My Dividend Growth Portfolio: Q1 Update

by: Integrator

I have been following a dividend growth strategy for some time. The aim of the portfolio is to generate $50k per year in dividend income by 2018. For 2013, I am targeting approximately $27.5k in dividend income. This update summarizes portfolio progress year to date for 2013.

Source of Funds

I am using selective reinvestment of my dividend income from 2012 as my primary source of funding for new investments, in addition to excess disposable income from savings. In 2012, my portfolio generated approximately $25k in dividends. My current dividend income is being reinvested primarily in US stocks, with a focus on those companies that have a history of dividend increases.

New Investments to the Portfolio

The first quarter was a fairly busy time in terms of new investments to the portfolio. I made a number of new additions to the portfolio within the first few weeks of the year. As I had indicated in a previous article on my dividend growth portfolio, my aim was to better diversify my Australian heavy portfolio with US stocks.

McDonald's (NYSE:MCD) - I initiated a new position in McDonald's at the beginning of the year of 60 shares at $94.50. McDonald's is one of my bottom drawer stocks that I look forward to being able to review and monitor periodically and never sell. Investors who had invested in McDonald's 10 years ago have had the opportunity to see the value of their investment increase by almost 8 times in value.

Western Union (NYSE:WU) - I initiated a new position in Western Union of 500 shares at $14.05. One of the dominant players in the money transfer market, Western Union stock has been hammered as a result of problems that it has been experiencing in certain corridors, particularly the Mexico-US corridor. I expect its problems are only temporary and that it will bounce back strongly over time, particularly as economic conditions improve. The company still has plenty of scope to increase its dividend

CME Group (NASDAQ:CME) - I initiated a new position in CME of 140 units at $54.00 earlier in the year. After a few years of flat dividend growth from 2008-2010, CME has been steadily increasing dividends over the last couple of years and I believe it will continue to benefit from its dominant position in the futures and options market

Novartis (NYSE:NVS) - I initiated a new position in Novartis stock of 100 shares at $64. Of all of the big pharmaceutical companies, Novartis arguably has one of the strongest product pipelines, and has been consistently increasing dividends for a number of years. I expect the company to be able to sustain these dividend increases moving forward as the pipeline is productized as starts generating revenue.

BP (NYSE:BP) - I initiated a new position in BP of 150 units at $43. While there is still a liability overhang on BP stock as a result of the explosion in the Gulf several years ago, BP continues to generate a lot of cash, increase revenues and ramp up dividends.

Quality Systems (NASDAQ:QSII) - I initiated a new position in Quality Systems of 400 units at $17.45. Quality Systems operates in the fast growth area of electronic medical health records. It doesn't have a very long dividend paying history, but is paying a generous dividend of around 4%. This is one of my more speculative dividend positions

Cisco (NASDAQ:CSCO) - I initiated a new position in Cisco stock of 400 units at $21. While Cisco's core markets of routing and switching have been relatively subdued recently, Cisco still manages to generate good revenue and earnings growth. Even though it is not traditionally a dividend payer, I expect it to continue to progressively increase dividend payments over time, given its significant increases over the last year.

2013 Dividend Income received

In the year to date, I have received approximately $6,117 in dividends. This was primarily from my Australian positions ($5,885), with the rest ($232) coming from my still rather small U.S. portfolio. Clearly, I still have quite some ways to go to achieve my diversification goal.

What worked well ?

Cisco announced a substantial increase in the dividend that it would be paying. The stock is now sitting on a yield of almost 3%. The good news is that the payout ratio is so low that there is still room for the dividend to be substantially increased from here.

Mastercard (NYSE:MA) announced a doubling in its quarterly dividend, however the yield is still so small that it hardly makes a significant impact to dividend income received in the portfolio.

The Commonwealth Bank (OTCPK:CMWAY) recorded a nice increase of 20% in the interim dividend paid out. Compared to some of the US Banks such as Bank of America (NYSE:BAC) and Citigroup (NYSE:C) that I had previously held and sold, my Australian Bank holdings such as Commonwealth Bank and Westpac (NYSE:WBK) have been providing generous dividend yields and robust dividend growth.

Some of my mid cap Australian holdings such as Invocare and Silverchef increase dividends substantially. Silverchef increased its dividend some 45%, while Invocare managed a dividend increase of almost 17%. Both continue to yield above 3%.

What didn't work so well?

A revised assessment of my portfolio revealed the opportunity to take some actions to better optimize the results. I will be looking to exit some positions in one or two Australian stocks that have substantially cut dividends and to redeploy capital for further investment in U.S. positions.

Quality Systems results in the last quarter still displayed some signs of quite muted sales growth, with no evidence of a sustained pick up in EHR activity. While there are no indications of any dividend cuts, I'll be looking for evidence in upcoming results that things are picking up and the sales pipeline is on the increase.

Future Actions

I will be looking to selectively redeploy some of my excess capital from planned disposals of a couple of Australian shares to new U.S. positions during the year. I expect there may be the opportunity to make a fresh injection of capital in the order of $10,000 sometime during the year

My priority positions for investment are to increase my holding in McDonald's and if possible to initiate a new position in either Paychex (NASDAQ:PAYX) or Clorox (NYSE:CLX).

McDonald's is a premium wide moat business that I feel still offers sustainable earnings and dividend growth into the future. Unfortunately, it has also significantly appreciated in price since I entered the stock just a few months ago and is up 13% in 2013. I will be looking for a pullback to occur before adding to my position here.

Paychex provides a relatively good yield of over 3% and has been increasing its dividend for a number of years (except for a short period after 2009). I believe once the employment situation starts to improve and interest rates pick up, Paychex should be poised for strong growth and increasing dividends.

I have always been very interested in the Clorox business as a provider of everyday consumer disposables that consumers frequently use. Clorox has provided consistent dividend increases over many years in part due to its strong portfolio of brands.

I will wait to evaluate my capital position during the current quarter to see where I can deploy any excess capital. Otherwise, I have completed all my planned investments for 2013 (short of any market corrections that emerge or stock specific opportunities).

Disclosure: I am long MCD, CME, WBK, OTCPK:CMWAY, BP, NVS, WU, CSCO, MA, QSII. 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.