Seeking Alpha
Long only, long-term horizon, dividend investing, value
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Summary

  • By using simple, easy to follow criteria you can create a successful DGI portfolio.
  • Even as I my total return has lagged the market this quarter my dividend growth has been excellent.
  • By focusing on dividend growth I believe my portfolio will outperform on both a total return and a dividend income basis.

There has been much discussion recently on SA about total return vs. total income. I think the topic has been covered very well, so I'm not going to waste more time getting into it here. I'm just bringing it up to say that for me personally, with my Keep It Simple, Stupid (KISS) portfolio, both are important, and I hope to achieve satisfactory results for both metrics. And in my opinion a well constructed DGI portfolio WILL give me the best total return over time, as well as meet my income goals. It is my understanding from many studies that dividend growth portfolios have delivered the best total return over the long term. So while I agree with those authors who say that total return should be the primary goal during the accumulation phase of investing, to me, the best way to achieve that total return is through dividend growth investing. And that is why my focus is on, and will remain on, my dividends.

But as a DGIer there will be times when my returns will trail "The Market". During those times my focus on my dividends, and not total return, will help me to stay the course, and stick with my DGI philosophy, even when my total returns are relatively weak on a relative basis. I know that as long as my companies continue to pay me ever increasing dividends, the total return will eventually follow. And in the meantime I'll be collecting and reinvesting my dividends, putting the magic of compounding to work.

Starting in Jan of 2013 when I began, and up to and including this past quarter, my portfolio has been doing very well on both a dividend growth basis and a total return basis. Over those 18 months my portfolio is up 42.31% while the S&P 500 is up 35.39% (as of 7/3/14). And my dividend income has been growing very nicely. But since my last update, over the past quarter, my portfolio has been underperforming the S&P. Since April 11th, although my portfolio has been up 6.59%, a nice return, the S&P has been up even more, 9.02%.

I know that three months doesn't mean very much for a long term investor, but watching the market go up more than my portfolio has been a little disconcerting. However, since my main focus is on my dividends, which have been increasing nicely, I've had no problem holding steady and not making any hasty moves just because I've been lagging the market a little bit. I still sleep very well knowing my dividend income keeps increasing.

So yes, I do want total return, and the last three months have not been the best for me by that metric, but my DGI portfolio still has been performing very well for me, and more than satisfied my desire for dividend growth. And I still believe that over the long term my portfolio will out perform the market on a total return basis, while also providing the dividend income I expect.

And now for the update and review of my portfolio.

Review of Second Quarter Contributions and dividends

These are the total dividends I received over the past three months, and the comparison (in parenthesis) to the same months during 2013:

Apr $1,449.47 ($1,959.17) (-26.02%)

May $2,553.38 ($2,059.03) (+24.01%)

June $3,168.23 ($2,037.02) (+55.53%)

Total dividends collected in the second quarter were $7,171.08 (some of this was used for automatic DRIPs)

Although I have not actually investigated the exact cause, I expect that the drop in dividends collected in April is because I sold some stocks that paid the dividend in April and replaced them with stocks that paid the dividend in other months, probably in June. But over-all the total dividends paid for the quarter were up.

Total first quarter pension contributions added to the account -- $14,375.02

The KISS System

Over the past year and a half I have been developing and refining my Keep It Simple, Stupid (KISS) system for creating a dividend growth portfolio. The system I developed has been discussed here, and in my previous updates, but as a quick summary my criteria for buying stocks are as follows:

For Purchase of Regular stocks

  • The stock is on the Dividend Champions, Contenders and Challengers ((NYSE:CCC)) list (as compiled by David Fish)
  • The Yield >3%
  • The Payout ratio < 60%
  • The Chowder Number >12%
  • A Quality Rating of A- or better from S&P
  • FAST Graph shows a 10 year uptrend in earnings
  • FAST Graph shows that the stock is not overvalued.

Recently I increased my yield cut off from 2.5% to 3%. I am soon to turn 50 and as the time I have for dividend growth to work its magic is decreasing I feel that I need to begin a transition to higher yielding stocks. Since I'm getting closer to retirement I don't have as much time as I used to depend on low yielding stocks with higher dividend growth. This doesn't mean I am going to sell my lower yielding, higher dividend growth stocks presently in my portfolio, but I will limit my new purchases to stocks yielding at least 3%.

