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Dividend growth investing, long-term horizon, value, growth
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Summary

  • My 401k's transition into Dividend Growth Investing has now reached its one-year anniversary.
  • While there have been several adjustments made to the portfolio during the year, the growth in income it produces has been on an upward trajectory.
  • In addition to increasing income, the portfolio has also had a sizable increase in capital gains.

The end of the first quarter now marks the first anniversary of my transition into dividend growth investing. Like many others on Seeking Alpha, I made a decision to transition from a focus on strictly capital gains to a focus on increasing dividend income from my investments.

While I still get the occasional urge to chase after the shiny objects (as you will see below), I believe I've built a well rounded DGI portfolio that provides the best of both worlds: capital gains and rising income.

Increasing Capital

When I created this portfolio at the beginning of 2013 and decided to share it on Seeking Alpha, I did so with the hope that I could continue to learn from feedback from the online community. I have been successful in that regard, as members have commented on holdings in the portfolio as well as the number of positions it contains.

Some of the initial comments were that I was spread too thin and holding too many different positions because, "There's no way you can follow that many companies!" Well, after one year of seeing the results of a diversified portfolio, I am thankful I decided on the 50 position limit. With that number of positions, I am able to spread out the risk by starting equal weight with 2% of my capital in each position. Also, in doing so I was able to purchase some more aggressive growth companies that I may not have been able to fit into a smaller number of positions.

Many of my best performers this year were companies that I would not consider core positions. I was able to garner total returns of greater than 40% in eleven holdings I currently own and two positions I sold: EOG Resources (48%), Lockheed Martin (92%), Lorillard (41%), MDU Resources (43%), Microsoft (46%), Polaris Industries (66%), Questcor Pharmaceuticals (106%), Thor Industries (64%), Walgreen Co. (50%), Wells Fargo (45%), Wynn Resorts (95%), Gannett (44%) and Sturm Ruger (71%). Of those thirteen big gainers, the only ones I would consider as "core" holdings are Microsoft, Walgreen Co. and Wells Fargo. Had I limited myself to a concentrated portfolio of only 10 positions, I likely would have missed out on some of my best performers, and subsequently lagged the market.

Another comment I received is that I should be buying stocks with higher initial yields, because it takes a decade or longer for a low yield, high dividend growth stock to provide more income than a high yield, low dividend growth stock would. This is certainly true when looking strictly at the income portion of the portfolio, and for investors at or nearing retirement, I agree that focusing on higher yielding stocks is an intelligent idea. However, as a 35 year old who is looking to build capital gains as well, I think some lower yielding, high growth stocks are certainly appropriate for my situation. Looking again at total returns, 5 of the stocks with my highest returns have been from stocks yielding under 2%.

Here is a list of the current 50 holdings in the portfolio, along with the performance to the end of the quarter.

