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Dividend growth investing, retirement
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I yanked my head out of the sand the other day to see what is going on in the world. I finally finished the 2012 edition of Top 40 Dividend Growth Stocks for 2012. I've been buried in that effort since Halloween. I'm ready to write some articles. If I can find my napkins somewhere, I've got a bunch of good ideas scribbled down. At least they seemed good when I scribbled them.

As many know, I maintain a public demonstration Dividend Growth Portfolio (DGP). I keep it out here in the open so that people can see how one person (me) executes a dividend growth strategy and what its results are. When I first got started in investing many years ago, I was appalled at how many predictions and recommendations were made, or flat performance claims ("I've averaged 14% returns for 26 years"), with no documentation to back up the claims and no follow-up at a later time to let you know how the predictions did. It's still appalling, but I digress.

My antidote to unaccountable punditry is to have an actual real-money real-time portfolio that shows what happens. I apologize that it has only existed since 2008. But it does reflect real-time decisions, not back-tested examples of what would have happened if you did such-and-so 20 years ago. This article is about what actually did happen, is happening right now, and might happen in the future, all reflecting decisions made in real time without the benefit of 20-20 hindsight.

The DGP has real money and stocks and exists at E*Trade. The background is that I took an old aimless portfolio and retooled it in 2008 to become a dividend growth portfolio. As a result, it had a goofy starting value of $46,783 on June 1, 2008. You may recall that 2008 was not a great time to start a new stock portfolio. My bad. But it has turned out to have the educational advantage of showing how dividends help a portfolio recover from even a major market skid.

Income Performance

In 2011, the DGP's dividend stream increased by 9% and its TTM (trailing twelve month) yield on cost increased from 3.8% to 4.2%. The incoming dividends - which I accumulate rather than drip - financed three new purchases of about $1000 each. Reinvesting dividends helps the portfolio compound faster and also accelerates the pace of the rising dividend stream.

The DGP's mission is to play a role in accumulating income rights for my retirement. The specific goal for the DGP is to have it yielding 10% on my original investment within 10 years of its creation. In other words, in 2018 I want to receive at least $4678 per year in dividends from it. Because no new money is added to the DGP, that $4678 represents a 10% yield on cost in 2018. I know that term ("yield on cost") drives some people up a wall, but for me it has always served as a handy way to express my goal, plus it serves as a benchmark to see how I am progressing along the way.

Here's the year-by-year progress:

Year Dividends Received Yield on Cost % Increase
2008 (7 mos.) $998 2.1%
2009 $1568 3.4% 57%
2010 $1799 3.8% 15%
2011 $1960 4.2% 9%
2012 (projected) $2221 4.7% 13%

The 2012 projection is based on E*Trade's Income Estimator. That handy tool assumes that all known information will continue unchanged throughout 2012. Thus it actually underestimates 2012's probable performance for three reasons:

  • Companies will increase their dividends. Dividend increases to be declared during 2012 are not included yet in the Estimator's projections.
  • Additional shares purchased with reinvested dividends will pay dividends themselves. Until the new shares are purchased, the Estimator does not know about them. Hell, I don't even know what I will buy until I do it.
  • Other changes may be made to the portfolio-such as swaps into higher-yielding stocks-that will increase the dividend stream. Again, the effects of these changes are not known to the Estimator until they are made.


In 2011, the Estimator's first projection of dividends at the beginning of the year proved to be 7% short of the actual dividends received. All three of the reasons listed above played a role. On my website, I track this portfolio each month, and it is fun to see the Income Estimator's projections update every month as it has new information to work with. By the end of the year, of course, all information will be in for the year, and the final estimate will match what the year's total income actually will be.

A couple of other notes. First, notice that the 4.7% projected yield on cost for 2012 represents the "run rate" for the portfolio right now. It's like the APY on a CD: It reflects payments expected to be made. Second, the annual increase shown in the last column applies to both dividends received and yield on cost. Since each is a different way of expressing the same thing, each one's percentage increase is identical from year to year.

Portfolio Reviews

I reviewed this portfolio twice in 2011, in April and October. The April review resulted in significant changes. (They are described in this article: "Dividend Growth Portfolio Review: Sherwin Williams Is Out.") I sold original holding Sherwin Williams (NYSE:SHW) at a handsome profit and scooped up some more Johnson & Johnson (NYSE:JNJ) and McDonald's (NYSE:MCD) at higher current yields. Both purchases immediately bumped up my income stream, which is the whole idea. Sherwin Williams' current yield had dipped too low, partly because of its price runup and partly because they became stingy with dividend increases. So I dismissed them: Failure to achieve objectives. They make great paint, but that was not my objective for them in this portfolio.

