Dividend Champions: Steady-Stream Model 3

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 |  Includes: AM-OLD, CBRL, CMI, EIX, FLO, HAS, HRS, KHC, LMT, NSC, OKE, SXT
by: David Fish

The Dividend Champions spreadsheet has been updated through 8/31/10

To download the latest version of the U.S. Dividend Champions spreadsheet or PDF, go here.

In separate articles, I discussed how a retirement-age investor might use the new Quarterly Schedule column to spread out their holdings by Pay Dates throughout the typical quarter so as to match spending needs, and then I went through a model-building exercise designed for investors that are far from retirement, perhaps even just starting out. But the story doesn't end there...

My Cistern is on Back Order

Hi, Baby Dave here. For Steady-Stream Model 2, Young Dave wrote about using the Quarterly Schedule column to help build a “starter portfolio” of companies that increase their dividends year after year. His stated goal was to fill the cistern over time, while not taking anything out. He could only afford modest amounts each month, so his plan was to invest through DRIPs, specifically company-sponsored Dividend Reinvestment Plans that allow the participants to make periodic investments, often as little as $25 at a time. The plan called for investing about $300 a month, or $25 in each of a dozen plans, with dollar-cost averaging spreading the investments over time, minimizing the pricing risk. That approach is a great way to accumulate assets over the course of the two decades (or more) that he has to build a nice retirement fund. But what about me? I may not retire until the 2070s! The good news is that I do have so much time on my side, but the sooner I get started, the better! As Albert Einstein said, “Die mächtigste Kraft im Universum ist Zinseszinsen.” (The most powerful force in the universe is compound interest.) Of course, he could also have been talking about compounding dividends and dollar-cost averaging.

As you can imagine, my peak earnings years are well ahead of me, so I'm going to have depend on the generosity of my parents, grandparents, and other relatives to get the ball rolling. Getting them to fund the companies I choose will be tricky, but my psychic powers are growing by the day. (I'm getting Old Dave to type this in...since I haven't developed motor skills yet.) Heh, have you seen that E*Trade (NASDAQ:ETFC) “Baby?” What a tool! The guy's got to be at least five years old by now. I mean, bring out the wheelchair, already! What kind of message are we supposed to take away from some phony day-trading poser, anyway? Don't get me started! OK, where was I? Oh, yeah, like Young Dave, my model will only include no-fee DRIPs, since it's foolish to waste money on plans that charge fees or commissions. But I'm going to skip right over the Champions and Contenders and pick companies from the Challengers list. I know what you're thinking...I'm psychic remember? You're thinking, “But Baby Dave, the Challengers listing doesn't even have a Quarterly Schedule column!” And you'd be right, of course, but I'm sure that I can pick a diversified portfolio from the 200+ companies on that list and, at my age, the exact dividend payment schedule really isn't as important.

The Exercise Begins

I started by choosing a few familiar stocks from the Challengers list that stand out as industry leaders and represent industries that will be around long after we're all gone. Old Dave only owns one of these, in keeping with my different approach, and that's almost accidental. Next, I chose some complementary companies that “fill in the gaps” in terms of diversification. I also tried to mix the yields, but I'm aiming for growth more than current income. The result was a diverse group of companies and a range of yields from 1.41% to 4.29%, with August 31 prices ranging from $19.30 to $74.41. I'm not recommending that anyone adopt this particular mix of stocks, nor do I plan to build such a portfolio for myself at this time. This exercise is for demonstration purposes only.

Company

Symbol

Price

Yield

Q Div

Yrs

Shares

Div.

Cost

American Greetings

AM-OLD

19.30

2.90

0.1400

7

1

0.14

19

Cracker Barrel OC

CBRL

44.61

1.79

0.2000

6

1

0.20

45

Cummins Inc.

CMI

74.41

1.41

0.2625

5

1

0.26

74

Edison International

EIX

33.75

3.73

0.3150

7

1

0.32

34

Flowers Foods

FLO

25.84

3.10

0.2000

9

1

0.20

26

H.J. Heinz Co.

HNZ

46.24

3.89

0.4500

7

1

0.45

46

Harris Corp.

HRS

42.07

2.38

0.2500

9

1

0.25

42

Hasbro Inc.

HAS

40.36

2.48

0.2500

7

1

0.25

40

Lockheed Martin

LMT

69.52

3.62

0.6100

7

1

0.61

70

Norfolk Southern

NSC

53.68

2.68

0.3600

9

1

0.36

54

ONEOK Inc.

OKE

42.91

4.29

0.4600

8

1

0.46

43

Sensient Technologies

SXT

27.73

2.88

0.2000

5

1

0.20

28

Portfolio Totals:

12

3.70

521

Click to enlarge


Putting the Model into Action

Since this model was designed to utilize company-sponsored DRIPs to accumulate shares, I specified just one share per company, which is all that is required to enroll in each DRIP. Some of these companies offer direct-enrollment plans, but that avenue of enrollment generally requires a minimum outlay of $250, $500, or even $1,000 per plan. Since this is just a model-building exercise, I'm going to simply estimate an initial outlay of $1,000, including the cost of one share and the enrollment fees. That contrasts with the retirement-age cost of over $68,000, which most 3-year-olds simply don't have lying around. (Of course, I plan to earn some royalties for my first book, which will be titled either “Baby Dave's Guide to Dividend Stocks” or “I'm OK, You're a Doo-doo Head.”)

Note that the dividends for the above portfolio for four quarters would total $14.80, based on an investment of $521, so the composite yield is 2.84%, but the yield-on-cost (YOC) would tend to rise steadily from that starting point. The real benefit of this starter portfolio, of course, would be in the future accumulation, based on regular investments. As stated earlier, the intent is to invest about $300 per month ($25 per company), or $3,600 per year. That would mean investing a total of about $72,000 (including some start-up costs) over the course of 20 years, which would make it reasonable to assume that such an investor could pay for college or continue to accumulate assets for another 20 years, if desired. To see how such a program might compound over time, I called on the DCA Model Calculator, which can be downloaded from the same page as the Dividend Champions. (Just look toward the right side of that page.) Using Model B, I input an initial investment of $521 and monthly investment of $150 and quarterly investment of $450 (because not all DRIPs allow as little as $25). I then input modest growth assumptions of 5% for stock appreciation, a beginning yield of 2.84% and 5% dividend growth. The result:

Summary: At the end of 20 years, you would have:

Invested a total of............................ $71,921.00

and reinvested dividends of.............. 35,619.87

for a total cost basis of...................... 107,540.87

your capital gain would be................. 63,168.67

and your total value would be......... $170,709.55

As you can see, even with modest growth expectations, such a program of dollar-cost averaging would more than double an investor's capital, as early as one's twenties! To find what a second 20-year period would accomplish, I simply input the $170,709.55 as the initial investment. After a second 20 years, that DCA model grew in value to an astonishing $956,178.11. I could be a millionaire before the age of 43...if only I can get mummy and daddy to get the ball rolling.

Conclusion

This model-building exercise was meant as a further thought-provoking demonstration of using dividends and dollar-cost averaging to build assets from an extremely early age. There are any number of variations that can be performed and adjustments would be likely over such a long time period, but the potential is obviously enormous. As always, suggestions are welcome.

Disclosure: Author owns EIX.