Embattled Linn Co (NASDAQ:LNCO) already has been placed on irrevocable waivers. Dividend laggard Waste Management (NYSE:WM) might be next to go. Underperforming Clorox (NYSE:CLX) and AstraZeneca (NYSE:AZN) must prove themselves to remain prospects.
Another earnings season has dawned, and I'm in the process of making some big-league changes to my Dividend Growth Investing roster.
That includes getting the general manager (me) to convince the owner (also me) to spend some cash on free agents that will significantly strengthen my team.
In the coming weeks, I hope to initiate positions in Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM), while adding to my relatively small stakes in McDonald's (NYSE:MCD), General Mills (NYSE:GIS) and Coca-Cola (NYSE:KO). Combine those with already fully funded positions in Procter & Gamble (NYSE:PG), Philip Morris (NYSE:PM) and Walgreen (NYSE:WAG), and that will make for quite an imposing lineup.
More on those nine superstars later.
Doing DGI Right
Fellow Seeking Alpha contributor Bob Wells recently wrote an article touting DGI: "Retired Investors, Is It Time To Consider A New Investment Strategy?" My answer: "No, I don't want a new investment strategy. I just want to do a better job using the one I have."
When I started focusing on Dividend Growth Investing 18 months ago, I adopted this mission statement:
My goal is to build and maintain a portfolio of high-quality companies that have a history of raising dividends annually and that figure to keep doing so for decades. In 10-15 years, that reliable, growing, inflation-beating dividend stream will complement monthly Social Security and pension payments, giving me and my wife predictable, dependable retirement income.
Yes, I talked a good game about my commitment to DGI. All too often, however, I have strayed from its fundamentals.
Reaching for yield, I have bought far too many companies that mocked my mission statement. Determined to find "deals," I have missed out on numerous fairly-valued stalwarts.
The result? A dysfunctional team, with not enough star power and too many "wannabes" that didn't belong in my DGI lineup.
As Warren Buffett famously said in his 1989 letter to shareholders: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Putting Money To Work
About a third of my portfolio has been sitting in cash. For nearly a year now, I've considered the market to be overheated, so I have hoarded dough to prepare for The Big Correction. It hasn't happened yet.
Will it happen? Of course... someday. How many days should one wait for someday to arrive, anyway?
It's time to get back to basics -- back to the reason DGI appealed to me in the first place.
Over the next couple of months, I will build my team of DGI superstars, ones that will adhere to my mission statement and let me sleep well every night. That group will be backed up by solid "role players" such as Kinder Morgan (NYSE:KMI), Southern Company (NYSE:SO), Lockheed Martin (NYSE:LMT), Target (NYSE:TGT) and other proven performers. I will weed out non-producers. And though I'll continue to hold money for future buying opportunities and for emergencies, my cash stash will be significantly smaller.
I acknowledge the importance of buying fairly valued and undervalued companies, and I agree with the philosophy of one of my favorite Seeking Alpha contributors, Chuck Carnevale. In addition to regularly warning against buying overpriced stocks, he recently authored a fine article titled "Own These World's Leading Brands And Never Fear A Recession Again." Included in his thesis were several companies on my buy list: JNJ, MCD, KO, Colgate-Palmolive (NYSE:CL) and Wal-Mart (NYSE:WMT).
Ironically, because those leading brands almost always carry premium price tags, the only way to buy them at fair value is to wait for the next recession.
Well, I'm no longer waiting. I'm finally ready to admit that I don't know if the next recession will start next month, next year or next decade.
If I happen to pay a little too much for Chevron in 2013, I doubt I'll mind owning it (and its dividend stream) in 2033. The same goes for the other studs that will make up my lineup.
But what if I stock up on JNJ next week and the market tanks a week later? Of course, I won't be pleased. I might even say a few words one can hear on HBO but not on PBS. Nevertheless, I'll try to remember what SA contributor Tim McAleenan wrote a couple of months ago about investors who bought blue chips prior to the 1987 market crash:
"If you own an excellent company, and if you buy before a steep correction or crash, you can still achieve impressive returns if you take advantage of the greatest asset a dividend investor can use to his advantage: a long-term time horizon."
