSE:PSX)39$62.75$69.97$2,728.83$48.751.790.44%11.51%
Pimco Corporate & Income Opportunity715$20.41$21.52$15,386.80$1,115.407.252.50%5.44%
Plains All American Pipeline LP276$52.55$56.48$15,588.48$621.003.982.54%7.48%
Procter & Gamble Co. (NYSE:PG)166$75.92$77.06$12,791.96$373.172.922.08%1.50%
Qualcomm Incorporated (NASDAQ:QCOM)143$66.73$66.94$9,572.42$143.001.491.56%0.31%
Raytheon Co. (NYSE:RTN)198$52.67$58.79$11,640.42$435.603.741.89%11.62%
Realty Income Corporation (NYSE:O)327$43.40$45.35$14,829.45$711.144.82.41%4.49%
Sysco Corp. (NYSE:SYY)372$32.09$35.17$13,083.24$416.643.182.13%9.60%
Target Corp. (NYSE:TGT)191$61.15$68.45$13,073.95$275.042.12.13%11.94%
United Technologies Corp (NYSE:UTX)108$89.84$93.43$10,090.44$231.122.291.64%4.00%
Wal-Mart Stores Inc (NYSE:WMT)166$70.49$74.83$12,421.78$312.082.512.02%6.16%
Walgreen Co. (NYSE:WAG)294$40.31$47.68$14,017.92$323.402.312.28%18.28%
Wells Fargo (NYSE:WFC)201.43$35.13$36.99$7,450.90$201.432.71.21%5.29%
CASH6,645.63 $1.00$6,645.63$7.970.121.08%
Totals $614,291.06$23,452.803.82% 6.71%

The portfolio has returned 6.71% since my first posting, compared to 3.70% for the S&P 500. These numbers are since February 1st. The best performers have been Boeing (14.67%), Buckeye Partners (16.43%), Cracker Barrel (23.44%), Hasbro (16.71%), Omega Healthcare (17.36%) and Walgreen (18.28%). The worst performers have been BHP Billiton (-16.81%), Nokia (-18%) and Deere (-9.16%). $2628.19 in cash has been collected in dividends. In addition to this cash, dividend reinvestment resulted in 44.829 more shares of Annaly and 1.431 more shares of Wells Fargo. These two stocks, along with GE, are held in an account where I can do dividend reinvestment. All other stocks are held in an account in which automatic DRIP is not available, so I collect all those dividends and allow them to build up in my portfolio.

Now, allow me to review the process I use to evaluate stocks and decide which ones to add to my portfolio. 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
  • Yield equal to or greater than 2%
  • Payout 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 than 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 its dividend.

I ran this screen today, and even with over 400 stocks on the CCC list it took me less than an hour to finalize the list of stocks that meet my criteria. There were 20 stocks, which passed my screen. They are Aflac, Air products, CSX Corp., Darden Restaurants, Deere, First Long Island, Harris Corp., Illinois Tool Works, L-3 Communications, Lockheed Martin, Medtronics, Microsoft, Norfolk Southern, Northrop Grumman (NYSE:NOC), Nu Skin (NYSE:NUS), Qualcomm, Raytheon, Target, Wal-Mart, and Walgreens. Of these I already have 18 of them in my portfolio. The ones in bold print are the only two that I don't already own.

Here is the information for these two stocks.

Northrop Grumman

Quality rating - A

Yield + DGR = 3.14 + 10.0 = 13.14

Payout Ratio = 28.17

Nu Skin

Quality Rating - A-

Yield + DGR = 2.71 + 13.8 = 16.51

Payout Ratio = 34%

SELLING: None of my stocks cut their dividend, so I will not be selling any stocks this quarter.

BUYING: I am supposed to get a quarterly pension contribution of $12,500, but unfortunately it is rarely sent out on a true quarterly schedule. Sometimes I don't get one for 6 months, and other times I'll get two within two months. I always get 4 a year, but they are spaced out unevenly. I have not yet received one yet this year. Therefore, for the time being, I only have my collected dividends, and cash left over from my previous update, to use for new purchases. Considering the size of my portfolio I feel it doesn't make sense to buy a new position unless I have at least $8,000 to put into it. And the exact amount I will put into it will depend on the yield of the stock I am buying, and how it affects the overall yield of my portfolio. As discussed in previous articles I am targeting an overall portfolio yield of 4%. So, although there are two new stocks that meet my criteria, I do not have enough cash to buy either one, so I'll not be buying any new stocks this quarter.

