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Dividend growth investing, long-term horizon, value, growth
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Another quarter has passed and I am now a year into my transformation into a dividend growth investor. Looking back over the past year it's pretty amazing seeing the progress that has been made in my investing strategy. I've transitioned from being an aimless accumulator of speculative stocks to a more focused and methodical investor looking to create long-term partnerships with companies that reward me with increasing amounts of cash dividends.

I feel blessed to have found the dividend growth community here on Seeking Alpha. There are so many great authors and individual investors who are willing to share their stories and methodologies. So my hats off to Chowder, Mike Nadel, PTI, Tim McAleenan, Eddie Herring, Chuck Carnevale, David Crosetti, Bob Wells, David Fish, David Van Knapp and many more for helping to shape my views on DGI.

Portfolio Performance

2013 was an amazing run for the stock market as the major indices saw greater than a 25% return for the year. This is pretty remarkable considering all of the "noise" that was occurring around the world. Investors were worried as the U.S. approached the fiscal cliff, feared Fed tapering, the Affordable Care Act, government sequester, Syrian civil war and the list goes on. Through it all, the market continued to slowly climb the wall of worry on its relentless ascent to new highs. Although we are off to a slow start thus far in 2014, I expect the market to continue the trend going forward.

While beating the indices isn't one of my major goals with my portfolio, I was able to take advantage of the rising markets and produce some solid returns over the course of the year. The portfolio began 2013 valued at $25,007 and by the end of the year it has grown to $35,800 for a gain of $10,793 or 43%. This includes new deposits of about $3,633 so backing those out the portfolio returned $7,160 or nearly 29%. I am ecstatic with those results, especially considering that all of the transaction costs for rebuilding the portfolio are included in the returns. With selling off all but one of my original securities held in the portfolio, Sturm Ruger being the only holdover, and trading a few other positions throughout the course of the year as I continued to refine the portfolio, I ended up making 93 trades during the year. At $8.95 per transaction, this resulted in $832 of fees throughout the course of the year. Looking ahead, these transactions costs will decrease significantly as I don't expect nearly as much turnover in the portfolio.

Dividend Income Performance

As one would guess, the point of emphasis in a dividend growth portfolio is the rising income produced by the equities held. Through an assortment of mutual funds and common stocks the portfolio produced about $485 of income in 2012. The account was rebuilt during the first quarter of 2013 to a diversified portfolio of 50 equities and those assets produced $738 of income during the year, for an increase of 52%. Based on current payout rates for the stocks held, the portfolio is projected to pass the $1000 mark in 2014.

My goal for the portfolio is to reach $1200 in dividends for 2014, which would be an average of $100 per month. This will be a difficult goal to reach as it is 20% higher than the current portfolio yield, but between new investments and increased payouts by existing equities it gives me something to shoot for.

Here is a spreadsheet I use to track dividends as they are paid in the portfolio. It is a great way to see progress as it is made. As you can see, I set a monthly record with $117.84 paid in December. Keep in mind that I finished the initial construction of the portfolio at the end of March, so the dividends paid in the first quarter were much lower than in the quarters that followed.

SYMBOLJFMAMJJASOND
2013
AAPL $6.10 $6.14 $6.18
ABC $2.10 $2.11 $2.37
AFL $3.50 $3.52 $3.75
BAX $3.43 $3.45
CBRL $3.50 $5.28 $5.32
CHD $2.24 $2.25 $2.26
CLX $4.48 $4.52 $5.05 $5.09
CMI $2.00 $2.51 $2.52
COH $3.38 $3.40
CVX $4.00 $4.03 $4.07
DE $3.06 $3.08 $6.16
DLR $10.14 $10.27
DPS $3.80 $3.83
DRI $5.50 $6.11 $6.18
EOG $0.75 $0.75 $0.75
FLO $3.20 $3.39 $3.40 $3.42
GCI $5.20 $5.25 $5.29
GIS $3.30 $3.82 $3.85
GPC $3.76 $3.79 $3.81
IBM $2.85
LMT $6.90 $6.98 $7.06 $8.24
LO $7.15 $7.24 $7.33
MAT $4.32 $4.36 $4.39 $4.43
MCD $3.85 $3.88 $3.91 $4.15
MDP $5.71 $5.76 $5.81
MDU $3.45 $3.47 $3.50
MSFT $3.91 $3.94 $4.83
NSC $3.50 $3.66 $3.69
O $2.18$2.19$2.20$2.21$2.22$2.23
OHI $9.40 $9.76
OXY $3.84 $3.87 $3.90
PII $2.52 $2.53 $2.54 $2.55
PM $13.16
POT
PSX $2.50 $2.51 $3.15
QCOM $2.00 $2.81 $2.83 $2.84
QCOR $4.00 $4.03 $4.86
RGR $6.56 $8.02 $10.74 $9.70
ROST $1.36 $1.36 $1.37
SBUX $1.89 $1.90 $2.35
TAL $7.00
TGT $2.88 $3.46 $3.48
THO $2.52 $2.53 $3.25$14.18
UNP $2.76 $3.17
WAG $3.03 $3.48 $3.50
WEC $5.74
WFC $4.50 $5.44 $5.48 $5.52
WMT $3.29 $3.31
WSO$1.50 $1.50 $1.51 $2.42
WYNN $5.00 $5.04 $5.07$15.22
EXP $1.20
INTC $5.40
LEG $4.64 $4.68
LNCO $10.65 $11.09 $7.39
MMM $3.18 $3.19
RAVN $2.16
SCCO $7.75 $3.50 $2.11
VVC $5.33 $5.38 $5.52
CWGIX $19.76
$1.50$22.88$53.61$25.57$62.93$100.61$52.82$60.86$103.19$53.60$76.06$117.84
Total:$731.47

