You will recall from Part One, I set out to construct a portfolio of companies for my sister she would feel comfortable owning. Her portfolio was constructed the end of last year 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.
We selected stocks that were fairly or even undervalued. We selected stocks she knew 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 were largely equal weight with the exception of Dynex Capital (DX) which was underweighted.
The portfolio produces current income and relies exclusively on income generated from stable dividends growing at a rate greater than inflation rather than through withdraw of capital. We set two major goals for her dividend growth investments: increased annual income through dividend growth greater than inflation and capital preservation. 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.
In Part One I suggested I was making changes in the portfolio before the end of the year. My goal being to increase current yield, maintain quality and reduce risk. The outpouring of great suggestions from the SA community was just amazing.
I stated I was considering selling and re-investing in Target (TGT) which is fairly valued with higher yield. Mr. Market provided that opportunity when TGT dropped over 4%. I picked up a position with even greater yield and a greater margin of safety. We trimmed her position in WAG for some of the necessary cash. We maintain her original position.
I have since sold the following:
Conoco Phillips - (COP)
Eli Lilly - (LLY)
Digital Realty - (DLR)
We swapped LLY for GlakoSmithKline (GSK) for the net result of an increase in current yield plus better dividend growth.
We traded DLR and plan to purchase Monmouth Realty (MNR) with the same yield and a clearly reduced short term risk to capital.
Between now and the end of the year we expect to rebalance the following:
Waste Management (WM)
Kimberly Clark (KMB)
Procter & Gamble (PG)
Johnson & Johnson (JNJ)
Below are the holdings expected to make up her portfolio by the first of the year.
Procter & Gamble
National Retail Properties
Bank of Montreal
Johnson and Johnson
Royal Dutch Shell
ALPS Alerian MLP ETF
Sector SPDR Utilities
Kinder Morgan Inc.
Now its your turn. As always I appreciate your comments and suggestions.