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'm targeting approximately $27k in dividend income. This update summarizes portfolio progress in Q3 2013.
Source of Funds
I'm 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. Selective use of buying on margin helps make investments in advance of dividend income being available for investment.
Existing Investments in the Portfolio
My dividend portfolio currently has the following companies:
McDonald's (NYSE:MCD), The Coca Cola Company (NYSE:KO), Colgate-Palmolive (NYSE:CL), Western Union (NYSE:WU), CME Group (NASDAQ:CME), Novartis (NYSE:NVS), BP (NYSE:BP), Cisco (NASDAQ:CSCO), Lockheed Martin (NYSE:LMT), Lorillard (NYSE:LO), Apple (NASDAQ:AAPL), Flowers Foods (NYSE:FLO), Westpac Bank (NYSE:WBK).
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 dividend growth over many years. I also observed that my exposure to the healthcare sector was a little weak, so to that end, increasing my exposure to dividend paying healthcare stocks was also a focus. This sector is particularly attractive to me given the dependable and consistent nature of underlying consumer demand.
I added to my position in Coca-Cola during the quarter. Coca-Cola is the embodiment of dividend longevity, with dividend increases for a continuous period of more than 50 years.
It appears that there are market concerns with declining soda sales in the US market, and the effect that this may have on Coca Cola's long-term earnings. Given Coca Cola has a majority of sales outside the US and is actively growing revenue outside of carbonated beverages, this isn't something that concerns me greatly. 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. I was able to pick up 35 shares of Coca-Cola at $38.5/share.
McDonald's is a company that I initiated a position in earlier this year. I've previously held McDonald's, only to sell later and then subsequently regret the disposal and buy back into the company. Along with Coca Cola, I view McDonald's as an ultimate bottom drawer stock which I don't intend to sell again. McDonald's is also a poster child wide moat stock. It's hard to think of another business that has managed to almost double operating margins over a 10-year period and also maintain returns on equity of greater than 30%.
Investors who invested in McDonald's 10 years ago have had the opportunity to see their investment increase 8x in value.
I added 15 shares of McDonald's at $95 per share.
Consistent with my interest in bulking up my exposure to the healthcare sector, I had the opportunity to initiate a small stake in a company called Resmed (NYSE:RMD) which operates in the medical devices space.
The company produces medical masks that are used to treat a condition called sleep apnea. In its mildest form, sleep apnea produces symptoms like snoring, but in more severe forms, people actually stop breathing for several seconds at a time while they sleep, without even realizing it, and wake up tired and lethargic the next day.
Resmed's revenue growth has been very strong, with annual revenue growth over the last 5 years of greater than 13% annually. With a newly introduced dividend that has been recently hiked, Resmed yields around 2.1%.
I was able to pick up 80 shares of Resmed at $49 each.
Female Health Company
Finally, I was able to acquire a stake in the Female Health Company (NASDAQ:FHCO), a small consumer healthcare company which provides female birth control. While I wasn't necessarily looking to pick up any additional stakes in small company dividend payers, I happened to stumble across this company and I liked what I saw after further investigation.
Revenues for the female health company have increased more than 4x over the last 10 years to $37M, while gross margins are close to 60%. While this is still without doubt an emerging play, the company pays a dividend of close to 3%, which it's been growing over the last 3 years.
I picked up close to 550 shares of Female Health Company at around $9.35/share.
2013 Dividend Income received
During Q3 of 2013, I received $9,956.60 in dividends from my Australian portfolio and $759.35 from my US stocks, for a total of $ 10,715.95. I'm happy about the increased income from my US portfolio. which is now at an annual run rate of greater than $3,000.
My total dividend income for 2013 thus far is $20,455.35. My total dividend goal for this year is $27,000, so I'm approximately 76% of the way there.
I'm reasonably optimistic that I will hit my year end goal.
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 still show reasonable value.
I may look to accumulate positions in large-cap dividend growth stocks on weakness, but I'm not planning any significant inflow of capital for the remainder of 2013 unless a material correction emerges.
Disclosure: I am long FHCO, MCD, KO, RMD, AAPL, CSCO, LMT, LO, BP, WBK, CL, FLO, WU, CME, NVS. 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.