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Summary

  • The DGI Lite Portfolio was created in November 2011 to find yield growth in a small group of CCC stocks.
  • This strategy combines The Dogs of the Dow with the CCC Lists for a quick method to find underdogs.
  • The current update explores various scenarios to see how it has performed.

Catching Up With the DGI Lite DiviDogs

I started the DGI Lite Portfolio in November 2011, based on the "Dogs" of the Champions, Contenders and Challengers (aka CCC lists), generously provided to all by Seeking Alpha author David Fish. The background on this portfolio is laid out in my articles starting with Confessions of a DGI Lite Investor, as well as the discovery of the dire fate of most of the stocks that fall into The Big Red Doghouse (see Rule #2 below).

While this was very close to my own IRA portfolio at the time, it was not an exact match and as of now is only a model portfolio, as I have only kept one of the original stocks, Vector Group. This model assumes the stocks are in an IRA and no new money would be added. There would be no tax consequences and trade fees would be minimal.

Combining the Dogs of the Dow method with the CCC lists, I screened for the highest-yielding stocks over 6% yield on the combined lists. Having learned a couple of painful lessons in my own IRA along the way, I added a few rules for the Dog Pack in August 2012:

Rule #1 - Sell and replace any CCC stock that doesn't raise the dividend, the sooner the better.

Rule #2 - Don't buy any CCC stock while it's in The Big Red Doghouse (has red dates for overdue dividend raises on the CCC lists).

Rule #3 - Only buy American CCC stocks that pay dividends at least quarterly.

Rule #4 - Add a new CCC stock when it will raise the overall yield, otherwise reinvest in the highest yielder.

The stocks selected were Omega Healthcare (NYSE:OHI), Old Republic Intl (NYSE:ORI), Pitney-Bowes (NYSE:PBI), PennantPark Investments (NASDAQ:PNNT), Senior Housing Properties (NYSE:SNH), Triangle Capital (NYSE:TCAP), and Vector Group (NYSE:VGR). A starting amount of $5000 each for $35,000 was invested, and as stated, no new money would be added. Buying and selling can be done without tax consequences since it's in an IRA. MLPs are excluded due to complicated tax consequences, and foreign stocks for variable currency exchange rates.

The original seven buys totaled $34,940.18 using the closing prices on 10/31/11 of the CCC lists. In March 2012 (at the end of Q1), a new CCC DiviDog, Dynex Capital Inc (NYSE:DX), was added to the pack with the accumulated dividend puppies, again at the end of Q2 in June 2012, and once again at the end of Q3 in September 2012, as Dynex had a higher yield on the CCC lists than any of the then-current DiviDogs at both points in time.

How Fares the Pack?

When last we checked up on the DiviDogs at the end of the first year in The DGI Lite Portfolio Q4 Results, the initial $35,000 had grown to $40,742.58 with the additional 82 shares of Pitney Bowes bought at the end of 2012 Q4, before PBI announced a dividend cut in 2013 Q1. Our dividend income for 2012 was $3301.06.

Over the next year, without adding in any of the dividends to buy more shares or selling any stocks, the DGI Lite DiviDogs would have appreciated by 30.96% to $50,922.17 in capital gains as of 12/31/2013, after 2 years and 2 months.

(click to enlarge)DGI Lite Q4 2013

When the additional 5% stock dividend in Q3 from Vector Group (298*0.05 = 14.9 shares) is included, that would bring the value to $51,151.35 (14 x $16.37 = $229.18). Only whole shares are added as the stock dividend, so the remaining 0.9 shares will be ignored. (It's actually paid out as half a share's worth of the stock price on the dividend date I believe, but half a dividend puppy is difficult to feed.)

Accumulating Dividends As Cash

The accumulated dividends from 2013 (without reinvesting) would add an additional $3498.12 as follows:

Dividend increases are shaded in green, dividend cuts are in red. (click to enlarge)

And that would bring the total return to $54,649.47 after adjusting for VGR, a nice gain of 35.96% over the original $35,000 investment. Prices are from Seeking Alpha portfolio on 12/31/13.

