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Dividend growth investing, long-term horizon, value, growth
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At the end of the first quarter of this year I wrote this article sharing my experiences in transitioning my 401k account from a full service brokerage account of mutual fund holdings to a self directed account in which I am investing in dividend growth companies.

I received positive feedback in the comments section of that article, including a few requests for updates as the portfolio progressed. As the second quarter is now nearing an end, I felt it would be beneficial to review how the portfolio has fared over the last 90 days and provide an update on the adjustments I have made in the account.

Significant Company Announcements

During the quarter, several major developments were announced by companies in the portfolio. Here are highlights of some of the more consequential items of note:

Flowers Foods, Inc. (NYSE:FLO) - Reported a nearly 26% increase in sales for the first quarter on May 16 and announced a 3 for 2 stock split on May 22. The company also provided an update on the Hostess acquisition at an investors conference on March 20.

Gannett Co., Inc. (NYSE:GCI) - On June 13 announced the acquisition of Belo Corp. (NYSE:BLC). The acquisition is expected to increase EPS by $0.50 within the first 12 months and will diversify revenues by increasing sales from television to about $2 billion.

Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) - On June 11th announced that it has acquired the rights from Novartis to develop Synacthen and Synacthen Depot. This is a positive development for Questcor in that it removes one of the potential competitors to its primary drug, Acthar, and also potentially diversifies its portfolio and revenue sources should it chose to develop the acquired drugs.

Dividend Increases Announced

As the name would suggest, the main tenet behind "Dividend Growth Investing" is the annual increase in dividends paid out by companies in the portfolio. This quarter provided no shortage of increases by companies, with the largest increase of 50 percent made by Cracker Barrel Old Country Store, Inc.

Here is a complete rundown of the announced increases during the second quarter:

  • Apple Inc. (NASDAQ:AAPL) - 15% increase from $2.65 to $3.05 per share.
  • AmerisourceBergen Corp. (NYSE:ABC) - 15% increase from $0.10 to $0.115 per share.
  • Baxter International Corp. (NYSE:BAX) - 9% increase from $0.45 to $0.49 per share
  • Cracker Barrel (NASDAQ:CBRL) - 50% increase from $0.50 to $0.75 per share.
  • Clorox Company (NYSE:CLX) - 11% increase from $0.64 to $0.71 per share.
  • Coach, Inc. (NYSE:COH) - 12.5% increase from $1.20 to $1.35 per share.
  • Chevron Corp. (NYSE:CVX) - 11.1% increase from $0.90 to $1.00 per share.
  • Darden Restaurants Inc. (NYSE:DRI) - 10% increase from $0.50 to $0.55 per share.
  • Flowers Foods Inc. - 5.5% increase to $0.45 per share.
  • QUALCOMM Inc. (NASDAQ:QCOM) - 40% increase from $0.25 to $0.35 per share.
  • Sturm, Ruger & Co. (NYSE:RGR) - 21% increase from $0.404 to $0.49 per share.
  • Target Corp. (NYSE:TGT) - 19% increase from $0.36 to $0.43 per share.
  • Wells Fargo (NYSE:WFC) - 20% increase from $0.25 to $0.30 per share.

All told, the thirteen companies announced an average increase in dividends of 18.4% over the prior quarter's rate. I couldn't be happier with the results so far as that rate of increase trounces the inflation rate and when coupled with the compounding of reinvested dividends will lead to a better than 20% increase in dividends next year.

Portfolio Transactions

My goal for this portfolio is to have as little turnover as possible and when purchasing a stock, I plan to hold it for the long term. That said, I did make two trades in the second quarter, which is more than I expect to make in future quarters.

Trade #1:

On May 13, I sold out of my position in Eagle Materials (NYSE:EXP) and initiated a position in Digital Realty Trust (NYSE:DLR). Eagle Materials was purchased at a basis of $63.25 per share in the beginning of January and was sold at $71.50 for a gain of 13% in 5 months. Digital Realty was purchased at a basis of $66.32.

