•Total Dividend Return (TDR) can serve an important role in your investment decision making.
•This article serves to expand readers' understanding of Total Dividend Return.
•Provides a look at how I applied TDR to my and my wife's personal portfolios.
February marked my third anniversary as a Self Directed Investor. The past three years have been quite a learning experience, and I'm sure 2014 will prove no different.
Like most investors I have a primary measure with which to gauge my success. As a retired investor in the distribution phase, my primary measure of success is to achieve an overall gain in dividend income greater than inflation. 2013 saw an increase in my retirement income of over approximately 8%, more than twice that of inflation. My objective for 2014 remains to exceed that number.
My central focus for this year shifts from yield to Total Dividend Return (TDR). Many Dividend Growth Investors refer to TDR as the "chowder rule" in honor of chowder, a regular contributor here on Seeking Alpha. Under this rule, a stock yielding 4% along with a 5 year Dividend Growth Rate of 8% would produce a total dividend return of 12%. A stock yielding 3% would require higher dividend growth to produce a TDR of 12%. The rule is relaxed a bit for higher yielding/slower growing equities such as utilities, telecoms and mlps. With this group a total dividend return of 8% is sought. I have a business plan for my portfolio that helps guide my decision making with respect to the buying and selling of holdings. With my new emphasis on TDR, I have added the following condition to my plan, available here: If a current holding slips below its required TDR, it is placed on probation until its Total Dividend Return increases. While on probation, no additional shares of that holding are purchased.
I'm a Dividend Growth Investor and most of my holdings are invested in Dividend Champions, Contenders and Challengers (CCC). As of the end of January, there were 488 CCC listed stocks available here: Since my focus is on income, I pay the most attention to those CCC stocks that yield 2.75% or higher. Stocks yielding between 2.5% and 2.75% are within my range for future consideration.
There were 259 CCC stocks yielding 2.5% or better as of January 31st. For this group, the average 5 year projected earnings growth was 6.3%. The group enjoyed a 1 year Dividend Growth Rate (DGR) of 8.7% and a 5 year Dividend Growth Rate (DGR) of 8.5%. The average yield for the group was 3.85%.
The next step in my evaluation was to determine how many of these 259 stocks qualify under the TDR/chowder rule. While the group enjoyed a combined chowder score of 12.4, more than 100 of the total failed to individually qualify. By eliminating those, I discovered an increase in not only the combined chowder rule score, but all four of the additional metrics. The 157 stocks making the cut have a combined chowder rule score of 15.5. In addition, the average yield increases to 4.12%. The group has estimated 5 year earnings growth of 7.2. Its 1 year Dividend Growth Rate is 11.0 with 5 year DGR of 11.4.
Finally, I did a quick assessment of how my personal CCC holdings compared to this benchmark. If all my CCC holdings were purchased today at equal weight, they would collectively yield 4.57%. They have a combined chowder rule score of 17.7. Their estimated 5 year Earnings Growth is 6.4%. They have a 1 year DGR of 10.0% with a 5 year DGR of 9.9%. As you can see, I have chosen to give up the possibility of slightly higher dividend and earnings growth for more current income. You may have chosen differently.
These 157 stocks will represent my formal performance benchmark moving forward. I hope to outperform my benchmark in both dividend growth and capital gain. This time next year, we'll have the results. For those interested in learning more about TDR a/k/a the chowder rule, click here.
Those of you who have followed me for any time know my wife and I retired in the later part of 2008. At the time both us had 401(k)s invested exclusively in cash accounts paying around 3.5%. We elected to forgo early Social Security in large part to my part-time work as a training consultant. During 2009 and 2010, we withdrew 3.5% each year from the account for income. As the amount paid through the cash account continued to decline, it became clear we needed to get back into the market.
I have written in the past about the events that followed, starting here:
As we began in early 2011, my wife offered one important piece of advice: "Don't lose money!" We started with my 401-K and I agreed that I would consider an advisor if I lost money the first year. 2011 was a turbulent year. I lost quite a bit of sleep, but did end the year with an increase in capital of around 6% on top of 3.5% from dividends withdrawn for income. By the later part of 2012, she agreed to rollover her small 401(k) and we started to build her Dividend Growth portfolio. As they became available at fair value or better, she purchased some key Dividend Growth holdings that were missing from my portfolio, including: Johnson and Johnson (NYSE:JNJ); Clorox (NYSE:CLX) and General Mills (NYSE:GIS). These three great stocks were overvalued when I was assembling my portfolio. We also picked up small additional positions in many of the holdings within my portfolio that presented the best value.
I'm happy to report she had a great first year with a total return of over 29%. She did very well with positions in Walgreen (WAG) and Bristol-Myers Squibb (NYSE:BMY), both of which we sold when they became overvalued. She is pleased with her first year results and has now officially joined the ranks of retirees favoring Dividend Growth investing for their distribution phase portfolios.
The following are the holdings in my wife's portfolio along with their current yield. The first 10 are stocks we are more inclined to add to during pullbacks and earnings misses. These stocks are more likely to reach positions equal to 2% of the total portfolio. The remaining stocks represent holdings that are not current members of the Dividend Champions, Contenders or Challengers, or those that possess yields in excess of 8%. Position size for these, particularly the higher yielders, shall not to exceed 1.5% of the portfolio. Each was purchased at fair value or better between 2012 and today. All may not currently represent fair value in today's market.
Collectively, the Wells Family Portfolios now contain a total of 66 holdings.
Next time out, I'll review recent changes in my portfolio and present our collective 2014 portfolio. As always, I appreciate your comments and reactions to my investment process.
Johnson and Johnson
Kinder Morgan MGT
Disclosure: I am long CLX, GIS, JNJ, SJR, TGT, LNT, BPL, TGH, GSK, GEL, INTC, ABBV, KMI, BBEP, PSEC, TCRD. 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.