Announced Dividend Increases in Q4

The fourth quarter showed another flurry of dividend announcements as 11 companies announced increased payouts. Watsco, Inc. led the charge with an impressive 60% boost to the dividend.

These announced increases average out to 21.1%, which is a new quarterly record for the portfolio, ahead of Q3's announced 16% and Q2's 18.4%. In addition to these announced increases, Thor Industries and Wynn Resorts also paid special dividends of $1 and $3 per share during the quarter.

Portfolio Transactions

During the fourth quarter I added to one of my positions and sold out of two positions to swap in new stocks for the portfolio. These trades were made on November 15.

For my scheduled purchase I used accumulated cash in the account to purchase 12 shares of Digital Realty Trust (DLR) at $47.75 per share. Digital Realty had seen a roughly 30% pullback from its 52-week high and was yielding 6.5%. The stock retreated along with many REITs on fears of increasing interest rates as well as concerns of slowing growth for the company. Personally, I think both of the risks are being overblown and while I do see somewhat slower growth than in the past for Digital Realty, I am reasonably confident that it can maintain at least a 5% growth rate over the coming years. Combining the 6.5% initial yield with a modest growth rate will allow me to grow my income from the stock at greater than a 10% rate going forward as I reinvest dividends.

The two trades I made in the portfolio was to sell out of my positions in Vectren Corp. (VVC) and 3M Company (MMM) to purchase Potash Corp. (POT) and TAL International (TAL).

  • Sold 5.056 shares of MMM at $129.40 per share.
  • Sold 15.3242 shares of VVC at $34.75 per share.
  • Bought 18 shares of POT at $32.40 per share.
  • Bought 10 shares of TAL at $52.90 per share.

My rationale behind these moves was to swap out of two companies that had been more slowly growing dividends into two companies with higher growth rates.

Potash Corp. is a value and yield play as the company is trading well off of 52-week highs after potash prices dropped following the collapse of a cartel in Russia. The stock yields 4.2% and has grown the dividend significantly in the last few years.

TAL International is a company specializing in shipping container leasing. It has grown at an impressive 22% annually since 2005 and has a current yield of around 6%.

Vectren announced another weak increase to the dividend, which has been a recurring theme in recent years. The small increase on top of a relatively high P/E ratio led me to believe there were better options for my investment. I am a proponent of the Chowder Rule, and with a yield of around 4% coupled with 1-2% annual increases in the dividend, Vectren was not meeting the minimum 8% threshold for utilities.

3M is a stock that I like and still believe in for the long term, but it too had been growing dividends at 8% or less over the last 5 years and had a yield of under 2%. This gives a Chowder # of around 10%, which is lower than I prefer. Looking at F.A.S.T. Graphs, the stock also is trading at a rich valuation compared to historical norms as its P/E of 20.3 is well above the normal ratio of 16.6.

When I pulled the trigger to sell 3M, I never expected that just a month later, 3M would boost its dividend by 35% and announce another large stock buyback. I'll be honest, I had a strong case of seller's remorse when I saw the news, but the reasons I sold are still valid, as you can see in the F.A.S.T. Graph for the company above.

Time will tell whether I made the right move in selling 3M and Vectren. On one hand I upgrade my income by swapping out stocks yielding 2% and 4% for others yielding 5% and 6% while also gaining the potential for more significant capital gains. On the other hand, I've downgraded from two high quality dividend champions to two more cyclical companies, one a fertilizer producer and another a shipping container company. If we hit an economic downturn I could face larger losses as well.

Overall, I'm still comfortable with the trade and think it will pay off in the long run. 3M goes back on the watch list and I will look for a lower price to re-enter.