DRIP?: Based on some back tests I have done, I do feel strongly that I should invest whatever cash I have on hand, every quarter, to get the benefits of dollar cost averaging. So rather than wait for my pension contribution in order to buy new positions, I will use the $6645.63 I presently have and reinvest it in the stocks I already own. There have been many discussions here on SA about whether to do a straight DRIP, (reinvest the dividends directly back into the stocks that pay them), or to collect the dividends and use them to buy shares of only the most "undervalued" stocks. I put "undervalued" in parenthesis because the term seems to mean something different to every investor. I am in a unique position concerning this argument, because, except for a few stocks held in a brokerage account (GE, NLY, WFC) DRIP is unavailable to me. The majority of my portfolio is held in a pension trust, and they do not offer dividend reinvestment plans. I could keep track of the dividend each stock paid, and manually buy that much of each particular stock, but I feel that, besides being a little cumbersome to do so, there is a better way. I believe that valuation can be, and should be, considered when deciding where to reinvest my dividends.

PAAY: As a dividend growth investor I am always looking to achieve a strong, steady and rising string of dividend payments. If I have added certain stocks to my portfolio then they must have met my criteria for inclusion, including, their dividend payment history and their yield. As time goes on, I will look for opportunities to buy these stocks when I think they are undervalued. I have found that one way to determine if a stock is undervalued is to look at its yield. If a stock has a yield of 2.5% over the past few years, but now has a yield of 3.0%, that, to me, is an indication that it may be undervalued. As long as it still meets my criteria for owning the stock, then I will consider adding to my position. So, when it is time for me to reinvest the dividends I have collected over the past quarter, I calculate the Percentage Above Average Yield (PAAY) for each of the stocks I own. This compares each stock to its own average yield. It does not compare one stock's yield to any other stock's yield. Just because one stock has a 5% yield and another has a 3% yield does not mean the 5% yielder is undervalued compared to the 3% yielder. If the stock with a 3% yield usually has a 2% yield then its PAAY will be 50% (50% above its average yield). A high PAAY could be an indication that it is undervalued. A stock with a 5% yield, but that usually has a 6% yield, would have a PAAY of -16%. This would be an indication that it is overvalued. Once I have calculated the PAAY for each stock in my portfolio I take dividends that I have collected and divide them amongst the ten stocks with the highest PAAY.

Here is an article I just wrote in which I discuss the method in more detail and show the results of a back test.

As of April 1st here are the ten stocks in my portfolio that have the highest PAAY:

MSFT --- 8.72%

WMT --- 7.82%

BBL --- 6.81%

*WFC --- 6.45%

APD --- 5.08%

PTY --- 4.91%

O --- 4.90%

HRS --- 2.28%

LMT --- 0.44%

FLIC --- .01%

(DRI --- -0.69%)

(* As mentioned before, WFC is in a brokerage account, and is already set up for DRIP. Therefore I will eliminate this as one of the top ten and move on to choice number 11. This is DRI with a PAAY of -0.69%.)

All of these stocks have either trailed the market for the past two months, or have recently raised their dividend. Either would be an explanation as to why these stocks may be undervalued at the present time.

In my back testing of average yield I have seen PAAY's as high as 30-40%. Seeing that the highest PAAY in my portfolio right now is under 10%, and that the 11th highest is actually a negative number, is an indication to me that the market, as a whole, is probably a little over valued. I will not act on this information by selling any stocks, but it is interesting to note.

I had $6645.63 in my account so I will split that amount evenly amongst the ten stocks and bought about $665 of each.

These purchases were made on April 1st:

APD, 7 shares @ 86.73

BBL, 11 shares @ 58.10

DRI, 13 shares @ 51.62

FLIC, 22 shares @ 30.12

HRS, 14 shares @ 46.25

LMT, 7 shares @ 96.41

MSFT, 23 shares @ 28.62

O, 14 shares @ 45.19

PTY, 30 shares @ 21.7

WMT, 9 shares @ 75.16

The total spent was 6,525.14 (including commissions).

Therefore, starting the second quarter, here is the present make-up of my portfolio.