My reason for the trade was to better align the 401k holdings with those of what a dividend growth portfolio should be. While Eagle Materials does pay a dividend, its yield is just 0.6% and the dividend payout has been held at $0.40 per share annually since 2008. The stock is also a bit overvalued at the current time based on a P/E of 54 and 2.8 PEG ratio. Meanwhile, Digital Realty Trust offered an attractive yield of just over 5% and as a member of David Fish's Challengers list, has a 9 year history of dividend increases with a 5 year dividend growth rate of just over 20%.

Trade #2:

On June 4, I sold out of my position in Raven Industries (NASDAQ:RAVN) and initiated a position on Realty Income Corp. (NYSE:O). Raven Industries was purchased at a basis of $28.20 on February 9 and sold at $30.85 for a gain of 9.8% in about 4 months. Realty Income was purchased at a basis of $45.55.

This was a bit tougher trade for me to make. As a member of the Dividends Champions list, Raven has a 27 year track record of dividend increases with a 10 year dividend growth rate of just over 19%. However, recent results haven't been quite as positive as the company has missed earnings estimates by 10% or more in three of the last four quarters. With a 24 P/E and 2.45 PEG ratio and yield of just 1.6%, I didn't feel there was enough safety in the stock at the current price and I was happy to take my profits and move them into a higher yielding company.

Realty Income has been on my radar for some time and after doing some more research into REITs after I initially completed my portfolio, I decided that it was a company that I wanted as a core holding. After all, how can you not have "The Monthly Dividend Company" in a dividend growth portfolio? Realty Income is a member of the Dividend Challengers list and has increased its dividend payout for the last 19 years in a row. With the recent pullback in REITs as a result of fears from rising interest rates, I was able to pick up O about 18% below its 52 week high at a yield of just over 5%.

Directed Investment:

This portfolio is an active 401k account with my employer in which I have monthly contributions (approximately $300 per month) being added to the account. As a result I was able to add to a position this period and on May 9, purchased additional shares of Linn Co. at $37.50 per share. This purchase was the first time an existing position has been added to in the portfolio. The buy lowered my cost basis from $40.20 to $39.15 and with a forward yield of over 8% provides a nice boost to dividends in the portfolio.

Current Portfolio Holdings

Here is a snapshot of my current portfolio, along with the paper gains and losses to date.

