“Do you know the only thing that gives me pleasure? It's to see my dividends coming in.” John D. Rockefeller (American Industrialist and Philanthropist, founder of the Standard Oil Company, 1839-1937)
That single line sums up the essence of what it means to hold a portfolio of dividend stocks. In the current environment it is rare to continuously receive a raise, and most dividend stocks do just that and consistently. There are several strategies one can utilize to invest. Which one is the best? Well, that is arguably the hardest investment question one can ask. And you are likely to get several answers that are both logical and valid.
My thoughts are that the single best investment strategy is one in which you simply invest. The simple act of placing funds in the market instead of utilizing elsewhere for the sole purpose of building wealth will increase your odds of financial success when compared to not doing so.
With 5 years of contributing to a retirement account under my belt I am fortunate enough to have funds where I do not have to start with a small cash balance. I have chosen to utilize a strategy of selecting several dividend stocks that are fairly to undervalued, have a history of increasing dividends, consistent and sustainable growth, and are leaders in their sector. These selections will form the foundation for my tax deferred retirement portfolio.
Within the next several weeks I will be transferring funds from a previously managed Roth IRA where fees averaged 2% and had lackluster results into an account that I will personally manage. Depending on the balance of the mutual funds at the time of the transfer fulfillment, it is likely that I will have just over $20,000 transferred to my Sharebuilder account to begin my portfolio. This is expected to occur at someone point in February. I will be starting my portfolio from the beginning. I have several advantages with building this portfolio;
1. Lower fees as I will be holding for long term and thereby trading less
2. Tax incentive as a Roth IRA is taking contributions at my current rate. At 28 years old I am likely at my lowest tax rate in my life, it will only go up from here
3. As a State Government worker I am required to contribute to a pension fund, which if solvent by the time I am able to retire will supplement any other retirement funds
a. As a result of essentially saving twice for retirement I am able to be less concerned with risk and loss
4. With over 30 years before I am required to take a distribution, the rate of compounding will be incredibly high
I have decided to focus on a core group of 6 stocks which make up roughly 16% of the total portfolio. I feel this core selection will provide a stable foundation from which I can add to on my way to establishing a successful DGI portfolio. Unfortunately for me, I am about a year or two late to the game and have missed several opportunities at well-known companies such as MCD, KO, XOM which are currently moderately or overpriced.
My selections show my preference towards solid large cap blue stocks. However, as I become established I will add to this portfolio. I wanted to stick to a few different criteria in selecting my positions. First, I preferred a yield at or over 2.5% and have increased their dividends for at least 10 consecutive years or have a long-term history of increasing dividends. The results are shown below:
Philip Morris International INC. (PM)
Normal P/E: 14.8
While Philip Morris International does not have at least 10 consecutive years of dividend increases as it spun off in March of 2008, it is likely to do so moving forward. With more favorable environments in the international markets, this stock is likely to continue to grow earnings due to fewer government restrictions outside the US. With a 5 year estimated growth rate of 12.5%, this stock is poised to do well.
AFLAC Incorporated. (AFL)
Normal P/E: 18.1
Aflac is the largest provider of supplemental insurance in the United States and obtains the large majority of its earnings from Japan. The company claims that it insures "one of four Japanese households." While struggling as of recent due to a catastrophic weather event, I believe the effect on the company is being overstated. Its payout ratio is less than 60% which is easily sustainable and it is has an expected dividend growth rate of 15%.
Chevron Corporation. (CVX)
Normal P/E: 12.8
Chevron is an American multinational energy corporation that is deeply involved in oil, gas, and geothermal energy industries. In addition, it is also participating in exploration, production, refining, marketing and transport, chemicals manufacturing and sales, and power generation. It boasts a solid balance sheet with a seven year EPS growth around 11%.
Intel Corporation. (INTC)
Normal P/E: 22.9
Intel is an American multination semiconductor chip maker. While a recent report states that the new versions of windows will utilize both Intel-chips and non-Intel chips, the company is expected to do well with the development of so called "Ultrabooks" and other products. With a 10 % estimated earnings per share this stock is situated nicely for growth.
Johnson & Johnson (JNJ)
Normal P/E: 20.9
Johnson & Johnson is an American multination pharmaceutical, medical devices, and consumer packed goods manufacturer. Many of the products in your own home are manufactured by JNJ. With an estimated growth rate of 6.2% for the next five years which trails PG, the current valuation leads to the conclusion this stock is a better value at current prices.
Lockheed Martin. (LMT)
Normal P/E: 16.2
Lockheed Martin is an American global aerospace, defense, security and advanced technology company with worldwide presence. Many have forgotten about this stock due to recent budget cuts towards the military but most forget that a lot of earnings (roughly 90%) come from overseas. As the largest defense contractor allows for stable earnings here in the US while overseas contracts may provide growth. This stock is on sale at current valuations. Political environments are cyclical and as such this stock is bound to rebound if held in a long term portfolio.
Of course these selections may be altered if there is significant prices changes between now and February. We have already begun to see a rise in the price of Aflac for example. What I hope to happen is for prices to remain stable so that current valuations aren’t changed. If my previous account were to make money between now and the date of the transfer, any profit over $20,000 will be placed in cash and be used towards the addition of a 7th selection or placed into one of the core selections if better valuation is there. I will rinse and repeat every month or two with new capital. My current plan has me contributing $416 dollars per month totaling the maximum allowed ROTH IRA contribution for the given year which is 5K.
We will re-evaluate not only these selections prior to purchase but also re-evaluate every time my cash balance reaches between 1-2K between dividends and fresh capital. This article serves two purposes. The first is to clearly state my investment goals, in a manner that I can refer back to in order to maintain a consistent strategy. Secondly, it serves to produce friendly discussion regarding different selections and ideas in regards to either which selection to make as well as how to utilize new capital moving forward.
This portfolio will be real, and I will make my sections in February. So I am putting my money where my mouth is. I also will be transparent with the Seeking Alpha community going forward so progress and decisions will be open for discussion.
Disclosure: I plan to potentially add positions to the stocks listed above at some point during the next month.