Portfolio Snapshot

Here are my updated holdings as of the end of the year and the returns seen so far on each purchase.

SymbolNameTotal SharesPriceMarket ValueInitial SharesInvested CapitalBasis Per ShareTOTAL RETURN% ReturnCURRENT YIELDPORTFOLIO WEIGHTINGESTIMATED ANNUAL INCOME
AAPLApple Inc.2.0378$561.02$1,143.252$926.51$463.26$216.7423.39%2.17%3.19%$24.86
ABCAmerisourceBergen Corporation10.1097$70.31$710.8110$515.95$51.60$194.8637.77%1.34%1.99%$9.50
AFLAFLAC Inc.10.1785$66.80$679.9210$504.55$50.46$175.3734.76%2.22%1.90%$15.06
BAXBaxter International Inc.7.1025$69.55$493.987$512.25$73.18-$18.27-3.57%2.82%1.38%$13.92
CBRLCracker Barrel Old Country Store, Inc.7.1406$110.07$785.977$574.48$82.07$211.4936.81%2.73%2.20%$21.42
CHDChurch & Dwight Co. Inc.8.1102$66.28$537.548$489.27$61.16$48.279.87%1.69%1.50%$9.08
CLXThe Clorox Company7.221$92.76$669.827$534.65$76.38$135.1725.28%3.06%1.87%$20.51
CMICummins Inc.4.056$140.97$571.774$473.95$118.49$97.8220.64%1.77%1.60%$10.14
COHCoach, Inc.10.1219$56.13$568.1410$504.45$50.45$63.6912.63%2.41%1.59%$13.66
CVXChevron Corporation4.0984$124.91$511.934$490.35$122.59$21.584.40%3.20%1.43%$16.39
DEDeere & Company12.1467$91.33$1,109.3612$1,060.70$88.39$48.664.59%2.23%3.10%$24.78
DLRDigital Realty Trust Inc.25.3622$49.12$1,245.7925$1,444.08$57.76-$198.29-13.73%6.35%3.48%$79.13
DPSDr Pepper Snapple Group, Inc.10.1695$48.72$495.4610$471.95$47.20$23.514.98%3.12%1.38%$15.46
DRIDarden Restaurants, Inc.11.3487$54.37$617.0311$508.35$46.21$108.6821.38%4.05%1.72%$24.97
EOGEOG Resources, Inc.4.0155$167.84$673.964$532.75$133.19$141.2126.51%0.45%1.88%$3.01
FLOFlowers Foods, Inc.30.5792$21.47$656.5420$505.95$25.30$150.5929.76%2.10%1.83%$13.76
GCIGannett Co., Inc.26.6533$29.58$788.4026$500.35$19.24$288.0557.57%2.70%2.20%$21.32
GISGeneral Mills, Inc.10.2147$49.91$509.8210$497.95$49.80$11.872.38%3.05%1.42%$15.53
GPCGenuine Parts Company7.142$83.19$594.147$505.25$72.18$88.8917.59%2.58%1.66%$15.36
IBMInternational Business Machines Corporation3$187.57$562.713$593.80$197.93-$31.09-5.24%2.03%1.57%$11.40
LMTLockheed Martin Corporation6.2481$148.66$928.846$536.95$89.49$391.8972.98%3.58%2.59%$33.24
LOLorillard, Inc.13.4736$50.68$682.8413$521.80$40.14$161.0430.86%4.34%1.91%$29.64
MATMattel, Inc.12.4014$47.58$590.0612$499.15$41.60$90.9118.21%3.03%1.65%$17.86
MCDMcDonald's Corp.5.1612$97.03$500.795$479.35$95.87$21.444.47%3.34%1.40%$16.72
MDPMeredith Corporation14.3748$51.80$744.6114$516.17$36.87$228.4444.26%3.15%2.08%$23.43
MDUMDU Resources Group Inc.20.3944$30.55$623.0520$492.95$24.65$130.1026.39%2.32%1.74%$14.48
MSFTMicrosoft Corporation17.365$37.41$649.6217$490.85$28.87$158.7832.35%2.99%1.81%$19.45
NSCNorfolk Southern Corp.7.1343$92.83$662.287$539.90$77.13$122.3822.67%2.24%1.85%$14.84
ORealty Income Corp.12.3235$37.33$460.0412$546.55$45.55-$86.51-15.83%5.84%1.29%$26.87
OHIOmega Healthcare Investors Inc.20.6331$29.80$614.8720$669.95$33.50-$55.08-8.22%6.44%1.72%$39.62
OXYOccidental Petroleum Corporation6.1303$95.10$582.996$527.95$87.99$55.0410.43%2.69%1.63%$15.69
PIIPolaris Industries, Inc.6.094$145.64$887.536$513.85$85.64$373.6872.72%1.15%2.48%$10.24
PMPhilip Morris International, Inc.14.1543$87.13$1,233.2614$1,228.10$87.72$5.160.42%4.32%3.44%$53.22
POTPotash Corp. of Saskatchewan, Inc.18$32.96$593.2818$592.15$32.90$1.130.19%4.25%1.66%$25.20
PSXPhillips 668.1255$77.13$626.728$535.75$66.97$90.9716.98%2.02%1.75%$12.68
QCOMQUALCOMM Incorporated8.156$74.25$605.588$537.75$67.22$67.8312.61%1.89%1.69%$11.42
QCORQuestcor Pharmaceuticals, Inc.16.2654$54.45$885.6516$516.15$32.26$369.5071.59%2.20%2.47%$19.52
RGRSturm, Ruger & Co. Inc.16.8536$73.09$1,231.8316$728.95$45.56$502.8868.99%3.17%3.44%$39.10
ROSTRoss Stores Inc.8.0393$74.93$602.388$486.15$60.77$116.2323.91%0.91%1.68%$5.47
SBUXStarbucks Corporation9.0848$78.39$712.169$518.80$57.64$193.3637.27%1.33%1.99%$9.45
TALTAL International Group, Inc.10.1249$57.35$580.6610$537.95$53.80$42.717.94%4.88%1.62%$28.35
TGTTarget Corp.8.1497$63.27$515.638$512.95$64.12$2.680.52%2.72%1.44%$14.02
THOThor Industries Inc.14.1787$55.23$783.0914$528.87$37.78$254.2248.07%1.67%2.19%$13.04
UNPUnion Pacific Corporation4.0381$168.00$678.404$568.15$142.04$110.2519.41%1.88%1.89%$12.76
WAGWalgreen Co.11.1882$57.44$642.6511$494.05$44.91$148.6030.08%2.19%1.80%$14.10
WECWisconsin Energy Corp.15.139$41.34$625.8515$627.39$41.83-$1.54-0.25%3.70%1.75%$23.16
WFCWells Fargo & Company18.5171$45.40$840.6818$638.95$35.50$201.7331.57%2.64%2.35%$22.22
WMTWal-Mart Stores Inc.7.0886$78.69$557.807$516.10$73.73$41.708.08%2.39%1.56%$13.33
WSOWatsco Inc.6.0785$96.06$583.906$470.95$78.49$112.9523.98%1.67%1.63%$9.73
WYNNWynn Resorts Ltd.5.1032$194.21$991.095$584.95$116.99$406.1469.43%2.57%2.77%$25.52
Cash$655.67
Totals: $35,800.16 $29,107.06 $6,037.4320.74%2.78%98.17%$993.61

