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Long-term horizon, dividend investing
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Remembering back to year-end 2012, the markets were confused with economic concerns regarding the turmoil in Washington. Congress came together on the 11th hour and passed a deal just before the start of 2013. Washington's uncertainty and the general market decline provided a great opportunity for a young investor to put some money on the table. And what a year 2013 turned out to be! The S&P 500 Index gained over 32%, while socializing with only 140 characters made investors money. Most importantly, I booked my first year of dividend growth investing.

I wish I could say that I started my DGI journey prior to 2013, knowing the market would go on a tear, but that would be a lie. That is the beauty of Dividend Growth Investing however; I am investing in businesses with predictable cash flows, reasonable PE multiples and a minimum 5 year dividend growth history. You see, dating back to late 2012, I had researched DGI for a number of months and after deciding the approach was in line with my horizons, placed a few orders for some well-known companies based on these simple criteria.

2013 Activity Review

Although my first article detailed my DGI Plan and portfolio as of August 2013, I want to take a step back and list each purchase and the one sale from the beginning of my journey through year-end 2013:

Purchases:

Month

Stocks Purchased

Dec-12

KO, JNJ, MCD

Jan-13

COP, CSX, WMT, WAG

Feb-13

-

Mar-13

AFL, KO, JNJ, MCD, WMT, WFC

Apr-13

AFL

May-13

COP, WMT

Jun-13

CVX, CSX

Jul-13

KO

Aug-13

KO, MCD

Sep-13

-

Oct-13

AFL, IBM, MCD, PG, O

Nov-13

O

Dec-13

-

Sale:

Month

Position Sold

Oct-13

PFRDX

As a younger investor (26) with many decades before retirement, accumulation is the focus of my strategy. Prior to October, T. Rowe Price Equity Income (MUTF:PRFDX) was the red-headed stepchild of my portfolio. Here is the stance on portfolio construction defined in my DGI business plan:

  1. Initial construction will allow for mutual funds/ETFs (based on current make-up of the portfolio) and stocks with an emphasis on converting the entire portfolio to individual stocks.

While I am not against mutual funds or ETFs for other young and old investors alike, I simply can't accept expense ratios reducing my overall return. This thinking is tailored toward my individual investment situation; annually revolving, non-commission trades provided by my broker. Today's expense ratio for PRFDX is 0.68%. Using the approximate $4,000 I held in PFRDX and 6% annual growth over 20 years, my ending value would be $11,197 (Fund Analyzer). However, total fees and expenses would have been $951, reducing my returns by nearly 8%. Multiply that starting $4,000 by 10 and we are talking over $9,500 in expenses! Of course investing solely in individuals stocks comes at a cost; just not one I should ever have to pay.

Adding a Few Positions

The capital from the PRFDX sale allowed me to reallocate capital into two companies with strong current dividend growth and appearances on the dividend contender list. IBM was beaten down in October with a near billion dollar revenue miss, although showing a beat on bottom line earnings of $0.03. This short-term miss provided a great entry point for what are hopefully years of "dating" this internationally diversified tech service provider. I was able to pick up ten shares near the $176 price point.

Additionally, Realty Income and REITs in general took a hit with the Fed's recent announcements on tapering. Realty's extensive property holdings and acquisition strategy, matched with management's maneuverability through the 2008-2009 recession, made for one of my most exciting purchases. This company has been on my watchlist for some time and I am thoroughly enjoying the monthly dividends. I made two purchases in October and November, with a current cost basis of just north of $39.

2013 Year-End Portfolio

Stocks

Symbol

Shares

Mkt Value

Weighting

5 Yr. DGR

Aflac

AFL

47.7

$3,088

9%

8.10%

Chevron

CVX

22.0

$2,667

7%

9.00%

Coca-Cola

KO

79.5

$3,124

9%

8.10%

ConocoPhillips

COP

44.7

$3,016

8%

13.30%

CSX Corp

CSX

117.1

$3,189

9%

18.10%

International Business Machines

IBM

10.1

$1,911

5%

14.30%

Johnson & Johnson

JNJ

18.5

$1,755

5%

7.60%

McDonald's

MCD

25.2

$3,389

10%

13.90%

Procter & Gamble

PG

20.1

$1,609

5%

8.80%

Realty Income

O

80.9

$3,109

9%

4.80%

Wal-Mart

WMT

41.9

$3,192

9%

14.20%

Walgreen

WAG

30.7

$1,818

5%

23.20%

Wells Fargo

WFC

35.8

$1,659

5%

-7.95%*

Total Stocks

$33,526

94%

Total Cash

$2,041

6%

Portfolio Totals

$35,567

100%

10.42%

*I will be posting a blog/article on my WFC holding

The market capitalization, economies of scale, and rich dividend policy of the companies in my portfolio help me to sleep well at night. Investing with any set strategy requires constant monitoring, tweaking, and goal realignment; but as Warren Buffett once stated, ( I would be) "perfectly happy with these companies if the stock market shut down for 10 years."

Looking at the overall portfolio totals, I want to touch upon my statement made earlier, "That is the beauty of Dividend Growth Investing however; I am investing in businesses with predictable cash flows, reasonable PE multiples and a minimum 5 year dividend growth history." As a Dividend Growth Investor, my main emphasis is on the growth of dividends. Whether 2014 Mr. Market extends another 30% or declines 45%, my cash flow is increasing.

My portfolio pumped out $633 in dividends through 2013, all reinvested. Using the hypothetical 45% market decline scenario and the figures above, the 2014 ending portfolio value would suddenly be $19,562. However, my cash flow would still have increased 10.42% to $699! Moreover, those dividends would reinvest at lower prices, thus purchasing more shares and ultimately more cash flow.

2014 Personal and Portfolio Outlook

Looking ahead to the next 10 months of 2014, I will have to slightly adjust my contribution and purchase strategy. My wife and I purchased a house nearly a month ago which included a number of large, one-time expenses. Luckily (although luck has nothing to do with it- just decide!), we live a frugal lifestyle and plan to have our IRAs fully contributed by July or August. Any unused contingencies set aside for housing expenses will be contributed immediately. I do want to stress that although our yearly IRA contributions may be delayed, my wife and I contribute the full matching 401k/403b amounts from our employers.

Through 2013, thirteen companies defined my portfolio. My DGI business plan allows for up to twenty positions, so there are still a few positions to fill. While I have a set list of companies in which I'd love to invest, I admittedly haven't been focused on building my portfolio the past few months. I continue to monitor my current positions but haven't done much research into adding positions. As this wonderful SA community grows, I would love to hear what DG stocks are currently on your watchlist!

Happy investing through 2014 and beyond!

Disclosure: I am long AFL, CVX, KO, COP, CSX, IBM, JNJ, MCD, PG, O, WMT, WAG, WFC. 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.