For Purchase of MLPs, REITS and utilities (High Yielders)

  • The stock is on CCC list
  • Yield > 4%
  • Chowder Number > 8%
  • DGR for all time periods (1yr, 3yr, 5yr and 10yr) at least 3.5%, but also consistent over all time periods.
  • FAST Graph shows a 10 year uptrend (or the life of the company, if less than 10 years) in Funds From Operations (FFO).
  • FAST Graph shows that the stock is not overvalued.

My criteria for selling a stock are also very simple:

I will sell a stock if either:

  • The Stock cuts or its dividend
  • The Stock becomes over valued, 2 years ahead of where the price should be based on its consensus earnings and normalized PE ratio, as per FAST Graphs, AND it has attained an over weighted position in my portfolio.

Sales

In my last article I discussed my thoughts about rebalancing. I decided that if one of my positions becomes much larger than my average position AND it appears to be significantly over valued based on its FAST Graph, then I will trim the position back to the average size. Note that, as long as the stock in question is still increasing its dividend, I will not sell the whole position.

This quarter Buckeye Partners (NYSE:BPL) was noted to be an over weighted position, and had become over valued. The FAST Graph shows that BPL should not be reaching its present price of about $80 until about 2018, based on its earnings.

Therefore, to trim BPL back to an average position size….

I sold 85 Shares of BPL for $81.63 per share (commission of $2.55) for a total of $6,935.84.

So, by the end of this quarter, including cash left over from the previous quarter's purchases, dividend deposited in my account, my pension contributions and the sale of some BPL shares, I had $30,141.33 to invest.

Purchases

After running my screen, the following stocks passed my "regular stock" criteria:

Lockheed Martin (NYSE:LMT), Tupperware (NYSE:TUP), McDonald's (NYSE:MCD), Chevron Texaco (NYSE:CVX), and General Mills (NYSE:GIS).

20 other companies passed my screen for high yielding MPLs, REITs and Utilities. Since I already have many oil and gas MLP's, and for diversification purposes, I chose to remove these from consideration. That left me with the following stocks:

National Health Investors (NYSE:NHI), Omega Healthcare Investors (NYSE:OHI), Digital Realty Trust (NYSE:DLR), W.P. Carey Inc (NYSE:WPC), Realty Income Corp (NYSE:O), and Southern Company (NYSE:SO).

Of the stocks that passed either of my screens I already own LMT, TUP, MCD, CVX, OHI, DLR, and O. I had enough funds to buy two new positions, and since I'm working on increasing my portfolio's over-all yield (and I needed to replace the lost yield from selling some of the BPL), I chose to purchase NHI and SO.

National Health Investors has raised its dividend for 12 straight years, has a yield of 4.97%, and has a 1yr., 3yr., 5yr. and 10yr. DGR of 8.2%, 7.1%, 5.7% and 6.2% respectively. This is a very steady DGR trend. The FAST Graph shows a smooth uptrend in Funds from Operations (FFO) over the past few years, and that NHI is fairly valued.

Southern Company has raised it's dividend for 13 straight years, has a yield of 4.80%, and has a 1yr., 3yr., 5yr. and 10yr. DGR of 3.6%, 3.7%, 3.9% and 3.8% respectively. Also very steady. Like NHI, the FAST Graph for SO shows a smooth uptrend in Funds from Operations (FFO) over the past few years, and that it is fairly valued.

I bought 242 Shares of NHI for $61.84 per share (commission of $7.26) for a total of $14,972.54.

I bought 341 Shares of SO for $43.96 per share (commission of $10.23) for a total of $15,000.59.

I also received the following shares, due to DRIP plans, in my Optionsxpress account:

Stock

Shares

General Electric (NYSE:GE)

2.859

Alliance Resources (NASDAQ:ARLP)

3.26

Kinder Morgan (KMR)

4.445

Avista (AVA)

4.309

Oneok (NYSE:OKE)

2.395

Wells Fargo (WFC)

1.816

Following these transactions this is the present composition of my portfolio (as of 7/3/14)

Shares

Stock

Price

Market Value($)

Div

Curr Yield

Estimated Ann Inc ($)

%Port

217

AFLAC (NYSE:AFL)

$63.29

$13,733.93

1.48

2.34%

$321.16

1.49%

111

Air Products (NYSE:APD)

$129.42

$14,365.62

3.08

2.38%

$341.88

1.56%

362.82

Alliance Res. Part.

