A Dividend Growth Portfolio Off The Beaten Path: Q1 2014

|
 |  Includes: CHEOY, CMI, COH, DE, DLR, INTC, O, OHI, RBA, TEVA, VOD
by: FinancialStorm

I first wrote about the dividend growth portfolio that I am constructing in this Seeking Alpha article, penned in May of 2013. With 2014 off to an interesting start, I figured it was time to provide an update. First, here is an overview of the portfolio as it stands at the close of market on February 3, 2014:

Ticker Date of First Investment Percentage of Portfolio Gain/Loss since Purchase Current Dividend Yield % Dividend Growth 5 Year
(NYSE:AFL) 8/9/2012 5.09% 16.23% 2.44% 10.87
(NYSE:BNS) 8/7/2012 2.84% 1.42% 4.55% 4.44
(OTCPK:CHEOY) 6/3/2013 1.34% -6.29% 5.25% --
(NYSE:CMI) 7/10/2013 1.88% 7.41% 2.02% 33.16
(NYSE:COH) 1/10/2014 2.65% -17.33% 2.9% --
(NYSE:DE) 12/20/2013 4.01% -6.07% 2.41% 13.43
(NYSE:DLR) 5/20/2013 4.82% -8.34% 6.23% 20.1
(NYSE:EMR) 7/19/2012 7.33% 31.11% 2.68% 6.45
(NASDAQ:INTC) 8/23/2012 2.58% 3.11% 3.76% 14.09
(NASDAQ:LLTC) 7/24/2012 5.2% 39.05% 2.48% 5.51
(NASDAQ:MAT) 2/14/2013 3.03% -6.91% 4.22% 10.58
(NASDAQ:MBVT) 1/11/2013 0.84% 7.02% 3.72% 0
(NYSE:MDT) 7/27/2012 2.68% 43.01% 2.05% 15.77
(NASDAQ:MSFT) 1/24/2014 3.3% -0.9% 3.07% 15.66
(NYSE:NEE) 2/20/2013 2.03% 23.95% 2.89% 7.91
(NASDAQ:NKSH) 12/19/2012 0.95% 17.74% 3.23% 7.68
(NYSE:NSC) 9/24/2012 7.68% 38.76% 2.41% 15.11
(NYSE:NVS) 8/20/2012 6.96% 27.37% 3.43% 10.47
(NYSE:O) 6/6/2013 5.43% -0.26% 5.5% 2.51
(NYSE:OHI) 7/5/2013 1.68% 2.39% 6.26% 9.37
(NYSE:PG) 7/9/2012 6.85% 22.22% 3.18% 9.55
(NYSE:RBA) 10/17/2013 1.93% 18.71% 2.33% 9.39
(NASDAQ:TEVA) 1/10/2014 3.36% 5.11% 2.96% 19.72
(NASDAQ:VOD) 10/3/2012 4.85% 28.61% 4.07% 6.68
(WAG) 7/16/2012 9.12% 63.17% 2.27% 23.46
(NYSE:WEC) 8/5/2013 1.57% -3.93% 3.7% 19.41
Portfolio 16.37% 3.28% 12.38
Click to enlarge

The percent Dividend Growth 5 Year is taken from Morningstar's portfolio tracker. Current yield is taken from my spreadsheet that I use to track the holdings and is generally based on data from Morningstar unless I have reason to believe Morningstar is inaccurate or missing data.

Below is the overview of portfolio allocations by sector:

Overview comments

In many ways, the past 6 months have been frustrating as I searched to find attractive businesses at valuations that I am comfortable with. That said, I was able to add a number of names to the portfolio, thus diversifying the income stream.

The portfolio has generated 89 dividend payments since inception.

At present, all dividends are reinvested in the stock that paid them with the exception of Intel (discussed below) and Cochlear (since my brokerage doesn't seem to automatically do the reinvestment and it's not worth paying a brokerage fee to do it manually).

REIT Additions

As I suggested in my previous article, I was interested in establishing some positions in REITs. Last year saw some price declines in the sector, so I spent a reasonable amount of time looking there for positions. This led me to three additions to the portfolio: Realty Income, Digital Realty Trust and Omega Healthcare Investors Inc. Over time, I may seek to diversify into additional names but I'm hesitant to increase the total portfolio's allocation to REITs at the present time.

Other Additions

I've also added three names that deal in heavy equipment: Ritchie Bros. Auctioneers, which I wrote about on SeekingAlpha here, Deere & Company, and Cummins Inc . My hope is that RBA will be a bit of a smoother ride than a name like Caterpillar (NYSE:CAT) while gaining exposure to some of the same macro forces. I expect DE to be quite cyclic and am prepared for volatility. With CMI, I have long-term optimism surrounding its engine business, and particularly the natural gas engine business.

In addition, I added shares of Coach as the company has strong free cash flow generation and the shares looked cheap. I had poor timing on this purchase and might learn a lesson about investing in fashion when my personal idea of fashion is "plaid."

Finally, I opened a position in TEVA. I see this position as a complement to Novartis' generic drug division.

Vodafone Group Plc

Investors in Vodafone know that there was a large deal announced last year for Verizon (NYSE:VZ) to acquire Vodafone's 45% stake in Verizon Wireless. From what I understand, Vodafone shareholders will receive a large one-time distribution of cash as well as a distribution of Verizon stock as part of the transaction. For the time being, I have decided that I will hold my VOD shares, take the distribution in cash for investment elsewhere, and hold any VZ shares that I receive. I will reevaluate both VOD and the prospective VZ position after the dust has settled a bit.

Position Trimmed

I consider myself to be a bit of an "asset hoarder" and I'm reluctant to sell. However, I have trimmed the holding in INTC by just over 50%. When I purchased INTC, I was aware of the board's past dividend history (namely that it had gone more than 4 quarters before a raise in recent memory and that it had given a token 1 penny raise at one point), so I wasn't too surprised that the dividend remained frozen. I still maintain a long-term bullish view on the company's prospects, which is why I maintained a reduced position size, but I feel that the risk profile has increased. This is also the only position in which I do not reinvest dividends at the moment.

Upon the sale of part of my Intel stake, I initiated a position in Microsoft (MSFT) with the funds freed up.

Watch List

We still have capital to allocate (although less than the last time I wrote), and I am currently looking into several possibilities. The two that seem the most likely are Baxter International Inc (NYSE:BAX) and Aqua America (NYSE:WTR). I like Aqua America's business but I'm hesitating for valuation reasons right now.

Return

According to Morningstar, from a total return perspective, this portfolio beats the S&P 500's Total Return by 112 basis points on an annualized basis since inception. Regardless, the goal of this portfolio is to build a durable and growing income stream, and I believe it is accomplishing that mission at present.

Disclosure: I am long AFL, BNS, CHEOY, CMI, COH, DE, DLR, EMR, INTC, LLTC, MAT, MBVT, MDT, MSFT, NEE, NKSH, NSC, NVS, O, OHI, PG, RBA, TEVA, VOD, WAG, WEC. 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 may initiate a long position in BAX and/or WTR in the near future.