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Dividend growth investing, long-term horizon, value, growth
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It's amazing how quickly time can pass during the hustle and bustle of summer. This year seemed exceptionally so as my wife and I made the biggest investment of our lives in purchasing our first home. Add to that the joys of chasing an adventurous toddler around the new house and it's easy to see how the advent of fall snuck up on me.

While the busy personal life has cut down on the time available for writing, it hasn't kept me from following the market and keeping an eye on my dividend growth portfolio, the beginnings of which I have chronicled here and here. I apologize for being a bit late with this most recent update. If nothing else, maybe this will keep it from being lost in the shuffle after the flurry of other updates posted in the last couple of weeks.

With this update I will discuss some of the market moving news for a few of the companies in the portfolio, the announced dividend increases during the quarter, buys and sells made in the quarter, and an update on the progress of the portfolio to date.

Significant Company Announcements

Sturm, Ruger & Company, Inc. (NYSE:RGR)

On July 31, the company reported blowout earnings of $1.63 per share, an increase of 79% over the previous year. On September 3, the company announced the purchase of a 220,000 square foot manufacturing facility in North Carolina, which is the company's first major expansion in more than 25 years.

Mr. Market seemed to enjoy the news as shares of Sturm, Ruger & Company saw an impressive increase in price of 34% during the quarter.

Polaris Industries, Inc. (NYSE:PII)

On July 23, the company reported earnings that beat estimates and also provided guidance for higher earnings for the second half of the year. The company also had several updates during the quarter regarding new product releases, including the much anticipated Indian Motorcycle.

The stock price steadily increased during the quarter, which was good enough for a 33% gain during the period.

Thor Industries, Inc. (NYSE:THO)

Thor announced several pieces of news during the last quarter. First, on July 31 the company sold off its bus business to Allied Specialty Vehicles for $100M. This sale price is worth nearly $2 per share in cash based on the 53.2M shares outstanding.

On August 27, the company announced that it had acquired the assets of RV maker Livin' Lite, which is expected to generate approximately $24 million in sales in 2013.

Finally, on September 26, the company announced earnings for the fiscal fourth quarter, which saw earnings increase by 35% on a 19% increase in sales.

While Thor wasn't able to keep up the returns seen by Sturm, Ruger & Company or Polaris, the stock was still able to see a nice 17% increase during the quarter.

Announced Dividend Increases

Once again the portfolio was fortunate to receive several increases to payout rates during the quarter, with Sturm, Ruger & Co. leading the charge with a nearly 33% boost.

All told, the nine companies increased their dividend payouts by an average of nearly 16%. These increases were slightly lower than last quarter's announced average increase of 18.4%, but with a goal of at least 10% dividend growth not counting reinvested dividends, I consider it a very successful quarter.

Portfolio Transactions

I finished the initial construction of this dividend growth portfolio at the end of March of this year. One of my goals in switching to the dividend growth strategy is to select companies that I can build a long-term partnership with in working my way toward retirement. That said, there has been a little more turnover in the portfolio than I'd prefer as I continue to learn the ropes of the new strategy.

After hearing Chowder continually beating the drum for quality, quality, quality and re-reading "The Single Best Investment," I decided to take the advice to heart and swap out a couple of weaker positions into ones that I believe are more stable companies with clearer growth prospects going forward.

Trade #1 - July 7

Sold 30.5896 shares of Linn Co. (NASDAQ:LNCO) for $29.50 per share.

Bought 8 shares of Philip Morris International for $88.65 per share.

Added to my Deere & Company (NYSE:DE) position by using remaining funds plus new cash to buy 8 shares at $82.65 per share.

Rationale: The uncertainty surrounding Linn Energy's accounting and proposed merger with Berry Petroleum, along with me not completely understanding the business model for the MLP, made me realize it was not a company I felt comfortable holding as a S.W.A.N. long-term investment.

Philip Morris is a cash cow tobacco company that annually raises the dividend by about 10% per year and has reliable growth in earnings and an effective share buyback program. While I give up some income now with the lower dividend, I pick up a much more stable company that is predicted to grow earnings and dividends by a near double-digit rate going forward.

Deere & Company seemed like a screaming buy at this price. The recent pullback comes on the heels of falling corn prices, which is a short-term problem and not something that I think will affect equipment purchases by farmers in the long run. Deere has grown both earnings and the dividend payout by over a 10% rate since 1999.

Trade #2 - July 26

Sold 16.2876 shares of Leggett & Platt (NYSE:LEG) for $30.52 per share.

