It's Time To Play Ball (Part 2): Building A Winning Dividend Growth Roster

by: Mike Nadel

Since writing about my flight to quality three weeks ago, I have spent earnings season digging into my cash stash to build a "starting lineup" of Dividend Growth Investing superstars.

As promised, I initiated positions in Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) while adding to existing stakes in Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD) and General Mills (NYSE:GIS). Procter & Gamble (NYSE:PG), Walgreen (WAG) and Philip Morris (NYSE:PM) already had been fully funded.

That indomitable nine represents my investing version of the '27 Yankees. Here's hoping it forms the core of my portfolio for decades.

When my wife and I retire in 10-15 years, we expect those DGI superstars to lead a group that will produce a reliable, ever-increasing, inflation-beating dividend stream. We then should be able to live on dividends, Social Security and pensions -- and should never have to sell any stock out of necessity.

The Rest of the Roster

As good as those blue-chippers are, it takes more than nine studs to win big. Any great organization needs quality depth, with "role players" that offer different strengths and unique characteristics.

So even as I bolster my starting lineup, I'm filling out my roster with other DGI standouts:

3M (NYSE:MMM). Yes, its yield (2.2%) and five-year dividend growth rate (4.2%) are less than ideal. Still, this industrial conglomerate is in its sixth decade of annual divvy increases, including hikes of 7.3% and 7.6% the last two years. Ten and 20 and 40 years from now, I'm pretty sure folks will be buying Post-it Notes and Scotch Tape. I took some profits last year after 3M had become my biggest position ... only to see its price climb from $93 to $117. D'oh!

Aflac (NYSE:AFL). When I bought this insurer a year ago at $41/share, it was extremely undervalued. I wish like heck I had bought more. Now it's fetching around 61 bucks ... and it's still a decent bargain, with a P/E ratio under 10. AFL's yield is only 2.3% but it has been growing its dividend nicely and its 21% payout ratio allows plenty of room to run.

Altria (NYSE:MO). In my previous article, I said this U.S. tobacco giant and its international arm, Philip Morris, would form one portfolio position. I since have decided Altria could and should stand on its own, taking advantage of a price dip to add to my position. While a relative lack of regulation abroad makes me favor PM slightly, MO's 4.9% dividend yield is about a point higher. Altria has been growing dividends for 44 years and also has stakes in wine and e-cig businesses.

ConocoPhillips (NYSE:COP). This large oil exploration company had been on my probation list because it hadn't raised its dividend since spinning off refiner Phillips 66 (NYSE:PSX) in the spring of 2012. COP earned a reprieve a few weeks ago with a 4.5% hike. I prefer 5% or more dividend growth annually, so I'll be watching that closely going forward. I'll also be watching earnings to see if COP can increase those as robustly as before, too. Thankfully, while I do all that watching, I'll be benefiting from its 4.2% yield.

Kimberly Clark (NYSE:KMB). Most analysts agree this consumer products company is overvalued. I nevertheless bought some on dips last week. Will I be sorry I didn't wait for the market to crater? Maybe, but it's not as if people will stop putting Huggies on their babies and using Kleenex to wipe their noses for the next umpteen years. I justified the purchase by saying I got so many great deals on other companies that I could afford to pay list price (or a little over) to buy quality. The 3.3% dividend yield works for me, too.

Kinder Morgan Inc. (NYSE:KMI) and Kinder Morgan Management (NYSE:KMR). Part of the famed Kinder family of oil pipeline and storage operators, KMI and KMR combine to form one full position for me. (I don't own Kinder Morgan Energy Partners (NYSE:KMP) because I want to spare myself MLP tax headaches. KMP also is best held in taxable accounts, and my available money is in IRAs.) KMI is KMP's general partner, trades like a traditional stock and yields 4.1%. KMR is KMP's management company, pays dividends in additional shares and yields about 6.2%.

Realty Income (NYSE:O). This real estate investment trust has registered the trademark "The Monthly Dividend Company" -- and for good reason. It has paid dividends for 515 consecutive months and has increased payouts for 63 straight quarters. As SA contributor Brad Thomas recently wrote, O has an outstanding portfolio of properties and a near record occupancy rate, making it the king of triple-net REITs. Its price surged nearly 40% in this year's first five months and pulled back sharply in June on interest-rate fears before settling into the mid-$40s. Though O arguably remains overvalued, its track record, 4.9% yield and monthly payment schedule are most attractive.

Royal Dutch Shell (NYSE:RDS.A). The oil behemoth froze (but didn't cut) its dividend in the aftermath of the Great Recession, making it the only company on this list without at least a decade-long streak of divvy growth. Shell resumed the hikes again in 2012 and now yields 4.5%. Holders of A shares receive additional stock, which is perfect for a dividend-reinvestor like me. I pay no foreign taxes because my broker, Vanguard, participates in Shell's Scrips Dividend Programme.

Southern Company (NYSE:SO). The only utility I own is the No. 1 energy provider in the growing Southeastern U.S. Based in Atlanta, Southern owns power companies in four states and also has a hand in fiber optics and wireless communication. SO has solid profit margins, has grown dividends 12 years in a row and yields 4.5%.

Wal-Mart (NYSE:WMT). Shortly before my daughter Katie was born in 1986, one of my wife's cousins told me to buy Wal-Mart stock. Knowing little about the company and even less about investing, I ignored him. As it turns out, ignorance isn't bliss! I finally bought my first shares last week, encouraged partly by SA contributor Chuck Carnevale's recent article stating that WMT is fairly valued. Wal-Mart's 2.4% dividend yield is only so-so, but I'll live with that from a big-time brand that grows earnings through good times and bad.

Looking Ahead

When fully funded, each of my "role player" positions will be worth 50% to 75% as much as a DGI superstar. I have all the MO, RDS.A, KMI/KMR, O, MMM and COP that I want right now but am still building my WMT, SO, KMB and AFL stakes.

I also am eyeing several potential roster additions, including Target (NYSE:TGT), Baxter International (NYSE:BAX), Dominion Resources (NYSE:D), Lockheed Martin (NYSE:LMT), Wisconsin Energy (NYSE:WEC), Air Products & Chemicals (NYSE:APD), Colgate-Palmolive (NYSE:CL), NextEra Energy (NYSE:NEE), Accenture (NYSE:ACN) and Raytheon (NYSE:RTN).

It is conceivable that growth, value, opportunity or other factors could push one or more role player into superstar status. (Wal-Mart and the Kinder companies leap to mind.) Without breaking any of my investing rules, it is important to be flexible, as I was with Altria.


With the market near all-time highs, I am proceeding cautiously ... but I am proceeding. As I said in my previous article, I no longer am willing to sacrifice quality for yield or perceived value.

I'm playing ball with the big boys now, and I am confident my Dividend Growth Investing team will come through in the clutch for years and years.

Disclosure: I am long AFL, COP, CVX, GIS, JNJ, KMB, KMI, KMR, KO, MCD, MMM, MO, O, PG, PM, RDS.A, SO, WAG, WMT, XOM. 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. At any time, I also could initiate or add to positions on any stock mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .