During the summer of 2012, when visiting my sister we had a discussion about investments and she asked me to look at the few mutual funds she held. I discovered they had been trailing the market on a consistent basis particularly when fees were factored in. In my opinion they didn't appear to be suitable holdings for someone in their 60's.
We talked for a while about dividend growth investing and how it was providing me with a reliable stream of monthly income solely from dividends and dividend growth. She asked if I would set up a portfolio of Dividend Growth stocks for her.
I set out to construct a portfolio of companies she would feel comfortable owning. Her portfolio was constructed from the lists of Dividend Champions, Challengers and Contenders (CCCs) maintained by Seeking Alpha Contributor David Fish and available here. Each stock selected has the distinction of not only maintaining its dividend during the bear market of 2008 but growing it each year, with most growing at a rate greater than inflation. Since the portfolio was under $140,000 when first purchased I also selected two ETFs to help provide diversity and add greater yield.
After finally transferring her funds into her IRA, initial purchases were made in December of last year. We selected stocks that were fairly or even undervalued. We selected stocks she new like her phone company, her drug store, her power company, one of her restaurant favorites, where she often stopped for coffee on the way to work and even the company that removed her garbage. Her positions are largely equal weight with the exception of Dynex Capital (DX) which is underweight.
The portfolio serves as a substitute for the 4% withdrawal of capital gain plus an additional withdrawal equal to inflation -- the rule so often recommended by advisers -- relying instead exclusively on income generated from stable dividends growing at a rate greater than inflation. We set two major goals for her dividend growth investments: increased annual income through dividend growth greater than inflation and capital preservation.
We set up her account so that income from dividends was automatically deposited the first of each month. She is pleased that the amount deposited will be increased by 10% the first of the year due to dividend growth. As of 10/31, her total return was just under that of the market at just under 24%.
Since my sister is in the distribution stage of her investments, capital returns do not directly affect the monthly income she receives from dividends. Capital gains do, however, help ensure holdings maintain their dividends and hopefully increase the growth of their dividends. Remember it is largely through dividend growth, not capital growth, that her monthly income increases. We like to think of the process as TDR - Total Dividend Return - yield plus dividend growth.
I am considering some changes and would appreciate your feedback. Walgreen's (WAG) appears to be highly overvalued. I am considering selling and re-investing in Target (TGT) which is fairly valued with higher yield. I'm also considering some profit taking with Johnson and Johnson (JNJ) and Intel (INTC). I am considering a new position in either Royal Dutch Shell (RDS.B) and/or Verizon (VZ) with the profits. Below are the current holdings making up the portfolio.
Procter & Gamble
National Retail Properties
Bank of Montreal
Johnson and Johnson
ALPS Alerian MLP ETF
Sector SPDR Utilities