The review in October produced no changes. (See "Dividend Growth Portfolio Semi-Annual Review: Pretty Boring Stuff... The Dividends Just Keep Increasing (Yawn).")

Dividend Reinvestments

Under the rules governing this portfolio, when the accumulated cash from dividends reaches $1000, the funds are re-invested in a company from the current edition of Top 40 Dividend Growth Stocks, which serves as each year's shopping list for me. The particular stock for reinvestment is selected based on current valuations and yields. The object is always to improve the DGP in some way, such as its current yield, its yield on cost, or its dividend stream, which are three ways of saying the same thing.

I made three dividend reinvestments in 2011. In January and June, I added to my position in Abbott Labs (NYSE:ABT). In November, I added more shares of AT&T (NYSE:T). All three purchases caused immediate jumps in the dividend stream's run-rate.

Current Portfolio

The DGP holds ten stocks and is probably too concentrated for most people's tastes. It works for me. I do intend slowly to increase the number of positions to spread risk more but feel no sense of urgency about it. (For a different and very logical "core" and "other" approach to portfolio construction, see Bob Johnson's excellent article, "Dividend Growth Portfolio Core Holdings Performance for 2011.") I let the positions float against each other so long as they stay within broad parameters for position sizing. I take the same approach to sectors, meaning that I don't try to have each one represented. Rather, I follow the money in the belief that dividends are where you find them. I do strive for a well-rounded portfolio within those broad rules. I don't expect to drop below ten or exceed 20 stocks in the portfolio.

Here's what's in the DGP right now:

  • Abbott Labs (ABT)
  • Alliant Energy (NYSE:LNT)
  • AT&T (T)
  • Chevron (NYSE:CVX)
  • Johnson & Johnson (JNJ)
  • Kinder Morgan Energy Partners (NYSE:KMP)
  • McDonald's (MCD)
  • Realty Income (NYSE:O)
  • PepsiCo (NYSE:PEP)
  • Telefonica (NYSE:TEF)
  • Cash ~ $365. This is from incoming dividends. It will be reinvested when it reaches $1000. My run-rate for receiving dividends is approaching $200 per month, although the take varies from month to month. So I'll probably make two reinvestments this year, in about April and again in about October.


Total Performance

As stated earlier, the mission for this portfolio is focused on income. In fact, it is focused on future income, with its objective stated in terms of what I want the income to be in 2018. That said, the current total value of the portfolio is $56,128, or +21% since its inception. Its total value increased by 15% in 2011. The S&P 500 is down 10% since I started the DGP, and it was flat last year (+2% if you include its dividends). The portfolio's current (projected) yield is about 4%, or about twice the yield of the S&P 500.

Issues and Decisions in 2012

Besides figuring out where to reinvest dividends this year, I see two issues on the horizon for 2012. (Others may arise during Portfolio Reviews.)

First, Abbott Labs has announced that it will split itself up in 2012 into two companies, Abbott and Costello. That gives me a few months to decide what if anything to do about that holding, which comprises about 9% of the portfolio. As discussed in "Abbott: Still a Dividend Growth Stalwart?," there are lots of directions this could go in, and not all of them are good for a dividend growth investor. I dislike the uncertainty. I might end up selling part and keeping part of my position. I still have a few months to decide.

Second, McDonald's price has risen so much that its yield has dropped below 3%. That is one of my triggers for "think seriously about selling." The price increase has also caused the position to balloon to almost 20% of the portfolio, which is another one of those triggers. I'm sitting on a 61% capital gain in a portfolio whose mission is to accumulate income assets. So I am seriously thinking about selling part of the MCD position and redeploying the proceeds into a higher-yielding stock that would bump up the dividend stream.

From reading other articles, I have learned that many dividend growth investors have difficulty with these "swap" decisions, especially when the stock in question has reached a lofty yield on cost such as 10% or 15%. I try to treat them as just routine portfolio management decisions. I did not invest in McDonald's to get a big capital profit, but now that it has happened, I want to keep my eye on the ball, which is the income stream. Note here how the selling guidelines lead to a similar thought pattern as "rebalancing," which is one of the mainstays of traditional asset-allocation methodologies.

I'll probably report on this portfolio again in April after the next Portfolio Review.

Disclosure: I am long ABT, LNT, T, CVX, JNJ, KMP, MCD, O, PEP, TEF.

Source: Rising Dividends: My Dividend Growth Portfolio 2011-2012 Report