Pooling Those Quarterly Dividend Puppies

If we followed our previous procedure by collecting the quarterly dividends and buying the highest-yielding stock at the end of the quarter, our buys would look like this:

Dividend increases are shaded in green, dividend cuts are in red. Prices are taken from the CCC lists.

(click to enlarge)DGI Lite 2013DR

Q1 - 86 shares of Dynex @ $10.68

Q2 - 55 shares of Vector @ $16.22 since Dynex was in the red

Q3 - 56 shares of Vector @ $16.10 plus 17 shares for the 5% stock option equals 73 shares

Q4 - $934.38 in dividends at the end of the year

That would bring our total for dividends to $3637.10 and the market value of our stocks to $53,705.53 plus the last quarter's dividends of $934.38 for a total return of $54,639.91 for a 35.94% gain. While the total return ended up about the same as not doing anything, the dividend income increased from the reinvested dividends, of course. The slightly lower gain is due to more shares of stocks that declined in price.

How About Reinvesting In Each Stock?

Would things turn out better or worse if all dividends are reinvested into the issuing stock, regardless of dividend cuts?

Dividend increases are shaded in green, dividend cuts are in red. Prices are taken from the CCC lists.

DGI Lite 2013 Drips

That would bring our total for dividends to $3601.63 and the market value of our stocks to $54,907.01 plus the last quarter's dividends of $917.73 for a total return of $55,824.98 and a gain of 37.30%. More total return, less income, due to reinvesting in all stocks so the ones that increased in priced accounted for more market value.

But Wait, What About The Rules?

Well, yes, we had Rules. Since there are some dividend freezes/cuts that have shown up, let's see what happens when stocks are sold following a dividend cut or freeze, and dividends are reinvested.

First up, Old Dog PBI is firmly in the The Big Red Doghouse. No big surprise on this one, everyone had been expecting it for months. Pitney Bowes announced the dividend cut in 2013 Q1, and was removed from the CCC lists with the April 2013 update. Looking back on the 3/28/13 CCC lists, PBI's price was $14.86/share. (All historical prices are taken from the CCC lists.) The 327 shares would fetch $4859.22, which would just about wipe out all the gains from the 82 shares added at the end of 2012. PennantPark is also in The Big Red Doghouse for failing to raise the dividend after a year.

The accumulated dividends from 2013 Q1 add up to $915.58. Those dividends would be used to buy additional shares of the highest-yielding, non-MLP, non-foreign stock on the 3/28/13 list, and again, that would be DX @ $10.68/share and a yield of 10.86%. That would buy 85 more shares ($915.58/$10.68).

Now, what about the $4859.22 from the sale of PBI? Looking at the 3/28/13 list for a replacement stock with over 6% yield, Mercury General Insurance (NYSE:MCY) comes in with a 6.46% yield at $37.93/share, which would add 128 shares.

Second Quarter: Red Zone

Dynex is now in the Red Zone along with PennantPark during the second quarter, but no dividend cuts yet. The Q2 dividends have come in at $901.60, a few dollars less than Q1. Definitely not the direction these DiviDogs are supposed to be going, but let's see what happens. No sense in feeding dogs in the Red Doghouse, so let's look at the next one on the list: Vector Group. At the end of 2013 Q2, Vector had a 9.86% yield at $16.22/share, which would add 55 shares. Since VGR adds the annual 5% stock dividend in Q3, this would be a good time to buy more shares.

Third Quarter: Time To Sell

More trouble ahead for the DiviDogs in Q3. Dynex cuts the dividend, and PennantPark goes more than a year without a raise, so both of these very bad Dogs are removed in September from the CCC lists and will be kicked out of the kennel. Looking back on the 8/30/13 CCC lists, DX's price was $8.03 and PNNT's price was $11.09.

Sell 364 shares of DX @ $8.03 = $2922.92

Sell 466 shares of PNNT @ $11.09 = $5167.94

Total $8090.86

While PNNT's price has increased slightly since purchase from $10.72 to $11.09, DX has been a very bad dog and stumbled from a high of $10.72 down to $8.03. Maybe it was a good thing Dynex was never a full kennel position.