$46.70

$16,943.69

2.45

5.25%

$888.91

1.84%

1180

Annaly (NYSE:NLY)

$11.06

$13,050.80

1.2

10.85%

$1,416.00

1.41%

522.08

Avista

$32.33

$16,878.85

1.27

3.93%

$663.04

1.83%

137

Becton Dickinson (NYSE:BDX)

$120.12

$16,456.44

2.18

1.81%

$298.66

1.78%

174

BHP Billiton(NYSE:BBL)

$68.37

$11,896.38

2.36

3.45%

$410.64

1.29%

117

Boeing Co (NYSE:BA)

$128.51

$15,035.67

2.92

2.27%

$341.64

1.63%

381

Brookfield Infra. Part. (NYSE:BIP)

$41.05

$15,640.05

1.92

4.68%

$731.52

1.70%

195

Buckeye Partners

$81.69

$15,929.55

4.4

5.39%

$858.00

1.73%

132

ChevronTexaco

$131.19

$17,317.08

4.28

3.26%

$564.96

1.88%

310

Cincinnati Financial (NASDAQ:CINF)

$48.49

$15,031.90

1.76

3.63%

$545.60

1.63%

197

ConocoPhillips (NYSE:COP)

$86.40

$17,020.80

2.76

3.19%

$543.72

1.84%

183

Cracker Barrel (NASDAQ:CBRL)

$100.48

$18,387.84

4

3.98%

$732.00

1.99%

560

CSX Corp (NYSE:CSX)

$31.20

$17,472.00

0.64

2.05%

$358.40

1.89%

303

Darden Restaurants,(NYSE:DRI)

$46.32

$14,034.96

2.2

4.75%

$666.60

1.52%

120

Deere & CO (NYSE:DE)

$91.38

$10,965.60

2.4

2.63%

$288.00

1.19%

62

Diageo (NYSE:DEO)

$130.41

$8,085.42

2.6

1.99%

$161.20

0.88%

281

Digital Realty Trust

$58.17

$16,345.77

3.32

5.71%

$932.92

1.77%

219

Dominion Resources (NYSE:D)

$68.66

$15,036.54

2.4

3.50%

$525.60

1.63%

161

Emerson Elec (NYSE:EMR)

$67.37

$10,846.57

1.72

2.55%

$276.92

1.18%

419

First Long Island Corp (NASDAQ:FLIC)

$38.49

$16,127.31

1.04

2.70%

$435.76

1.75%

162

General Dynamics (NYSE:GD)

$116.02

$18,795.24

2.48

2.14%

$401.76

2.04%

579.18

General Electric Co

$26.86

$15,556.77

0.88

3.28%

$509.68

1.69%

253

Harris Corp (NYSE:HRS)

$76.18

$19,273.54

1.68

2.21%

$425.04

2.09%

300

Hasbro Inc (NASDAQ:HAS)

$54.12

$16,236.00

1.72

3.18%

$516.00

1.76%

157

Illinois Tool Works(IRW)

$87.70

$13,768.90

1.68

1.92%

$263.76

1.49%

159

Johnson & Johnson (NYSE:JNJ)

$105.42

$16,761.78

2.8

2.66%

$445.20

1.82%

276.675

Kinder Morgan Mngmt.

$78.45

$21,705.15

5.52

7.04%

$1,527.25

2.35%

146

L-3 Communications (NYSE:LLL)

$120.63

$17,611.98

2.4

1.99%

$350.40

1.91%

144

Lockheed Martin

$159.90

$23,025.60

5.32

3.33%

$766.08

2.50%

128

McDonald's Corp

$100.98

$12,925.44

3.24

3.21%

$414.72

1.40%

261

Medtronic Inc (NYSE:MDT)

$64.55

$16,847.55

1.22

1.89%

$318.42

1.83%

495

Microsoft Corporation (NASDAQ:MSFT)

$41.80

$20,691.00

1.12

2.68%

$554.40

2.24%

242

National Health Invest.

$61.92

$14,984.64

3.08

4.97%

$745.36

1.62%

174

Norfolk Southern Corp (NYSE:NSC)

$103.84

$18,068.16

2.16

2.08%

$375.84

1.96%

200

Novartis (NYSE:NVS)

$91.43

$18,286.00

2.72

2.97%

$544.00

1.98%

449

Omega Healthcare

$36.55

$16,410.95

2

5.47%

$898.00

1.78%

272.94

ONEOK Inc

$67.61

$18,453.47

2.24

3.31%

$611.39

2.00%

438

Paychex Inc (NASDAQ:PAYX)

$41.55

$18,198.90

1.4

3.37%

$613.20

1.97%

162

Pepsico Inc (PEPE)

$90.02

$14,583.24

2.62

2.91%

$424.44

1.58%

827

Pimco Corp & Income (NYSE:PTY)

