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Dividend growth investing, retirement
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The Dividend Growth Portfolio is a public “demonstration” portfolio to illustrate the practical application of principles that I use in dividend-growth investing. The portfolio contains real money and actual stock holdings. I publicly report on its results. That allows interested persons to see successes and mistakes, and to form judgments on whether the principles make sense and work in the real world. These articles let people comment on what they think about the principles, suggest improvements, and consider how my decision-making compares to what they would do.

I advocate semi-annual formal Portfolio Reviews. The reason is to establish a disciplined schedule of examining the portfolio, thinking about each stock, and taking appropriate actions. Formal portfolio reviews, along with paying attention to news about your companies on an ongoing basis, combine to create a buy-and-monitor habit that helps avoid the pitfalls of a more passive buy-and-forget approach.

All that said, this review is two months late, so there’s a blunder right there. Luckily, little or no harm was done by the delay.

Normally in dividend-growth investing, not much portfolio turnover is expected. Most stocks, once purchased, are held for a long time, ideally “forever.” But stuff happens, and during a Portfolio Review, each holding carries a burden of justifying its continued existence in the portfolio. As explained more fully in the first “Portfolio Forensics” article cited above, some of the questions for each stock are:

  • What is its yield on cost (YOC)? The overall goal in this portfolio is to attain a YOC of 10% within 10 years of its creation in 2008. To get there, each stock must progress steadily via annual dividend increases. Price gains are nice but don’t help toward the central goal. Stocks that began with higher initial yields do not have to progress as fast to make it to the finish line on time, but they still need to advance. The formula for YOC is: Yield on Cost = (Current Yield x Current Price) / Acquisition Price. In other words, it is the yield on your cost.

  • Should some profits be taken? If the company’s price has skyrocketed, that may present an opportunity to cash out some or all and purchase another stock selling at a better valuation and offering a higher yield.

  • Is the safety of its dividend in question?

  • Is there a chance to improve the portfolio by making a stock swap or adding a new position? Improvements can be made along various dimensions, such as increasing the total dividend stream, diversification, or gaining a higher expected rate of dividend growth.

  • Has the dividend growth rate taken a turn for the worse? Is the stock no longer on track for reaching the 10%-in-10-years goal?

After the last review in August, 2010, I made decisions to sell three stocks: Diageo (NYSE:DEO) because of an inconsistent pattern of dividend increases when translated to U.S. dollars; Emerson Electric (NYSE:EMR) because of slow dividend growth; and Royal Bank of Canada (NYSE:RY) because it froze its dividend. Those sales produced about $5800. I added about $600 in accumulated dividends, and used the proceeds to make two purchases:
  • Added to existing position in Alliant Energy (NYSE:LNT) ($3490)
  • Initiated position in Johnson & Johnson (NYSE:JNJ) ($2910)

The purchases have worked out great:
  • The Alliant Energy purchase is up 11% in price, and its YOC has already advanced to 4.9%

  • Johnson & Johnson has gone up 10% in price and its YOC stands at 3.8%

Here’s my current thinking on several positions in the portfolio.

Abbott Labs (NYSE:ABT): I own three slugs, purchased in 2008, 2009, and 2011. (The latter purchase was made with accumulated dividends.) Their YOCs are 3.5%, 4.0%, and 4.0% respectively. The three slugs together make up 7% of the portfolio and have registered a tiny price gain. Abbott has already increased its dividend 9% for 2011 after a 10% increase in 2010. The stock is working fine. Decision: Hold

Alliant Energy (LNT): Two slugs, both purchased in 2010. They have a blended price gain of 13% and YOCs of 5.4% and 4.9% respectively. The position makes up about 10% of the portfolio. Alliant has already announced a dividend increase of about 8% for 2011. Decision: Hold.

Johnson & Johnson (JNJ): Position initiated in 2010 has worked out well so far: Up 10% in price and yielding 3.8%. This position makes up about 6% of the portfolio. The company increased its dividend 9% in 2010 and has not declared its increase for 2011 at this time. I do not expect JNJ’s well-publicized operational screw-ups and product recalls to have a long-term impact on the company. I believe the company will fix the problems. Decision: Hold.

Kinder Morgan Energy Partners (NYSE:KMP): Purchased in 2008, KMP comprises about 8% of the portfolio. It is up 30% in price and YOC has reached 7.9%. Kinder Morgan Energy usually increases its distribution more than once per year. In 2011, KMP has increased its dividend twice for a total of about 3% so far. This is working fine. Decision: Hold.

McDonalds (NYSE:MCD): MickeyD’s has been a real all-star. Purchased in 2008 and again in 2009, it comprises 13% of the portfolio. Its blended price increase is 31% and the YOCs are 4.1% and 4.6% respectively (up from 3.7% and 4.1% last August). Typically raises its dividend with the year’s final payment; last December’s increase was 11%. Decision: Hold.

Sherwin-Williams (NYSE:SHW): The room I am sitting in was painted with SHW paint and it looks great, but I am going to sell the stock. Last August, I noted that its dividend increases had been just 1% for 2009 and 2010. The decision then was to hold but consider selling next time if the dividend increases did not improve. “Next time” is now. SHW’s increase for 2011 came in at 1% again. Its current yield is only 1.7% (which would not qualify it as a new purchase), and my YOC is only 2.5%. This was one of the portfolio’s original holdings in 2008, and it comprises 10% of the portfolio, but its time is up. It is unlikely that its YOC will reach anything close to 10% in the next six years. The good news is that I have a 47% price gain, so I will have about $5000 to deploy elsewhere. Decision: Sell.

The Dividend Growth Portfolio’s other holdings are Chevron (NYSE:CVX), Realty Income (NYSE:O), Pepsico (NYSE:PEP), AT&T (NYSE:T), and Telefonica (NYSE:TEF). Without going into the details, the decisions on all of those are to continue holding. The unweighted simple average YOC of all of the portfolio’s holdings is 4.8%, up from 4.6% last time. The purchase of replacement(s) for SHW will probably hold the portfolio’s YOC at about the same level or improve it slightly. More importantly, they will position the portfolio for better future advances, since I will be looking for stocks with dividend increases better than 1% per year.

I am compiling a new Shopping List based on my e-book, Top 40 Dividend-Growth Stocks for 2011. Following normal practice, I will update the information on candidate stocks, especially their yields, valuations and dividend growth rates, before making any purchase. I do not anticipate difficulty in finding a stock or two that will improve the portfolio’s makeup and performance over the long haul. Thanks to Sherwin-Williams for a good try, but you are outta here.

This is the fifth article in a series about my Dividend Growth Portfolio. Earlier articles in the series are:

Source: Dividend Growth Portfolio Review: Sherwin Williams Is Out