For replacement stocks, the 8/30/13 CCC list shows one eligible stock above 6% yield: Universal Health Realty Trust (NYSE:UHT) @ $40.11/share with 6.23% yield. Using PNNT's proceeds to buy a full position would be 128 shares ($5134.08). The remaining $2956.78 will be split between the 3 stocks above 6% yield that have not had any capital added yet: OHI, SNH and TCAP. Both ORI and MCY have fallen below 6% yield. That tends to happen with Old Dogs.

Buy 35 shares OHI @ $28.40 = $994.00

Buy 43 shares SNH @ $22.75 = $978.25

Buy 34 shares TCAP @ $29.17 = $991.78

Total $2964.03

(There are always a few dollars left over from previous transactions to make up the $8 difference.)

At the end of Q3, there would be $919.16 in dividends, and they would be added to Vector Group as the highest-yielding and hardest-working Dog at $919.16/16.10 = 57 shares, plus the 17 shares as the 5% stock dividend.

Year End Vet Check

The dividends at the end of Q4 reflected the loss of younger and faster higher-yielding Dogs, DX and PNNT, even though they were replaced. The dividends of MCY and UHT couldn't make up the difference, so the Q4 dividends were only $855.35. Senior Housing Trust falls into The Big Red Doghouse after not raising the dividend on time, but it has a few months to go before being kicked out of the kennel.

By reinvesting the dividends and replacing stocks, the annual dividend amount came in at $3591.43, a slight increase over the original accumulated $3498.48. The market value of the stocks at the end of the year is $52,206.75 plus the $855.09 Q4 dividends, which have not been reinvested yet. Total portfolio value is $53,061.84, which wouldn't quite beat the $54,664.57 achieved by just leaving it alone and collecting the dividends.

Re-Cap: Which DiviDog Shuffle Worked Best?

Scenario 1 - Accumulating Dividends As Cash

  • End Market Value: $51,151.35
  • Total Dividends Paid: $3498.12
  • End Cash as Accumulated Dividends: $3498.12
  • Total Return: $54,649.47
  • Gain Over Original $35,000 Invested: 35.96%

Scenario 2 - Pooling & Reinvesting in Highest-Yielders

  • End Market Value: $53,705.53
  • Total Dividends Paid: $3637.10
  • End Cash as Last Quarter Dividends: $934.38
  • Total Return: $54,639.91
  • Gain Over Original $35,000 Invested: 35.94%

Scenario 3 - Reinvesting In Issuing Stock

  • End Market Value: $54,907.01
  • Total Dividends Paid: $3601.63
  • End Cash as Last Quarter Dividends: $917.73
  • Total Return: $55,824.98
  • Gain Over Original $35,000 Invested: 37.30%

Scenario 4 - Selling & Replacing Dividend Cutters

  • End Market Value: $52,206.75
  • Total Dividends Paid: $3591.43
  • End Cash as Last Quarter Dividends: $855.09
  • Total Return: $53,061.84
  • Gain Over Original $35,000 Invested: 34.04%

Conclusions

After having the DiviDogs jump through all the hoops and perform all their tricks, the results turned out to be pretty logical. If you want more dividend income, pool those dividend puppies and reinvest in the highest-yielding Dogs each quarter. If you want more capital appreciation, reinvest in all the Dogs as you go along so the long distance Dogs have room to run. If you change the Dog Pack too much, they tend to squabble and you risk losing more income and capital appreciation both. And if you do nothing at all, you'll be following the original Dog strategy and that might be just as good, although the Dogs would be sold at the end of the year and new Dogs would be bought each year.

For a parting thought, here's a screenshot of the portfolio as of the date this article was finished on 8/4/14, with the same number of shares as above on 12/31/13 including the extra 14 shares of Vector added. Accumulated dividends as cash to date would be $1728.55 for the first two quarters of 2014 plus the $3498.12 from 2013 for a total of $5226.67. That would be $59,254.29 total return, for a 40.93% gain over the original $35,000 invested on 10/31/11, or for 2 years, 9 months. Not too bad, Dogs!

(click to enlarge)DGI Lite 2014 0804

Source: Catching Up With The DGI Lite DiviDogs