SYMBOL INITIAL SHARESBASIS/SHAREORIGINAL INVESTMENTCURRENT SHARESMARKET PRICEMARKET VALUETOTAL RETURN% ReturnYIELD
Apple Inc.2$463.26$926.522.0139$396.53$798.57($127.95)-13.81%3.08%
AmerisourceBergen Corporation10$51.60$516.0010.0395$55.83$560.51$44.518.63%1.50%
(NYSE:AFL)AFLAC Inc.10$50.46$504.6010.0621$58.12$584.81$80.2115.90%2.41%
Baxter International Inc.7$73.18$512.267$69.27$484.89($27.37)-5.34%2.83%
Cracker Barrel Old Country Store, Inc.7$82.07$574.497.0416$94.66$666.56$92.0716.03%3.17%
(NYSE:CHD)Church & Dwight Co. Inc.8$61.16$489.288.0371$61.71$495.97$6.691.37%1.81%
The Clorox Company7$76.38$534.667.1074$83.14$590.91$56.2510.52%3.08%
(NYSE:CMI)Cummins Inc.4$118.49$473.964.017$108.46$435.68($38.28)-8.08%1.84%
Coach, Inc.10$50.45$504.5010$57.09$570.90$66.4013.16%2.36%
Chevron Corporation4$122.59$490.364.0327$118.34$477.23($13.13)-2.68%3.38%
(NYSE:DE)Deere & Company6$92.64$555.846.0346$81.25$490.31($65.53)-11.79%2.51%
Digital Realty Trust Inc.13$66.32$862.1613$61.00$793.00($69.16)-8.02%5.11%
(NYSE:DPS)Dr Pepper Snapple Group, Inc.10$47.20$472.0010$45.93$459.30($12.70)-2.69%3.31%
Darden Restaurants, Inc.11$46.21$508.3111.1059$50.48$560.63$52.3210.29%4.36%
(NYSE:EOG)EOG Resources, Inc.4$133.19$532.764.0063$131.68$527.55($5.21)-0.98%0.57%
Flowers Foods, Inc.20$25.30$506.0030.2622$22.05$667.28$161.2831.87%2.04%
Gannett Co., Inc.26$19.24$500.2426.2458$24.46$641.97$141.7328.33%3.27%
(NYSE:GIS)General Mills, Inc.10$49.80$498.0010.0654$48.53$488.47($9.53)-1.91%3.13%
(NYSE:GPC)Genuine Parts Company7$72.18$505.267.0483$78.07$550.26$45.008.91%2.75%
(NASDAQ:INTC)Intel Corporation24$21.46$515.0424.2116$24.23$586.65$71.6113.90%3.71%
(NYSE:LEG)Leggett & Platt, Incorporated16$30.96$495.3616.1418$31.09$501.85$6.491.31%3.73%
(NYSE:LMT)Lockheed Martin Corporation6$89.49$536.946.0723$108.46$658.60$121.6622.66%4.24%
Linn Co, LLC30$39.15$1,174.5030.5896$37.27$1,140.07($34.43)-2.93%8.26%
(NYSE:LO)Lorillard, Inc.13$40.14$521.8213.1662$43.68$575.10$53.2810.21%5.04%
(NASDAQ:MAT)Mattel, Inc.12$41.60$499.2012.201$45.31$552.83$53.6310.74%3.18%
(NYSE:MCD)McDonald's Corp.5$95.87$479.355.0778$99.00$502.70$23.354.87%3.11%
(NYSE:MDP)Meredith Corporation14$36.87$516.1814.1271$47.70$673.86$157.6830.55%3.42%
(NYSE:MDU)MDU Resources Group Inc.20$24.65$493.0020.1387$25.91$521.79$28.795.84%2.66%
(NYSE:MMM)3M Company5$106.94$534.705.0291$109.35$549.93$15.232.85%2.32%
(NASDAQ:MSFT)Microsoft Corporation17$28.87$490.7917.1135$34.54$591.10$100.3120.44%2.66%
(NYSE:NSC)Norfolk Southern Corp.7$77.13$539.917.0452$72.65$511.83($28.08)-5.20%2.75%
Realty Income Corp.12$45.55$546.6012$41.92$503.04($43.56)-7.97%5.18%
(NYSE:OXY)Occidental Petroleum Corporation6$87.99$527.946.0471$89.23$539.58$11.642.21%2.87%
(NYSE:PII)Polaris Industries, Inc.6$85.64$513.846.0548$95.00$575.21$61.3711.94%1.77%
(NYSE:PSX)Phillips 668$66.97$535.768.0381$58.91$473.52($62.24)-11.62%2.12%
QUALCOMM Incorporated8$67.22$537.768.0761$61.09$493.37($44.39)-8.25%2.29%
Questcor Pharmaceuticals, Inc.16$32.26$516.1616.1258$45.44$732.76$216.6041.96%2.20%
Sturm, Ruger & Co. Inc.16$45.56$728.9616.5253$48.04$793.88$64.928.91%4.08%
(NASDAQ:ROST)Ross Stores Inc.8$60.77$486.168$64.81$518.48$32.326.65%1.05%
(NASDAQ:SBUX)Starbucks Corporation9$57.64$518.769.0294$65.51$591.52$72.7614.02%1.28%
(NYSE:SCCO)Southern Copper Corp.15$42.25$633.7517.5948$27.62$485.97($147.78)-23.32%2.90%
Target Corp.8$64.12$512.968.0413$68.86$553.72$40.767.95%2.50%
(NYSE:THO)Thor Industries Inc.14$38.79$543.0614.0723$49.18$692.08$149.0227.44%1.46%
(NYSE:UNP)Union Pacific Corporation4$142.04$568.164$154.28$617.12$48.968.62%1.79%
(NYSE:VVC)Vectren Corporation15$33.44$501.6015.1564$33.83$512.74$11.142.22%4.20%
(NYSE:WAG)Walgreen Co.11$44.91$494.0111.0612$44.20$488.91($5.10)-1.03%2.49%
Wells Fargo & Company18$35.50$639.0018.2596$41.27$753.57$114.5717.93%2.91%
(NYSE:WMT)Wal-Mart Stores Inc.7$73.73$516.117.0432$74.49$524.65$8.541.65%2.52%
(NYSE:WSO)Watsco Inc.6$78.49$470.946.0376$83.96$506.92$35.987.64%1.19%
(NASDAQ:WYNN)Wynn Resorts Ltd.5$116.99$584.955.0363$127.97$644.50$59.5510.18%3.13%
Totals:$27,640.47 $29,212.64$1,572.175.69%2.91%

Since the portfolio was completed near the end of the first quarter, the account has seen an overall increase of 5.69%.

