Transforming A Portfolio Without A Real Plan Into A Dividend Growth Portfolio: My First Step

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Includes: BMY, COP, DE, GILD, MCD, MMM
by: Norman Blue

Summary

My journey as a dividend growth investor has begun.

Selling a non-dividend producer and buying five dividend growers has left me with a good impression so far.

Some of my purchase decisions were good, but others were not as good.

In 10 years, I could be looking at an almost 10% yield on cost.

My Background and My Motivation

For about a decade, I have been buying individual stocks without a real plan. Just about every month, I would buy a stock or two with the intention of holding forever, but not really knowing with certainty what my rationale for the purchase was. Sometimes I made some good decisions, but more often than not, my purchases were not especially wise decisions.

Fortunately, I discovered Seeking Alpha in mid-2013 and immediately fell in love with the idea of dividend growth investing. Finally, after reading articles from multiple authors at this site, I felt like I had been exposed to an idea that would help me come up with a plan. At the beginning of 2014, I made a decision to work harder toward an actual plan with my savings, and I committed to making a gradual change in my holdings, focusing more on stocks that pay dividends and raise dividends regularly. The change would involve reducing and eliminating some of my non-dividend payers and working harder to make the right decisions about what to buy to replace them.

My First Step

The first stock that I said goodbye to in January was Gilead Sciences (NASDAQ:GILD). Gilead Sciences is a biopharmaceutical company that treated me well. I bought it in 2008, but I did not have a really good reason to purchase it. The stock languished for years until 2012 when it started a triumphant march up from around $20 to over $70 at the beginning of this year. Because I did not have a reason to buy it, because I was unsure about whether it would be a good idea to hold it, and because GILD did not pay a dividend, I sold it.

Gilead Sciences had become one of my largest holdings. During January and February, I split the proceeds up into five different stocks, in all of which I already owned a position: McDonald's (NYSE:MCD), ConocoPhillips (NYSE:COP), Bristol-Meyers (NYSE:BMY), Deere & Co. (NYSE:DE), and 3M (NYSE:MMM). I have managed a 7% average increase in the value of the stocks, compared to a 9% increase in GILD. Meanwhile my dividends have increased from 0% to 2.8%, so I am still thinking positively about the move.

Some Resources I Utilized to Analyze My Progress

Thanks to Chuck Carnevale's F.A.S.T. Graphs, I was able to compare prices to value. Some of my purchases were better values than others.

MCD might have been a little overvalued, but I have enjoyed a 7% return on paper since I made the purchase.

COP was probably my most undervalued purchase, and it has rewarded me with a 15% return.

BMY was probably my most overvalued purchase, and it is the only one in the group that has resulted in a paper loss (down 4%) since it was purchased.

DE was most likely undervalued at its purchase price and has risen 7%, but it is the only one in my group that seems to have stopped raising dividends (for now).

MMM was quite overvalued, but it has moved up 9% since I bought it.

Thanks to David Fish's monthly CCC updates, I am able to see what I might be able to expect with future dividends. As a group, my five purchases have a great track record for increasing dividends. The 10-year growth rates for my five purchases are at 23% for MCD, 16% for COP, 2% for BMY, 16% for DE, and 7% for MMM. The average growth rate works out to 13%. If that kind of growth rate continues for the next ten years, then the yield on cost for those five stocks can be found below for each year.

2014 2.8%
2015 3.2%
2016 3.6%
2017 4.0%
2018 4.6%
2019 5.2%
2020 5.8%
2021 6.6%
2022 7.4%
2023 8.4%
2024 9.5%
Click to enlarge

Looking Toward the Future

Did I make the right decision by letting GILD go? Will price increases for my new purchases continue to lag GILD like they have so far this year? Will the dividend growth rate for the group continue at this high rate? Only time will tell. In the meantime, I will enjoy the newly purchased dividend rights and anticipate annual increases that could be just as enjoyable.

Disclosure: I am long MCD, COP, BMY, DE, MMM. 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.