A Real Dividend Growth Machine: Q3 2013 Review

Includes: HCP, KMI, XOM
by: Dividend Growth Machine


It is time for the latest update on my dividend growth machine, a diversified portfolio of stocks that pay increasing dividends year after year. My primary goal as a dividend growth investor is to build a sustainable and rising dividend income stream that handily beats inflation. My secondary goal is to achieve a satisfactory total return on my investments. To evaluate my progress toward achieving these goals, in the current article I will review my investing performance during the third quarter of 2013. As always, you will see real results from a real portfolio involving real money.

Input To The Machine

New capital represents the input to my dividend growth machine and allows me to buy stocks. In previous reviews, I reported the quarterly savings of my net job income, which corresponded directly to new capital for investment. However, a few months ago I moved to a different state and started a new job. Due to seasonal variations in how I am paid by my new employer, there will be discrepancies between my savings and my investment contributions throughout the year. For that reason, from now on I will simply report the amount of new capital invested during each quarter. The figure below shows quarterly contributions of new capital to my investment accounts in 2012 and 2013:

A quick word about the second quarter: I did not contribute any new capital from April to June because I was saving for my move in July and I needed to cover expenses incurred during the transitional period between jobs when I had no income. (My old job contract finished at the end of June but my new job contract did not begin until mid-August.)

Once my move was finished and I started getting paid by my new employer, I was able to make up for the absence of new capital in Q2 with a solid year-over-year increase in Q3. In fact, my year-to-date total of $12,415 is only slightly less than the corresponding total in 2012 of $13,500. I am confident that I will be able to meet and exceed my 2012 total by the end of 2013.

Parts Of The Machine

Dividend growth stocks represent the parts of my dividend growth machine. The table below shows the composition of my portfolio at the ends of Q2 and Q3 2013, with holdings in my Roth IRA denoted by [R] and various changes highlighted.

I will briefly discuss the highlighted changes to the portfolio:

  • I started a position in HCP, Inc. (NYSE:HCP) by purchasing shares twice for my Roth IRA. HCP is a diversified healthcare REIT that I discussed in an article published in August. Its stock price experienced a considerable decline during the summer (as was the case for many other REITs) due to rising interest rates. More recently, the stock had a sharp drop and subsequent recovery after the company announced that its Board of Directors fired the CEO over concerns about his leadership. While the sudden firing has created uncertainty, HCP has been operating well and my investment thesis has not changed.
  • I increased my position in Kinder Morgan, Inc. (NYSE:KMI) in both my taxable account and Roth IRA. KMI is one of the largest energy companies in North America and operator of an extensive pipeline network. Its stock price dropped recently on a negative report from an analyst at Hedgeye. However, on a subsequent conference call, Richard Kinder responded to the major issues raised in the report in a satisfactory manner (in my opinion). For that reason, I viewed the drop as a buying opportunity and I think the stock continues to be attractively valued.
  • I started a position in Exxon Mobil (NYSE:XOM) by purchasing shares in my taxable account. XOM is the world's largest publicly traded oil and gas company, and I provided an overview of it in an article published in September. In contrast with the broader market, XOM's stock price has not fared well this year, partly due to recent weakness in profits. However, with several major projects in development, I have a positive long-term outlook for the company and its role in meeting global energy demands. I think XOM continues to be attractively valued and I increased my position at the start of the fourth quarter.

In summary, in the third quarter I made a total of five purchases of three stocks. I did not sell any stocks. Thus far this year, I have made 11 purchases and one sale, resulting in a very low turnover rate. I try to keep transaction fees to no more than about 0.5% of my total cost and for 2013 the ratio is currently 0.47%.

Besides adding parts to my machine, I want to make sure all the parts are running smoothly. I monitor the operating results of my companies, but I also stay on the lookout for my favorite announcements: dividend increases! Thus far in 2013 there have been dividend increases for 26 of the 30 stocks in my portfolio, with a mean increase of 11.0%. I am confident that all but one of my stocks will increase their dividends by the end of this year, with the lone exception being Intel (NASDAQ:INTC). I know that several dividend growth investors have sold some or all of their INTC shares due to the dividend remaining flat this year, but I plan to continue holding into early 2014. If they do not announce a dividend increase by February and there is no sign that their operating results are improving, then I will consider reducing my position.

Output Of The Machine

Dividends and capital gains represent the output of my dividend growth machine, all of which is selectively reinvested when sufficient funds are available. As mentioned earlier, my primary investing goal is to build a sustainable and rising dividend income stream. The figure below shows the total dividends I received during Q3 2013, along with the quarterly totals in 2012 for comparison.

I continue to see solid year-over-year increases in dividends, with the $695 in Q3 2013 representing a 55% increase over the $449 in Q3 2012. Of course, the increase reflects a combination of organic dividend growth from companies raising their dividends and new dividends from recent purchases with new capital. I am pleased with the growth of my dividend income stream and by the end of Q3 2013 my forward 12-month dividend total was $2,814.

My secondary investing goal is to achieve a satisfactory total return. The portfolio table (see above) shows that my portfolio's value increased by 10.9% during the third quarter, from $83,990 to $93,148. The increase reflects a combination of capital gains, dividends, and invested new capital. The figure below shows end-of-month portfolio values since the start of 2012.

Thus far, 2013 has been a good year for my portfolio. Using the XIRR function in Excel, which takes into account when new capital was added in previous quarters, I have achieved an annualized return of 17.9% since January 1, 2012. I consider that to be a satisfactory total return.

Outlook For Q4 2013

I am expecting fairly regular investing activity to close out the year. I have already contributed and invested new capital in October, increasing my position in XOM and starting a position in Wal-Mart Stores (NYSE:WMT), which I discussed in a recent article. With the government shutdown, debt ceiling debacle, and forthcoming earnings reports, I expect considerable volatility in the market this quarter. However, volatility does not really bother me anymore. I will just continue to follow my strategy of seeking attractively valued dividend growth stocks and monitoring the earnings of companies in my portfolio, letting Mr. Market do whatever he wants in the background.

Disclosure: I am long HCP, INTC, KMI, 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.

Additional disclosure: I am long all stocks listed in the portfolio table.