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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.
  • Colgate's stretched valuation with limited revenue growth caused me to sell the stock.
  • Increased regulatory risk for Lorillard and a compelling takeover offer caused me to exit the stock.

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 Q2 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.

Observations

The second quarter featured very little net new investment activity to the portfolio in terms of either new positions or increases to existing positions. I did look to selectively lighten or completely exit certain positions whose valuations I felt had become stretched or where other concerns emerged. My feeling was that certain dividend growth stocks with a perception for high quality are now trading at quite elevated valuations. I feel I can get a better return on my capital in some of these positions elsewhere.

Colgate

I was torn with what to do about my Colgate (NYSE:CL) position. I had previously exited this position in its entirety, only to repurchase it again. The reason for my indecision with this stock is that Colgate represents a business with very consistent, stable earnings that is also non-discretionary in nature. Beyond the actual dividend payment, I valued Colgate for the general price stability that it had and the fact that the volatility of the stock was so limited. This had the favorable effect of encouraging me to hold onto the stock for the stability that it helped provide to my overall portfolio.

However, it seems this stability was well recognized by numerous other investors and Colgate currently trades at a P/E of close to 30, well above its 5-year average of 20. In fact, Colgate is currently trading at higher multiples to sales and cash flow than it generally has over the last 5 years. With recent revenue growth averaging just over 2% annually, I made the decision to entirely dispose of my Colgate holding.

Lorillard

I was attracted to Lorillard (NYSE:LO) in late 2012, largely for its significant dividend. The company rewarded me nicely with a great income stream. The capital growth was even better on this stock. It appreciated over 50% during the 18 months I held on. However, there have been increasing indications that a more active regulatory approach may be taken against methanol products, which contribute close to 75% of Lorillard's revenue.

Lorillard had recently been the subject of merger attention from Reynolds (NYSE:RAI). With the recent confirmation of the merger, I took the opportunity to exit the stock.

McDonald's

While I haven't made any adjustments to my holding of McDonald's (NYSE:MCD) stock, I've been watching with some level of interest the sluggish performance in same store sales across the key North American market. Like Colgate, McDonald's holds value to my portfolio for the level of price stability that it provides.

Beyond just the actual dividend, I benefit from the reduced volatility that is offered by a low beta stock like McDonald's, which minimizes the gyrations on my portfolio value. However, sustained poor operating performance will certainly cause me to reconsider my holding.

Female Health Company

I completely exited my position in Female Health Company (NASDAQ:FHCO). While I have been attracted to early stage dividend paying stocks, they carry large risk given the infancy of their business. Female Health Company had a significant dependency on a single product, which had lumpy sales with irregular timing. This contributed to the decision taken by the company to broaden their product portfolio and slash the dividend. This further validated my decision to exit the stock.

2014 Dividend Income

In Q1 2014, I have received approximately $4,311 in dividends. This was primarily from my Australian positions ($3,391), with the rest ($920) coming from my US portfolio.

Q2 2014 was an equally great quarter, with approximately $4,541 received in total dividend income. I received approximately $3,492 from my Australian portfolio and $1,049 from my US portfolio.

So far in 2014, the dividend portfolio has delivered $8,855 in income.

Future Outlook

I intend to remain on the sidelines for the remainder of 2014 as far as new capital inflows are concerned. If stocks have a material pullback, I may reconsider this. If valuations continue to rise unabated, I may look to selectively exit some holdings that I feel have overshot fundamental value.

Source: My Dividend Portfolio Q2 2014