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Long-term horizon, dividend growth investing
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Summary

  • My wife and I established a different kind of "number" for our retirement goal -- annual dividend income.
  • By concentrating on high-quality dividend growers, we have reached our first major milestone and should hit our next within 5 years.
  • Recent blue-chip additions PepsiCo, AT&T and Kraft strengthened our portfolio.
  • We are now bargain-hunting, using a shopping list that even includes more speculative names.

Reaching 69.44% of a milestone usually isn't cause for celebration. Thanks to Dividend Growth Investing, however, my wife and I happily exchanged high-fives and hugs for a mission semi-accomplished.

Roberta and I want our portfolio of individual companies to generate at least $36,000 in annual dividend income by the time she retires from her job as a pediatric nurse. That $3,000 per month will nicely complement the amount we expect to receive from Social Security and pensions - thereby allowing us great financial freedom when we're enjoying heli-skiing, big-wave surfing, motorcycle racing and various other tranquil hobbies pursued by your typical retiree.

Although we still have a ways to go to hit $36K, we practically guaranteed we'd get there on time when we reached the $25,000 mark last week. As I explained in Part 1 and Part 2 of this series, $25K in annual dividend income is a celebration-worthy milestone.

Even if we do not invest another penny of "new" money into our portfolio, our annual dividend income will reach $36,000 within five years. This assumes 5.5% dividend growth and 3% overall yield - numbers we are easily beating now and expect to trump for decades. It also assumes we reinvest all dividends, either back into the companies from which they come (as we do now) or into different companies (as we might do in the future).

Since generating inflation-beating returns is one of the main attractions of DGI, I'd be remiss if I didn't discuss that variable. Assuming 4% inflation (nearly double the current U.S. rate), we would get to $36K in today's dollars by 2023 - the year Roberta turns 62. (Because we do plan to keep maxing out our 401(k) plans and Roth IRAs for the next several years, we should hit our numbers well ahead of schedule.)

It's been about two years since I decided Dividend Growth Investing made sense. I can't predict whether any company's stock price will advance, decline or stay flat in the years ahead, but I can predict with reasonable confidence that the dividend streams of most companies we've bought will grow. Why? Because they have grown for decades despite recessions and wars and bad sitcoms and Chicago Cubs collapses.

At first, my DGI strategy was a tad haphazard, as I invested in too many second-stringers and not nearly enough stars. Last summer, however, I focused on building a high-quality portfolio of proven dividend growers, and I'm confident our future is more secure as a result.

Making Moves

Since Part 2 of this series was published two months ago, here are some of the moves we've made:

++ We initiated positions in PepsiCo (NYSE:PEP) and AT&T (NYSE:T), taking advantage of short-term negative reactions to what I thought were decent earnings reports for these Dividend Aristocrats. Pepsi has been growing dividends for 42 years and just announced an impressive 15% boost, bringing its yield over 3% for the first time in quite a while. AT&T's nearly 6% yield and three-decade history of raising distributions helped me overlook its utility-like slow growth.

++ We sold our stake in Kimberly-Clark (NYSE:KMB) and used the proceeds to open a position in Kraft Foods (NASDAQ:KRFT). While KMB has enjoyed a major run-up, KRFT's price had been lagging despite overall solid growth. I had wanted Kraft but we already were overweight in consumer staples, so selling Kimberly-Clark made sense from a portfolio-balance standpoint. That we bought KRFT when its dividend yield was 4% -- a full percent higher than KMB's -- was a nice bonus. Since then, KMB announced it was raising its dividend by only 3.7%; we want our non-utilities to have annual DGR of at least 5%, so that helped reinforce our decision.

++ We sold Vodafone (NASDAQ:VOD) for a nice profit and used the proceeds to buy Rogers Communications (NYSE:RCI), a 4.3% yielder that has fallen recently but is a stable part of a three-company Canadian telecom oligarchy. Vodafone had just completed its big deal with Verizon (NYSE:VZ) and I had too many question marks about its future.

++ We bought small stakes in each of Canada's "big five" banks: Toronto-Dominion (NYSE:TD), Bank of Montreal (NYSE:BMO), Bank of Nova Scotia (NYSE:BNS), Royal Bank of Canada (NYSE:RY) and Canadian Imperial Bank of Commerce (NYSE:CM). Together, the five make up one full satellite position in our portfolio. We had been underweight financials, and I have admired Canadian banks' record of safety, consistency and dividend growth.

++ We took advantage of the early-year market pullback to top off several companies we already owned, including Johnson & Johnson (NYSE:JNJ), Philip Morris (NYSE:PM), Altria (NYSE:MO), Omega Healthcare (NYSE:OHI), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Kinder Morgan Management (NYSE:KMR) and Kinder Morgan Inc. (NYSE:KMI).

++ We continued to put money into our Lockheed Martin (NYSE:LMT) direct reinvestment plan.

Good Deal Hunting

We are in the late stages of the accumulation phase and have far less investable cash available than we had a year ago. So where we once had been eagerly buying fairly valued companies, we now are exclusively shopping for bargains.

Our watch list is topped by two utilities, Avista (NYSE:AVA) and Xcel Energy (NYSE:XEL), but it's not a price-is-no-object situation. We're looking for Avista to pull back to the 4.5% yield point ($28.22) and Xcel to drop under $29/share. We prefer Avista because we already own Wisconsin Electric (NYSE:WEC), which is in Xcel's geographic region, but XEL is more likely to reach our buy zone.

We don't own much in the industrial sector and are looking at Textainer Group (NYSE:TGH), a beaten-down 5.2% yielder. We'll consider buying it within Roberta's 401(k) in a few weeks if it doesn't take off before the money is available. We're also watching 6% yielding deepwater driller Ensco (NYSE:ESV) and cigarette paper supplier Schweitzer Mauduit International (NYSE:SWM), a 3.2% yielder, for this or other accounts. All three companies were rated as significantly undervalued in a recent article by Seeking Alpha "value guru" Chuck Carnevale.

There are plenty of other high-quality companies I'd like to own but they simply are overvalued. Costco (NASDAQ:COST), NextEra Energy (NYSE:NEE) and Beckton Dickinson (NYSE:BDX) leap to mind.

Time To Have "Fun"?

Reaching our $25K number might have freed us to consider spending a little "fun money" on something less DGI-ish and more speculative.

I have been intrigued for quite some time by deepwater driller Seadrill (NYSE:SDRL) and business development corporation Prospect Capital (NASDAQ:PSEC). Along with the rest of its industry, Seadrill has been punished recently, but I think its long-range prospects are quite favorable. Prospect Capital, like most companies in its sector, has fallen since major indexes announced they would de-list BDCs. This seems more of a buying opportunity than a long-term detriment.

Each soon could reach an "Aw, what the heck?" buy zone. For SDRL, $34/share would boost yield to 11.5%. PSEC's yield would hit 12.5% if its price dips to $10.60.

Were we to buy either or both, we would break from our longstanding pattern of reinvesting dividends right back into all companies we own. We instead would use the income generated by SDRL and/or PSEC to purchase different stocks as we pursue our $36K number - and beyond.

Disclosure: I am long BMO, BNS, CM, COP, CVX, JNJ, KMI, KMR, KRFT, LMT, MCD, MO, OHI, PEP, PM, RCI, RY, T, TD, WEC. I could initiate positions in any of the following in the near future: AVA, ESV, PSEC, SDRL, SWM, TGH, XEL. 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.

Source: What's Your (Dividend Growth) Number?: Part 3