Sold 24.2116 shares of Intel (NASDAQ:INTC) for $23.10 per share.

Bought 20 shares of Omega Healthcare (NYSE:OHI) for $33.05 per share.

Bought 3 shares of International Business Machines (NYSE:IBM) for $195.90 per share.

Rationale: Like many investors I was disappointed with the results posted by Intel. The company missed earnings, lowered guidance going forward and failed to address the dividend or raise it as expected. While I think the potential is there for Intel to dominate the chip market, I'm not yet convinced that will translate into profits. Similarly, Leggett & Platt also announced lackluster earnings and guidance and has had a slowing growth rate on the dividend in recent years.

Meanwhile, IBM has been a model of consistency with earnings and dividend growth, with each posting greater than 13% annual growth over the last 20 years. What I am giving up for in current yield I am gaining in quality, reliability and growth. Omega Health was an opportunity to diversify my REIT holdings and pick up a quality dividend at a decent price. The company has grown FFO at 8% and dividend rate at 11% rates since 2005 and with the large numbers of baby boomers getting closer to retirement home age, I think the trend of growth should continue.

Trade #3 - September 3

Used accumulated cash contributions to the account and added to my Philip Morris position by buying 6 shares at $83.50 per share.

Rationale: With an expected announcement of a dividend increase on the horizon, I wanted to add to my position ahead of the news. On cue, the company announced a larger than expected increase on September 11, pushing my yield on cost for the purchase to 4.5%.

Trade #4 - September 24

Sold 17.6691 shares of Southern Copper (NYSE:SCCO) for $28.53 per share.

Bought 15 shares of Wisconsin Energy (NYSE:WEC) for $41.23 per share.

Rationale: While Southern Copper has been a great stock over the last decade, the earnings and dividends have been too volatile and unpredictable for my tastes.

With only having two other utilities in my portfolio, I decided I wanted to add another quality holding to the mix. Wisconsin Energy has one of the higher dividend growth rates among utilities and based on comments from management, I expect the trend to continue for the next several years.

Portfolio Performance

At the end of my second quarter update the portfolio was worth $29,212.64 with a portfolio return of 5.69%. As you can see below, the third quarter was another stellar one as the portfolio has grown to $32,038.35 with a return of 12.62%.