The top performers so far have been Questcor Pharmaceuticals at 42%, Flowers Foods at 32%, Meredith Corp. at 30%, Gannet Co. at 28%, and Thor Industries at 27%.

The biggest laggards in the group are Southern Copper at -23%, Apple Inc. at -14%, Phillips 66 at -12% and Deere & Company at -12%.

Dividend Payout Chart

The most enjoyable aspect of dividend growth investing for me is tracking the dividend payments in the portfolio and watching them build month by month as compounding of reinvestment coupled with dividend increases by companies take effect.

As currently comprised, this portfolio of 50 stocks will produce 220 dividend payments (O and LNCO pay monthly dividends) a year, plus whatever special dividends are declared by companies at the end of the year. This means that I receive roughly 4 payments a week of additional cash into the portfolio.

20132014
SYMBOLTOTALSAUGNOVDECJANFEBMARAPRILMAYJUNE
AAPL$6.10 $6.10
ABC$2.10 $2.10
AFL$3.50 $3.50
BAX$0.00
CBRL$3.50 $3.50
CHD$2.24 $2.24
CLX$9.00 $4.48 $4.52
CMI$2.00 $2.00
COH$0.00
CVX$4.00 $4.00
DE$3.06 $3.06
DLR$10.14 $10.14
DPS$0.00
DRI$5.50 $5.50
EOG$0.75 $0.75
FLO$6.59 $3.20 $3.39
GCI$5.20 $5.20
GIS$3.30 $3.30
GPC$3.76 $3.76
INTC$5.40 $5.40
LEG$4.64 $4.64
LMT$13.88 $6.90 $6.98
LNCO$21.74 $10.65 $11.09
LO$7.15 $7.15
MAT$8.68 $4.32 $4.36
MCD$7.73 $3.85 $3.88
MDP$5.71 $5.71
MDU$3.45 $3.45
MMM$3.18 $3.18
MSFT$0.00
NSC$3.50 $3.50
O$0.00
OXY$3.84 $3.84
PII$5.05 $2.52 $2.53
PSX$2.50 $2.50
QCOM$4.81 $2.00 $2.81
QCOR$4.00 $4.00
RGR$99.88$6.03$6.16$73.11 $6.56 $8.02
ROST$1.36 $1.36
SBUX$1.89 $1.89
SCCO$93.75 $82.50 $7.75 $3.50
TGT$2.88 $2.88
THO$5.05 $2.52 $2.53
UNP$0.00
VVC$5.33 $5.33
WAG$3.03 $3.03
WFC$9.94 $4.50 $5.44
WMT$3.29 $3.29
WSO$3.00 $1.50 $1.50
WYNN$5.00 $5.00
$6.03$88.66$73.11$1.50$22.88$26.95$30.31$61.73$99.23
2013 Total:$167.80 2014Total:$242.60

While the amount of these payments are pretty small at the current time, being able to watch them grow from month to month is a satisfying way to follow the portfolio's progress. I am looking forward to a few years down the road when my monthly dividend reinvestment begins to outpace the cash contribution I make from salary withholdings into the account.

Watch List For Next Buy

Cash in the portfolio is nearing a point where another purchase will be made to add to an existing position, and I expect to make a buy sometime during July with these funds. At the current time I am looking at purchasing additional shares of one the following: Deere & Company, Intel Corp or Wells Fargo.

All three of these companies seem to be undervalued according to Fast Graphs and with PE ratios between 10-12 and PEG ratios between 1-1.5 they look attractive at current prices.

Conclusion

I hope this update proves useful (and interesting) to others who may be looking to take their retirement accounts into their own hands and work towards a promising future. I've learned so much from other contributors on Seeking Alpha and enjoy sharing my experience in building this portfolio.

Disclaimer: The companies listed in the tables of this article are all held in my personal 401K account. I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.


Source: 401k Reconstructed: 2013 Second Quarter Review