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Long only, long-term horizon, growth at reasonable price, dividend growth investing
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Summary

  • High market valuations provide limited opportunities for new investment for dividend investors.
  • Selective large cap dividend stocks such as KO, MCD and FAST still appear to offer reasonable return.
  • MCD's slower rate of revenue and dividend growth may give some pause for investors.

I have been following a dividend growth strategy for some time. The aim of the portfolio is to provide early retirement via dividend income. For 2014, I am targeting approximately $28k in dividend income. This update summarizes portfolio progress in Q1 2014.

Source of Funds

I am using selective reinvestment of my dividend income from 2013 as my primary source of funding for new investments, in addition to excess disposable income from savings. In 2013, my portfolio generated approximately $27k in dividends. Selective use of buying on margin helps make investments in advance of dividend income being available for investment.

Observations

The first quarter featured very little activity to the portfolio in terms of either new positions, increases to existing positions or disposals of existing positions. One of my aims in 2014 with my portfolio was to be far more disciplined in terms of new investments to the portfolio. My focus is to selectively add to existing positions that I already own, rather than diluting the quality of what I have with subpar investments in new companies with less robust business models. Given that I have a rather sizable concentration of mid and small capitalized dividend payers that are Australian holdings, my objective has been to strengthen the core of my portfolio with US dividend growth holdings with wide moats that have displayed increases in dividend growth over many years.

Fastenal

I initiated a new position in Fastenal (NASDAQ:FAST) earlier in the quarter. The company is engaged in the distribution of industrial fasteners, screws, bolts etc. throughout the US and has a strong competitive advantage in getting the right fastener in the hands of the customer in the quickest time. Distributing fasteners isn't a particularly glamorous business, however, it's a fairly profitable one. Fastenal has had a return on equity exceeding 20% for much of the last decade. $10,000 invested in Fastenal 10 years ago would have also returned close to $50,000 today.

I started a small position in Fastenal at around $45.00.

Coca-Cola

I was very tempted to add to my position in Coca-Cola (NYSE:KO). Coca-Cola is the embodiment of dividend longevity, with dividend increases for a continuous period of more than 50 years.

It appears that there are market concerns with declining soda sales in the US market, and the effect that this may have on Coca-Cola's long-term earnings. Given Coca-Cola has a majority of sales outside the US and is actively growing revenue outside of carbonated beverages, this isn't something that concerns me greatly.

Coca-Cola had a recent dividend increase of close to 9%. Clearly management believes that Coca-Cola still has a solid sustainable future ahead of it. If the company can maintain similar rates of dividend growth going forward, I believe it should be on track to return low double-digit total returns well into the future.

Given I accumulated Coca-Cola at similar price levels toward the end of 2013, I would be very interested in adding to my position on a broader pull back in the market, at which point I feel Coca-Cola would also retreat as well.

McDonald's

McDonald's (NYSE:MCD) is a company that I initiated a position in during 2013. I've previously held McDonald's, only to sell later and then subsequently regret the disposal and buy back into the company. Along with Coca-Cola, I view McDonald's as an ultimate bottom drawer stock, which I don't intend to sell again. McDonald's is also a poster child wide moat stock. It's hard to think of another business that has managed to almost double operating margins over a 10 year period and also maintain returns on equity of greater than 30%.

Investors who invested in McDonald's 10 years ago have had the opportunity to see their investment value increase 8x in value.

The rather sizeable yield on McDonald's of close to 3.3% makes it very interesting for me to consider further additions. However, what gives me a little bit of pause is the recent growth in income and dividends has been trending close to 5%. Still a fairly strong performance, but potentially putting McDonald's on track to being a dividend sloth, rather than a classic dividend growth company.

2014 Dividend Income received

During Q1 of 2014, I received $3,391 in dividends from my Australian portfolio and $919.73 from my US stocks, for a total of $4,311. I'm happy about the increased income from my US portfolio, which is now at an annual run rate of close to $4,000.

Future Outlook

I intend to selectively contribute additional capital toward high quality dividend paying stocks in 2014. Additionally, I've made the decision to make full contributions to my retirement accounts in 2014. I estimate that this will result in an incremental $500k over the life of the contribution horizon compared to investing that money in taxable accounts.

I'm particularly interested in increasing existing positions that I acquired partial stakes in during 2013. In particular, I want to increase my stake in McCormick & Co (NYSE:MKC) and Mead Johnson (NYSE:MJN), as well as consider other stock specific opportunities as they arise.

Stocks generally are pretty fully valued right now. I'm not actively looking to add any new positions unless there is stock specific weakness. In my view, some of the large cap classic dividend growth stocks such as Coca-Cola and McDonald's still show reasonable value.

Source: My Dividend Portfolio: Q1 2014