TickerNameInitial SharesInitial Basis Per ShareInvested CapitalCurrent SharesEnd Q3 PriceMarket ValueGain (Loss)% ReturnCURRENT DIVIDENDCURRENT YIELDPORTFOLIO WEIGHTINGANNUAL INCOME
(AAPL)Apple Inc.2$463.26$926.522.0261$476.75$965.94$39.424.25%$12.202.56%3.01%$24.72
(ABC)AmerisourceBergen Corporation10$51.60$516.0010.076$61.10$615.64$99.6419.31%$0.841.37%1.92%$8.46
(AFL)AFLAC Inc.10$50.46$504.6010.1219$61.99$627.46$122.8624.35%$1.402.26%1.96%$14.17
(BAX)Baxter International Inc.7$73.18$512.267.1025$65.69$466.56($45.70)-8.92%$1.962.98%1.46%$13.92
(CBRL)Cracker Barrel Old Country Store7$82.07$574.497.0942$103.18$731.98$157.4927.41%$3.002.91%2.28%$21.28
(CHD)Church & Dwight Co. Inc.8$61.16$489.288.0756$60.05$484.94($4.34)-0.89%$1.121.87%1.51%$9.04
(CLX)The Clorox Company7$76.38$534.667.1665$81.72$585.65$50.999.54%$2.843.48%1.83%$20.35
((CMI))Cummins Inc.4$118.49$473.964.037$132.87$536.40$62.4413.17%$2.501.88%1.67%$10.09
(COH)Coach, Inc.10$50.45$504.5010.1219$54.53$551.95$47.459.40%$1.352.48%1.72%$13.66
(CVX)Chevron Corporation4$122.59$490.364.0654$121.50$493.95$3.590.73%$4.003.29%1.54%$16.26
((DE))Deere & Company12$88.39$1,060.6812.0716$81.39$982.51($78.17)-7.37%$2.042.51%3.07%$24.63
(DLR)Digital Realty Trust Inc.13$66.32$862.1613.3622$53.10$709.53($152.63)-17.70%$3.125.88%2.21%$41.69
(DPS)Dr. Pepper Snapple Group, Inc.10$47.20$472.0010.1695$44.82$455.80($16.20)-3.43%$1.523.39%1.42%$15.46
(DRI)Darden Restaurants, Inc.11$46.21$508.3111.2293$46.29$519.80$11.492.26%$2.204.75%1.62%$24.70
(EOG)EOG Resources, Inc.4$133.19$532.764.0113$169.28$679.03$146.2727.46%$0.750.44%2.12%$3.01
(FLO)Flowers Foods, Inc.20$25.30$506.0030.4206$21.44$652.22$146.2228.90%$0.452.10%2.04%$13.69
(GCI)Gannett Co., Inc.26$19.24$500.2426.6533$26.79$714.04$213.8042.74%$0.802.99%2.23%$21.32
(GIS)General Mills, Inc.10$49.80$498.0010.1388$47.92$485.85($12.15)-2.44%$1.523.17%1.52%$15.41
(GPC)Genuine Parts Company7$72.18$505.267.142$80.89$577.72$72.4614.34%$2.152.66%1.80%$15.36
((IBM))International Business Machines3$198.88$596.643$185.18$555.54($41.10)-6.89%$3.802.05%1.73%$11.40
((LMT))Lockheed Martin Corporation6$89.49$536.946.1918$127.55$789.76$252.8247.09%$5.324.17%2.47%$32.94
(LO)Lorillard, Inc.13$40.14$521.8213.3297$44.78$596.90$75.0814.39%$2.204.91%1.86%$29.33
(MAT)Mattel, Inc.12$41.60$499.2012.3041$41.88$515.30$16.103.22%$1.443.44%1.61%$17.72
((MCD))McDonald's Corp.5$95.87$479.355.1176$96.21$492.36$13.012.71%$3.243.37%1.54%$16.58
(MDP)Meredith Corporation14$36.87$516.1814.2577$47.62$678.95$162.7731.53%$1.633.42%2.12%$23.24
(MDU)MDU Resources Group Inc.20$24.65$493.0020.3944$27.97$570.43$77.4315.71%$0.692.47%1.78%$14.07
(MMM)3M Company5$106.94$534.705.056$119.41$603.74$69.0412.91%$2.542.13%1.88%$12.84
((MSFT))Microsoft Corporation17$28.87$490.7917.2341$33.28$573.55$82.7616.86%$1.123.37%1.79%$19.30
((NSC))Norfolk Southern Corp.7$77.13$539.917.0932$77.35$548.66$8.751.62%$2.082.69%1.71%$14.75
(O)Realty Income Corp.12$45.55$546.6012.1573$39.75$483.25($63.35)-11.59%$2.185.48%1.51%$26.50
((OHI))Omega Healthcare Investors Inc.20$33.50$670.0020.3266$29.87$607.16($62.84)-9.38%$1.886.29%1.90%$38.21
(OXY)Occidental Petroleum Corporation6$87.99$527.946.0899$93.54$569.65$41.717.90%$2.562.74%1.78%$15.59
((PII))Polaris Industries, Inc.6$85.64$513.846.0752$129.18$784.79$270.9552.73%$1.681.30%2.45%$10.21
((PM))Philip Morris International, Inc.14$87.72$1,228.0814$86.59$1,212.26($15.82)-1.29%$3.764.34%3.78%$52.64
(PSX)Phillips 668$66.97$535.768.0812$57.82$467.25($68.51)-12.79%$1.562.70%1.46%$12.61
(QCOM)Qualcomm Incorporated8$67.22$537.768.117$67.32$546.44$8.681.61%$1.402.08%1.71%$11.36
(QCOR)Questcor Pharmaceuticals, Inc.16$32.26$516.1616.1879$58.00$938.90$422.7481.90%$1.202.07%2.93%$19.43
((RGR))Sturm, Ruger & Co. Inc.16$45.56$728.9616.7271$62.63$1,047.62$318.6643.71%$2.604.15%3.27%$43.49
(ROST)Ross Stores Inc.8$60.77$486.168.0393$72.80$585.26$99.1020.38%$0.680.93%1.83%$5.47
(SBUX)Starbucks Corporation9$57.64$518.769.0559$76.97$697.03$178.2734.37%$0.841.09%2.18%$7.61
(TGT)Target Corp.8$64.12$512.968.0947$63.98$517.90$4.940.96%$1.722.69%1.62%$13.92
((THO))Thor Industries Inc.14$38.79$543.0614.1234$58.04$819.72$276.6650.95%$0.921.59%2.56%$12.99
((UNP))Union Pacific Corporation4$142.04$568.164.0381$155.34$627.28$59.1210.41%$3.162.03%1.96%$12.76
(VVC)Vectren Corporation15$33.44$501.6015.3242$33.35$511.06$9.461.89%$1.424.26%1.60%$21.76
((WAG))Walgreen Co.11$44.91$494.0111.1268$53.80$598.62$104.6121.18%$1.262.34%1.87%$14.02
((WEC))Wisconsin Energy Corp.15$41.83$627.4515$40.38$605.70($21.75)-3.47%$1.533.79%1.89%$22.95
(WFC)Wells Fargo & Company18$35.50$639.0018.392$41.32$759.96$120.9618.93%$1.202.90%2.37%$22.07
(WMT)Wal-Mart Stores Inc.7$73.73$516.117.0886$73.96$524.27$8.161.58%$1.882.54%1.64%$13.33
(WSO)Watsco Inc.6$78.49$470.946.0532$94.27$570.64$99.7021.17%$1.601.70%1.78%$9.69
(WYNN)Wynn Resorts Ltd.5$116.99$584.955.072$158.01$801.43$216.4837.01%$4.002.53%2.50%$20.29
Totals: $28,448.83 $32,038.35$3,589.5212.62% 2.88%100%$923.80