SymbolNameInitial Purchase DateTotal SharesEnd Q1 PriceMarket ValueInitial SharesInvested CapitalInitial Basis Per ShareTOTAL RETURN% ReturnYIELD ON COSTPORTFOLIO WEIGHTINGESTIMATED ANNUAL INCOME
AAPLApple Inc.2/19/20132.0492$536.74$1,099.892$926.51$463.26$173.3818.71%2.63%2.95%$25.00
ABCAmerisourceBergen Corporation3/27/201310.1444$65.59$665.3710$515.95$51.60$149.4228.96%1.82%1.78%$9.54
AFLAFLAC Inc.2/19/201310.2366$63.04$645.3210$504.55$50.46$140.7727.90%2.92%1.73%$15.15
BAXBaxter International Inc.3/27/20137.1525$73.58$526.287$512.25$73.18$14.032.74%2.68%1.41%$14.02
CBRLCracker Barrel Old Country Store, Inc.3/28/20137.1964$97.24$699.787$574.48$82.07$125.3021.81%3.63%1.87%$21.59
CHDChurch & Dwight Co. Inc.2/21/20138.1465$69.07$562.688$489.27$61.16$73.4115.00%2.03%1.51%$10.10
CLXThe Clorox Company1/11/20137.2797$88.01$640.697$534.65$76.38$106.0419.83%3.70%1.72%$20.67
CMICummins Inc.3/19/20134.0735$148.99$606.914$473.95$118.49$132.9628.05%2.11%1.63%$10.18
COHCoach, Inc.3/19/201310.2519$49.66$509.1110$504.45$50.45$4.660.92%2.67%1.36%$13.84
CVXChevron Corporation3/27/20134.134$118.91$491.574$490.35$122.59$1.220.25%3.26%1.32%$16.54
DEDeere & Company3/19/201312.22$90.88$1,110.5512$1,060.70$88.39$49.854.70%2.31%2.97%$24.93
DLRDigital Realty Trust Inc.5/13/201326.1396$53.08$1,387.4925$1,444.08$57.76-$56.59-3.92%5.76%3.72%$86.78
DPSDr Pepper Snapple Group, Inc.3/27/201310.2505$54.46$558.2410$471.95$47.20$86.2918.28%3.48%1.50%$16.81
DRIDarden Restaurants, Inc.2/20/201311.4792$50.76$582.6811$508.35$46.21$74.3314.62%4.74%1.56%$25.25
EOGEOG Resources, Inc.2/19/20134.0201$196.17$788.624$532.75$133.19$255.8748.03%0.37%2.11%$2.01
FLOFlowers Foods, Inc.1/10/201330.7505$21.45$659.6020$505.95$25.30$153.6530.37%2.65%1.77%$13.84
GISGeneral Mills, Inc.3/27/201310.2969$51.82$533.5910$497.95$49.80$35.647.16%3.29%1.43%$16.89
GMEGameStop Corp3/13/201418.1553$41.10$746.1818$701.75$38.99$44.436.33%3.39%2.00%$23.96
IBMInternational Business Machines Corporation7/26/20136.0305$192.49$1,160.816$1,160.00$193.33$0.810.07%1.97%3.11%$22.92
KOThe Coca-Cola Company2/6/201320$38.66$773.2020$769.10$38.46$4.100.53%3.17%2.07%$24.40
LMTLockheed Martin Corporation2/22/20136.2993$163.24$1,028.306$536.95$89.49$491.3591.51%5.83%2.75%$33.51
LOLorillard, Inc.3/19/201313.6298$54.08$737.1013$521.80$40.14$215.3041.26%6.08%1.97%$33.53
MATMattel, Inc.2/19/201312.5264$40.11$502.4312$499.15$41.60$3.280.66%3.65%1.35%$19.04
MCDMcDonald's Corp.2/20/20135.2039$98.03$510.145$479.35$95.87$30.796.42%3.38%1.37%$16.86
MDPMeredith Corporation3/19/201314.5127$46.43$673.8214$516.17$36.87$157.6530.54%4.65%1.80%$25.11
MDUMDU Resources Group Inc.2/2/201320.5147$34.31$703.8620$492.95$24.65$210.9142.79%2.87%1.89%$14.57
MSFTMicrosoft Corporation3/27/201317.4931$40.99$717.0417$490.85$28.87$226.1946.08%3.85%1.92%$19.59
NSCNorfolk Southern Corp.3/19/20137.1751$97.17$697.207$539.90$77.13$157.3029.14%2.79%1.87%$15.50
NXPINXP Semiconductors N.V.2/10/201420$58.81$1,176.2020$1,053.95$52.70$122.2511.60%0.00%3.15%$0.00
ORealty Income Corp.6/4/201312.4883$40.86$510.2712$546.55$45.55-$36.28-6.64%4.83%1.37%$27.35
OHIOmega Healthcare Investors Inc.7/26/201336.958$33.52$1,238.8336$1,174.90$32.64$63.935.44%6.02%3.32%$72.44
OXYOccidental Petroleum Corporation2/19/20136.1733$95.29$588.256$527.95$87.99$60.3011.42%3.27%1.58%$17.78
PIIPolaris Industries, Inc.2/21/20136.1148$139.71$854.306$513.85$85.64$340.4566.25%2.23%2.29%$11.74
PMPhilip Morris International, Inc.7/10/201314.3154$81.87$1,172.0014$1,228.10$87.72-$56.10-4.57%4.29%3.14%$53.83
POTPotash Corp. of Saskatchewan, Inc.11/15/201318$36.22$651.9618$592.15$32.90$59.8110.10%4.30%1.75%$25.20
PSXPhillips 663/19/20138.1675$77.06$629.398$535.75$66.97$93.6417.48%2.33%1.69%$12.74
QCOMQUALCOMM Incorporated3/1/20138.1919$78.86$646.018$537.75$67.22$108.2620.13%2.50%1.73%$13.76
QCORQuestcor Pharmaceuticals, Inc.3/11/201316.3422$64.93$1,061.1016$516.15$32.26$544.95105.58%3.67%2.84%$19.61
ROSTRoss Stores Inc.3/6/20138.08$71.57$578.298$486.15$60.77$92.1418.95%1.31%1.55%$6.46
SBUXStarbucks Corporation3/27/20139.1174$73.38$669.039$518.80$57.64$150.2328.96%1.80%1.79%$9.48
TALTAL International Group, Inc.11/15/201310.2991$42.87$441.5210$537.95$53.80-$96.43-17.93%5.37%1.18%$29.66
TGTTarget Corp.2/20/20138.2067$60.51$496.598$512.95$64.12-$16.36-3.19%2.68%1.33%$14.12
THOThor Industries Inc.2/19/201314.2382$61.06$869.3814$528.87$37.78$340.5164.38%2.42%2.33%$13.10
UNPUnion Pacific Corporation3/27/20134.0571$187.66$761.364$568.15$142.04$193.2134.01%2.56%2.04%$14.77
WAGWalgreen Co.3/19/201311.2401$66.03$742.1811$494.05$44.91$248.1350.22%2.79%1.99%$14.16
WECWisconsin Energy Corp.10/8/201315.2727$46.55$710.9415$627.39$41.83$83.5613.32%3.73%1.90%$23.83
WFCWells Fargo & Company1/23/201318.6362$49.74$926.9618$638.95$35.50$288.0145.08%3.92%2.48%$26.09
WMTWal-Mart Stores Inc.3/19/20137.1308$76.43$545.017$516.10$73.73$28.915.60%2.60%1.46%$13.69
WSOWatsco Inc.1/10/20136.1043$99.91$609.886$470.95$78.49$138.9329.50%2.03%1.63%$9.77
WYNNWynn Resorts Ltd.2/21/20135.1295$222.15$1,139.525$584.95$116.99$554.5794.81%4.13%3.05%$25.65
Totals: $37,337.42 $30,968.46 $6,368.9620.57%3.38%100.00%$1,047.35