As you can see there was a wide range of results in the portfolio. There were some really big winners with greater than 50% gains in Gannett, Lockheed Martin, Polaris, Questcor, Sturm Ruger and Wynn Resorts while I am sitting on greater than 10% paper losses in Realty Income, Digital Realty Trust and TAL International.

I think the results of my big winners is one of the benefits of holding so many positions. I've been criticized in the past for having 50 stocks in a relatively small account. However, if I had limited myself to only 10 or 20 positions it's likely that I would have been concentrated more heavily on the blue chip dividend champions and would have likely missed out on every one of the larger returns. So, while I originally went with 50 positions for diversification and safety there has been an ancillary benefit of allowing me to purchase some higher growth and value stocks that I may not have otherwise been able to find room for.

Potential Portfolio Moves for 2014

Gannett Co. has now moved into fair value and I am sitting on decent gains for the stock. The company has also maintained a $0.20 dividend payout for eight quarters now and without an increase soon I will likely move on.

Sturm Ruger is another stock where I am sitting on large capital gains and will be closely monitoring. While I do like the growth the company has shown, I also believe much of the run-up in gun sales has been due to fears of legislation. Now that those fears have subsided somewhat, I worry that the huge recent growth in the company may slow as well.

Some of the stocks I have been looking at as possible replacements include General Electric (GE), Coca-Cola (KO), International Paper (IP), Ford Motor Co. (F), Johnson & Johnson (JNJ) and Hewlett-Packard (HPQ). As often preached by Chuck Carnevale, it is a market of stocks not a stock market that we invest in. I agree with the statement and think there are still plenty of worthwhile opportunities available.

Closing

Again, I'd like to thank all of you for making this such a great community. I've learned so much from the different viewpoints and feel that the new approach with dividend growth has led me to great results in my investments. I hope you enjoy reading about my journey with the portfolio as much as I have enjoyed constructing it.

Here's to a successful 2014, may you all have more ups than downs this year in the market!

Source: 401(k) Reconstructed: 2013 Recap

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.