NameSharesPrice 3/29/13Market Value($)Estimated Ann Inc ($)Curr Yield%Port
AFLAC Inc.217$52.02$11,288.34$303.802.691.84%
Air Products & Chemicals Inc106$87.12$9,234.72$281.163.261.50%
Amerigas Partners L P339$44.93$15,231.27$1,084.807.122.48%
Annaly Capital Management1905.19$15.89$30,273.47$3,429.3411.334.93%
Becton Dickinson & Co.137$95.61$13,098.57$271.262.072.13%
BHP Billiton PLC161$58.06$9,347.66$342.003.931.52%
Boeing Co.153$85.85$13,135.05$296.822.262.14%
Buckeye Partners, L. P.280$61.16$17,124.80$1,162.006.792.79%
Cincinnati Financial Corp.279$47.22$13,174.38$454.773.452.14%
ConocoPhillips Com197$60.10$11,839.70$520.084.391.93%
Cracker Barrel Old Country State Inc.180$80.85$14,553.00$360.002.472.37%
CSX Corp.546$24.63$13,447.98$305.762.272.19%
Darden Restaurants, Inc.298$51.68$15,400.64$570.003.872.51%
Deere & Co.98$85.98$8,426.04$199.922.371.37%
Diageo plc62$125.84$7,802.08$176.732.271.27%
Dominion Resources219$58.18$12,741.42$492.753.872.07%
Emerson Elec Co.161$55.87$8,995.07$264.042.941.46%
First Long Island Corp.406$29.65$12,037.90$384.003.371.96%
General Dynamics Corp.162$70.51$11,422.62$362.883.181.86%
General Electric301.14$23.12$6,962.36$228.873.31.13%
Harris Corp.245$46.34$11,353.30$341.883.191.85%
Hasbro Inc.300$43.94$13,182.00$480.003.642.15%
Illinois Tool Works Inc.157$60.94$9,567.58$238.642.491.56%
Johnson & Johnson159$81.53$12,963.27$387.962.992.11%
Kinder Morgan Energy Partners L.P.160$89.77$14,363.20$825.605.752.34%
L-3 Communications Holdings Inc.146$80.92$11,814.32$321.202.721.92%
Lockheed Martin Corp144$96.52$13,898.88$630.204.772.26%
McDonald's Corp.98$99.69$9,769.62$301.843.091.59%
Medtronic Inc.261$46.96$12,256.56$271.442.212.00%
Microsoft Corporation495$28.60$14,157.00$434.243.222.30%
Nike Inc.143$59.01$8,438.43$120.121.421.37%
Norfolk Southern Corp174$77.08$13,411.92$348.002.592.18%
Nokia.1452$3.28$4,762.56$0.0000.78%
Novartis AG ADS200$71.24$14,248.00$429.103.012.32%
Omega Healthcare383$30.36$11,627.88$689.405.931.89%
Paychex Inc.438$35.06$15,356.28$578.163.762.50%
PepsiCo Inc.162$79.11$12,815.82$348.302.722.09%
Phillips 6639$69.97$2,728.83$48.751.790.44%
Pimco Corporate & Income Opportunity745$21.52$16,032.40$1,115.407.252.61%
Plains All American Pipeline LP276$56.48$15,588.48$621.003.982.54%
Procter & Gamble Co.166$77.06$12,791.96$373.172.922.08%
Qualcomm Incorporated143$66.94$9,572.42$143.001.491.56%
Raytheon Co.198$58.79$11,640.42$435.603.741.89%
Realty Income Corporation341$45.35$15,464.35$711.144.82.52%
Sysco Corp.372$35.17$13,083.24$416.643.182.13%
Target Corp.191$68.45$13,073.95$275.042.12.13%
United Technologies Corp.108$93.43$10,090.44$231.122.291.64%
Wal-Mart Stores Inc.175$74.83$13,095.25$312.082.512.13%
Walgreen Co.294$47.68$14,017.92$323.402.312.28%
Wells Fargo201.43$36.99$7,450.90$201.432.71.21%
CASH6,645.63$1.00$120.49$7.970.120.02%
Totals $614,274.73$23,452.803.82%

I will do my next update in early June.

Thank you for reading my article.

Source: My K.I.S.S. Dividend Growth Portfolio 2nd Quarter Update