Increasing Dividends

As one would expect, the driving force behind a dividend growth portfolio is the increasing dividends, both from increasing payouts by the companies paying them and the compounding due to reinvestment of dividends in the account.

The first quarter of 2014 was a busy one in the way of announced dividend increases, as 20 holdings announced new payouts.

The average of the announced increases for this quarter was 10.4%, which was significantly lower than the 21.1% in Q4, 16% in Q3 and 18.4% in Q2 of 2013.

One reason for the lower average rate of increases is that Norfolk Southern, Omega Health, and Wisconsin Energy have all had multiple increases in the last year, so the announced raise is less than their actual annual increases. Wal-Mart also had a disappointing increase of just 2.1% on increased capital outlays for expansion and concerns for slowing earnings growth over the next year.

It's hard to complain too much about a 10% raise, however, as this number, when combined with reinvested dividends, will still provide for a doubling of income every 5 to 6 years.

Here are the total monthly and quarterly dividends paid in the portfolio over the course of the last twelve months.

(click to enlarge)

While there have been some fluctuations in the month to month totals, there has certainly been an upward trend over the last twelve months. While some of this is due to new capital being invested into the portfolio, the majority of the increases are due to actual growth in the payouts as listed in the announced increases above.

I announced in my 2013 recap article that my goal for 2014 is to collect $1200 in dividends, which averages out to $100 per month. Thus far, I am behind the pace needed to achieve my goal. However, between the announced increased payouts, additional capital being added, and continued reinvestment of dividends, I believe the goal is still achievable.

