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 $27k 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.
New Investments to the Portfolio
The second quarter featured some modest activity in the portfolio and I made a number of new additions. Given that I have a rather sizable concentration of mid and small capitalized dividend payers that are Australian holdings, my objective has been to strengthen the core of my portfolio with US dividend growth holdings with wide moats that have displayed consistent increases in dividend growth over many years. To that end, I added a few new positions to my portfolio.
Coca-Cola - I initiated a new position in Coca-Cola (KO) during the quarter. Along with McDonald's (MCD), this is one of my ultimate bottom drawer stocks that I expect to hold onto indefinitely and never sell. Coca-Cola is the embodiment of dividend longevity, with dividend increases for a continuous period of more than 50 years.
An investor in The Coca-Cola Company who invested $10,000 about 50 years ago would have stock valued at almost $500,000, handsomely beating a comparable return from the S&P 500 over the same period.
With patented IP and competitive advantages in marketing and distribution, Coca-Cola has a significant wide moat. I was able to pick up 200 shares of Coca-Cola at $40/share.
Colgate-Palmolive (CL) is a company that I have wanted to own for years. When I think of consumer staples and building defensive positions in companies with great brands and wide moats, Colgate is often the first company that comes to mind.
Colgate-Palmolive's revenues have close to doubled over the last decade while dividends have grown at a rate of 12% per annum. It's hard to go past the stellar brands that Colgate has in the oral care category. When you think of oral hygiene, you think Colgate-Palmolive.
The other reason I really like the Colgate business from a defensive perspective is that it has a set of products that aren't easily substituted. People are generally reluctant to substitute things that they put in their mouths. I was able to pick up 60 shares of Colgate at $57/share.
While not a traditional dividend growth stock, I couldn't resist the opportunity to snap up a little stake in Apple (AAPL) at an effective yield of 3%. Apple also recently hiked its dividend 15%, something which I'd love to see it do over the next few years to reduce its mounting cash position.
Apple is very much a company in transition, and I expect it to have a more mature growth profile as it introduces more price competitive versions of its existing products.
While consumer technology companies sometimes have uncertain moats, Apple has a large embedded base of subscribers, carrier subsidized devices and ecosystem lock in which provide a wide moat that should endure for considerable time yet. I picked up an entry position of 10 shares at $405 per share and won't consider additions unless price point becomes more compelling.
I was particularly attracted to Lorillard (LO) by the nice yield on offer. The company offers a yield of close to 5%, as well as a dominant position in the US cigarette market that provides it with a wide moat.
Of course, this is a business that is constantly exposed to regulatory risk, which is something that will limit the size of the position that I take. Revenue and dividend growth for the business has been fairly good for Lorillard over the last 10 years. I picked up close to 100 shares of Lorillard at around $40/share.
I was also attracted to Lockheed Martin (LMT) by the nice dividend on offer, close to 4.75% at the time of purchase. Lockheed's dividend growth has also been very strong for the last few years, with the dividend most recently hiked 15%.
I can't see this continuing, particularly with some of the budget cuts for defense that will impact Lockheed. However, as the dominant defense contractor in the US, I expect the company to be able to manage through these cuts, albeit with slightly reduced dividend growth rates over the medium term.
I added to my existing position in BP (BP). It was one that I could not pass up at current prices levels. With a current yield of almost 5%, reasonable payout ratio, and ~10% dividend growth, BP provides compelling value to wait and watch as the various legal actions get sorted out. The outlook for oil looks positive in my view, with strengthening economic growth in the US and globally.
At 6x earnings, BP trades at a fairly significant discount to Exxon, Chevron and Royal Dutch Shell, which all trade at 8-10x earnings. I added almost $7k to my investment in BP @$40.50
Finally, I had a chance to start a position in a relatively unknown mid cap dividend payer, Flowers Foods (FLO). While adding mid cap dividend positions is not a driving force behind my portfolio strategy presently, I am always happy to add these positions when I come across strong mid cap dividend players.
Flowers Foods has been baking a variety of breads and packaged foods for bakeries and other food services clients for almost 100 years.
It pays a small yield of around 2%, but more than the current yield, I was drawn to this stock for its strong earnings and dividend growth.
Flowers' revenue has more than doubled in the last 10 years, while earnings per share have increased more than 10 times during this period. Dividends over the last 10 years have increased more than 6 times.
I started a position in this company recently of 100 shares at $22 per share.
2013 Dividend Income received
I received $3097.5 in dividends from my Australian portfolio and $525.10 from my US stocks, for a total of $ 3622.50 during Q2 2013. I'm happy about the increased income from my US portfolio. which is now at an annual run rate of greater than $2000.
My total dividend income for 2013 thus far is $9739.50. My total dividend goal for this year is $27000, so I am approximately 36% of the way there.
I am still confident that I will achieve my target, because my Australian companies tend to pay their dividends twice a year. The final dividend tends to be the larger dividend (generally almost 2/3 of the total yearly dividend), so I am expecting a strong dividend contribution in the latter half of the year to get me to my dividend target.
Stocks generally are pretty fully valued right now, as they have been since the early part of this year. I'm not actively looking to add any new positions unless there is stock specific weakness. In my view, some of the large cap classic dividend growth stocks such as Coca-Cola are still reasonably valued right now.
I will be looking to steadily accumulate positions in large cap dividend growth stocks that continue to provide reasonable value, but I'm not planning any significant inflow of capital for the remainder of 2013.