Some big winners [QCOR, PII, THO, LMT] have done much of the heavy lifting for the portfolio while the REITs [DLR, O, OHI] have lagged the market because of the fear caused by rising interest rates.

Overall I'm quite happy with how the portfolio has performed during a choppy market as it outperformed the DJIA, which saw roughly a 1% increase from 14,911.60 to 15,072.58 during the period.

Portfolio Income

While capital gains are nice, income is the name of the game in the long run with the dividend growth investing strategy. The trading around of positions while I tweak the portfolio cut down the dividends slightly but the portfolio still produced more income ($214.34 vs. $198.54) quarter over quarter.

AAPL $6.10 $6.14
ABC $2.10 $2.11
AFL $3.50 $3.52
BAX $3.43
CBRL $3.50 $5.28
CHD $2.24 $2.25
CLX $4.52 $5.05
CMI $2.00 $2.51
COH $3.38 $3.40
CVX $4.00 $4.03
DE $3.06 $3.08
DLR $10.14 $10.27
DPS $3.80
DRI $5.50 $6.11
EOG $0.75 $0.75
FLO $3.39 $3.40
GCI$5.20 $5.25
GIS $3.30 $3.82
GPC$3.76 $3.79
LMT$6.90 $6.98 $7.06
LO $7.15 $7.24
MAT $4.36 $4.39
MCD $3.88 $3.91
MDP $5.71 $5.76
MDU$3.45 $3.47
MMM $3.18 $3.19
MSFT $3.91 $3.94
NSC $3.50 $3.66
O $2.18$2.19$2.20
OHI $9.40
OXY$3.84 $3.87
PII $2.53 $2.54
PSX $2.50 $2.51
QCOM $2.81 $2.83
QCOR $4.00 $4.03
RGR $8.02 $10.74
ROST $1.36 $1.36
SBUX $1.89 $1.90
TGT $2.88 $3.46
THO$2.52 $2.53
UNP $2.76
VVC $5.33 $5.38
WAG $3.03 $3.48
WFC $5.44 $5.48
WMT $3.29 $3.31
WSO $1.50 $1.51
WYNN $5.00 $5.04
EXP $1.20
INTC $5.40
LEG$4.64 $4.68
LNCO $11.09 $7.39
SCCO $3.50 $2.11

I'm looking forward to seeing the dividend income really take off in the fourth quarter as the recently announced dividend increases take hold and I'm hopefully near the end of tweaking my holdings as I get comfortable with the positions. The quarter is off to a great start already as Watsco (60%), Phillips 66 (26%), Thor Industries (28%) and Questcor (20%) have all announced large increases to dividends.


I'm hoping this update is of interest to those out there in a similar situation to myself. I've gone from a haphazard collection of mutual funds and speculative stocks to what I hope is a diversified portfolio of solid dividend growth companies. I like the mix of higher yielding REITs, slow and steady blue chips and faster growth low yielders that I hope can grow into large capital gains along with the rising income.

Any thoughts or suggestions for me to consider as we head to the end the of the year?

Source: 401(k) Reconstructed - 2013 Third Quarter Review

Additional disclosure: The companies listed in the tables of this article are all held in my personal 401(k) account. I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.