Portfolio Transactions

During the first quarter, I made three sales and five buys in the portfolio as I sold out of Gannett (NYSE:GCI), Sturm Ruger (NYSE:RGR), and Genuine Parts; started new positions in Coca-Cola, NXP Semiconductors (NASDAQ:NXPI) and GameStop Corp. (NYSE:GME); and added to my positions in International Business Machines (NYSE:IBM) and Omega Healthcare Investors.

2014 - Q1 Sales

2014 - Q1 Buys

IBM was added to in January as the stock had dropped $10 from my initial purchase price made in July of 2013. I believe the long-term earnings for IBM will continue to grow and being able to buy additional shares at a discount looked appealing.

Gannet was purchased in January of 2013 based on valuation as mainly a capital gains play. The company was paying a 4.2% yield at the time, and appeared undervalued based on expected earnings. This sale locked in a better than 40% gain and allowed me to open a position in Coca-Cola, which offered a similar, yet growing, dividend. This worked out well as Coca-Cola announced an 8.9% increase to the dividend shortly thereafter, while Gannet continues to pay the same $0.80 annual rate.

Sturm Ruger was another trade that provided an opportunity to lock in gains, this time of around 70%. I was becoming concerned with a drop-off in gun sales at some of the larger retailers and felt that the fast growth that it had experienced was about to slow down.

Proceeds from Sturm Ruger were used to open a position in the only non-dividend paying company in the portfolio, NXP Semiconductors. I think NXP Semiconductors is a good opportunity to buy a fast-growing company at a reasonable valuation. The company trades at a forward P/E of under 12 and is expected to grow earnings at a 35% annual rate over the next 5 years. The company recently paid down a large amount of debt and announced a 25 million share buyback program worth about 10% of outstanding shares. Management has also hinted at the possibility of a future dividend payment, although the company is currently focusing on share repurchases to take advantage of the current apparent discount on shares compared to peers.

Omega Health was a purchase made to add shares to an existing position. The stock appeared undervalued based on FAST Graphs and with a yield of 6.3% at the time of purchase, coupled with a 5 year dividend growth rate of nearly 10%, seemed like a great point to add to my position.

The final pair trade I made was the sale of Genuine Parts and purchase of GameStop. Genuine Parts appears overvalued at its current price, and provides a yield of 2.7% with a 5 year dividend growth rate of just 7%. Meanwhile, GameStop trades at a P/E of around 13, has very low debt, has steadily increased the dividend to a current yield of 3.3% and in November announced a share buyback program worth about 10% of outstanding shares.

So far, these trades have worked out quite well as I am above water on all of the recent purchases.

On The Radar

With the market becoming a little more frothy with the recent pullback, I've begun looking at my positions to see if there are any that are significantly overvalued at current prices or if any have questionable finances or significant headwinds that could mean danger if there is a large downturn. Some stocks that currently fit these profiles are Cracker Barrel, Church & Dwight, and Darden Restaurants.

Cracker Barrel and Church Dwight both appear to be 10-15% overvalued compared to historical P/E ratios, while Darden has struggled recently to grow earnings and compete in the cut-throat dining market. With an S&P credit rating of just BBB- and a payout ratio approaching 90% of trailing earnings, I have little confidence that the company will be able to maintain the current payout over the long term.

I have been watching General Electric (NYSE:GE) for some time and with a yield of 3.4% and a P/E of around 16, the stock looks attractive. I am also watching Tupperware Brands (NYSE:TUP), Blackrock Inc. (NYSE:BLK), The Gap Inc. (NYSE:GPS), PetSmart Inc. (NASDAQ:PETM), and T. Rowe Price Group (NASDAQ:TROW) as potential replacements.

Closing

I hope this review of the workings of my portfolio can help others on their journey in dividend growth investing. I've learned so much from others who have shared their thoughts and ideas on Seeking Alpha and look forward to feedback from readers to see if I'm on the right track.

Thanks for reading and happy investing!

Source: 401(k) Reconstructed: Q1 2014 Review

Additional disclosure: The companies listed in the tables of this article are all held in my personal 401(k) account. I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.