$18.38

$15,200.26

1.38

7.51%

$1,141.26

1.65%

287

Plains All American (NYSE:PAA)

$58.43

$16,769.41

2.52

4.31%

$723.24

1.82%

166

Procter & Gamble Co (NYSE:PG)

$79.98

$13,276.68

2.57

3.21%

$426.62

1.44%

152

Qualcomm Inc (NASDAQ:QCOM)

$80.99

$12,310.48

1.68

2.07%

$255.36

1.33%

198

Raytheon Co. (NYSE:RTN)

$93.22

$18,457.56

2.42

2.60%

$479.16

2.00%

369

Realty Income Corp

$44.23

$16,320.87

2.19

4.95%

$808.11

1.77%

341.00

Southern Co

$44.00

$15,004.00

2.1

4.77%

$716.10

1.63%

372

Sysco Corp (NYSE:SYY)

$37.24

$13,853.28

1.16

3.11%

$431.52

1.50%

249

Target Corp. (NYSE:TGT)

$59.51

$14,817.99

2.08

3.50%

$517.92

1.61%

180

Tupperware Corp

$85.55

$15,399.00

2.72

3.18%

$489.60

1.67%

379

UGI Corp (NYSE:UGI)

$50.23

$19,037.17

1.18

2.35%

$447.22

2.06%

108

United Tech Corp (NYSE:UTX)

$115.53

$12,477.24

2.36

2.04%

$254.88

1.35%

184

Wal-Mart Stores Inc (NYSE:WMT)

$75.75

$13,938.00

1.92

2.53%

$353.28

1.51%

229

Walgreen Co (NYSE:WAG)

$73.98

$16,941.42

1.26

1.70%

$288.54

1.84%

266.23

Wells Fargo

$53.00

$14,110.19

1.4

2.64%

$372.72

1.53%

258

Williams Partners (NYSE:WPX)

$53.98

$13,926.84

3.62

6.71%

$933.96

1.51%

336

Wisconsin Energy Corp (NYSE:WEC)

$44.91

$15,089.76

1.56

3.47%

$524.16

1.64%

TOTALS

$915,717.24

3.51%

$32,171.71

Results and Conclusion:

Since April 11 my portfolio's value, not including pension contributions, has increased from $844,227.01 to $899,860.43 (the contributions bring the value up to $915,717.24 as of 7/3/14). This is an increase of 6.59%. The S&P 500 is up 9.35% during that time, so my portfolio has lagged the market a bit during this past quarter. Still, 6.59% is a nice return for three months, and over all, since I began the portfolio, I have out performed the S&P 42% to 35%. I also recently began compared my portfolio to the SPDR S&P dividend ETF (NYSEARCA:SDY), a dividend ETF that tracks the Dividend Aristocrats, because it would be a better comparison for how my DGI portfolio is doing. SDY is up 6.38% this quarter, including its dividend payments, and 7.13% for the year. So I am still outperforming a "typical" DGI benchmark by over 2% for the year. I know that some DGIers don't compare their portfolios to benchmarks, preferring just to make sure they are attaining their own personal goals, and I respect that position. But for me, I want to know that the efforts I am putting into running my own portfolio are worthwhile. If I'm not doing as well as these benchmarks then it would make more sense for me (just for me, not for anybody else) to just buy SPY or SDY and save the effort. So it is very satisfying for me to see that my portfolio is performing very well in comparison over the past 18 months.

As for my dividends, YTD I have collected $14,501.16, as compared to $11,115.14 for the same period last year, an increase of 30.46%. The amount of dividends I expect to collect in the next 12 months (ED12) is $32,171.71, a 5.87% increase over my previous update from the first quarter of 2014, and a 34.57% increase from the second quarter of 2013. The present yield of my portfolio is 3.51%. Over time I hope to get that yield closer to 4%.

Even though I have lagged "The Market" a bit this past quarter I am still very pleased with the results. A three month total return result won't cause me to change my game plan, and besides, I am mainly focused on the dividends (even as I follow my benchmarks), and my ED12 has increased by over 34% over the past year. Who wouldn't be pleased with those results?? So my plan will continue to be to focus on the dividends, but to follow the total return to make sure I'm not falling too far behind. I believe my results continue to support my hypothesis, that by using simple, straightforward, easy to understand criteria for buying and selling, and by using the hard work of other people (Thank you David Fish, Chuck Carnevale of FAST Graphs, and S&P!), that someone can achieve excellent investment results without having to put an inordinate amount of time into the process.

Source: My K.I.S.S. Dividend Portfolio: 2nd Quarter 2014 Update