While SEC involvement and other negative news played a role in my decision to dump Linn Co, the biggest factor was my realization that I didn't understand how the company worked. As I read articles about LNCO, the comment-stream debates were filled with concepts that might as well have been written in Serbian or Swahili.
Peter Lynch says we should buy what we know, and I concur. I should be able to easily explain every stock I own to my wife and kids. Linn Co? I couldn't even explain it to myself. I had to bail, and thankfully I did so at minimal cost.
Waste Management's dividend growth has slowed to a crawl: from 12.5% in 2008 to 8.6% in 2010 to 4.4% in 2012 to 2.8% in 2013. I want my companies to boost divvies by at least 5% annually, so it's the ninth inning for WM, and it's down to its final swings. If it doesn't have a meaningful dividend hike this year, it's gone. My new, improved lineup has no room for laggards.
As for purchases, I already have named the nine companies that will form the nucleus of Team Nadel. Here's more on them:
First, it's actually 10. I'm pairing Philip Morris with Altria (NYSE:MO) to form a full position -- kind of like a baseball platoon, in which two quality players perfectly complement each other. The two were part of the same company until PM was split off to become the international arm five years ago. I have about three times as much Philip Morris because non-U.S. tobacco companies generally face less governmental interference. At 4.9%, Altria's dividend yield is about 1% higher than PM's. Eventually, MO might have an expanded role in my portfolio.
Aside from being the biggest names in big oil, Chevron and Exxon Mobil are dividend champions (25+ years of dividend growth). Chevron has raised its payout nearly 14% each of the last two years and XOM, sometimes criticized for being stingy to shareholders, followed its 18% dividend hike in 2012 with an 11% boost this year. Although both are priced near 52-week highs, they are not overvalued.
Healthcare behemoth Johnson & Johnson has prospered despite recessions, product recalls and patent expirations. It also has raised dividends for 51 consecutive years and yields 3%. It's wrong that I own shares in three healthcare companies but not in the world leader.
When one hears the words "fast food," one immediately thinks of McDonald's. When one wants to invest in the fast-food industry, one also should immediately think of McDonald's. It is expected to grow earnings nearly 9% annually over the next five years, and it has made double-digit dividend raises the norm.
Having raised dividends for "only" 10 consecutive years, General Mills is the only non-Champion on my list. Still, the company of Cheerios, Green Giant and Haagen-Dazs has paid divvies for 113 years without interruption and has raised them by an average of 11% the last five years.
Besides being perhaps the most recognized brand name in the universe -- that's right, I'm quite sure Coke is quaffed in the Alpha Centauri system -- Coca-Cola also might be the most consistent dividend-grower anywhere. Since 2002, it has increased payouts by 11.1, 10.0, 13.6, 12.0, 10.7, 9.7, 11.8, 7.9, 7.3, 6.8, 8.5 and 9.8 percent. Yes, it is somewhat overvalued. It almost always is. You get what you pay for.
Walgreen is the No. 1 drug store chain in the United States and this week was the subject of a bullish article by SA contributor Larry Smith. Also this week, the company announced another 14.5% dividend increase, its 38th straight year of payout growth. I was fortunate to buy WAG last summer at $30, and it has blossomed to be my second-largest position behind only...
Procter & Gamble. PG has one of the best no-fee dividend reinvestment programs, which I used with great success for four years. From Bounty to Charmin to Pampers to Gillette, PG features 25 brands that each exceed $1 billion in annual sales. Oh yeah... PG also has grown its dividend for 57 straight years.
The companies I acquire will be all-stars, not scrubs. They will be icons that span generations, not flashes in the pan.
As the general manager of Team Nadel, I don't just want a winner, I want to build a dynasty. I want the '50s-era Yankees, '60s-era Celtics, '70s-era Steelers, '80s-era Lakers and '90s-era Bulls all wrapped up in one portfolio juggernaut.
It's time to do Dividend Growth Investing right. It's time to stop settling for second-best. It's time to play ball.