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We have had a very mild winter, here in Bumpass, Virginia. It's a good thing too, because the modular high school has just been finished in the parking lot of the quake damaged high school and the replacement Thomas Jefferson modular elementary school was built on the recreation field at Trevilians Elementary. With this work complete, playground equipment is being transferred to the new modular school site to make the children feel more at home in the trailers and a canopy is being built over the walkway between the trailers. The middle school students will be glad to get off the 2 day per week shift schedule and have their middle school back full time.

Now that the Baby Boomers are retiring at an accelerated pace, I thought I would continue my series on Dividend Growth Portfolios for building retirement funds. If one starts early in their career-say their 20s-it is easier to build up a large enough portfolio to handle most any situation. But if, due to unforeseen circumstances, one has not saved enough and finds themselves prematurely out of a job, it is nice to have some funds saved up. When coupled with Social Security and any pensions, it will be possible to enjoy the golden years.

Today, I will look at three dividend growth stocks which I have screened from David Fish's CCC stock list. These stocks are all large cap with dividends approaching my minimum 4% yield + high dividend growth rates. In the secular bear market that we find ourselves in, dividend yield + dividend growth can provide good returns, even when (as last year) there is no capital appreciation of the market (as represented by the SPY). When using the dividend growth model, time is on your side. The most important part of the plan is to purchase reliable dividend paying stocks with long track records of increasing dividends. Once purchased, they should be set on drip and monitored for any news events. Broad diversification using the SPY as a model for sector allocation is what I pursue and have recommended to my children and grandchildren. I like to diversify a sector with several stocks and treat the whole like a mini ETF. A recent series on technology stocks by Chuck Carnevale has just been completed and sheds a view from a different angle. (Data from Yahoo Finance and David Fish's CCC charts).

  1. Intel Corporation (NASDAQ:INTC) -- Technology Sector. Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. This Dividend Challenger has 8 years of increasing dividends. The current yield is 3.14%*. The 5-year dividend growth rate is 14.4%, while last year's dividend growth rate was 24.2%. The current P/E is 11.19. The projected earnings per share growth rate for next year is 7.88%, while for the next 5-years it is 11.6%. *It should be noted that the yield does not meet my 4% minimum for initial investment. I would hold out for the next dividend increase, to see if the 4% yield will be met.

  2. Microsoft Corporation (NASDAQ:MSFT) -- Technology Sector. Microsoft Corporation develops, licenses, and supports a range of software products and services for various computing devices worldwide. The company's Windows & Windows Live Division segment offers PC operating systems that primarily includes Windows 7 and Windows Vista operating systems; Windows live suite of applications and Web services; and Microsoft PC hardware products. This Dividend Challenger has 7 years of increasing dividends. The current yield is 2.7%*. The 5-year dividend growth rate is 12.9%, while last year's dividend growth rate was 23.6%. The current P/E is 10.96. The projected earnings per share growth rate for next year is 11.57%, while for the next 5-years it is 9.4%. *It should be noted that the yield does not meet my 4% minimum for initial investment. I would hold out for the next dividend increase, to see if the 4% yield will be met.

  3. International Business Machines (NYSE:IBM) -- Technology Sector. International Business Machines Corporation provides information technology products and services worldwide. Its Global Technology Services segment provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology, and maintenance services, as well as technology-based support services. This Dividend Contender has 16 years of increasing dividends. The current yield is 1.63%*. The 5-year dividend growth rate is 21.4%, while last year's dividend growth rate was 16%. The current P/E is 14.62. The projected earnings per share growth rate for next year is 10.91%, while for the next 5-years it is 11.1%. *It should be noted that the yield does not meet my 4% minimum for initial investment. This stock could be purchased by a younger investor for the strong earnings per share growth and dividend growth rate. The stock has had a strong run since January 2009. I would wait for a pullback to $162, which would reflect the earnings per share growth rate.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).


(Click to enlarge)

As can be seen from the chart, IBM held up the best during the Great Recession and it's 5-year price growth was 100%. INTC has been flat until October of 2011, when it broke out of the $18-$24 range. MSFT has been cyclical averaging around $30 since 2000.

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

INTC

$.18

463.6

$83.91

MSFT

$.16

370.91

$59.35

IBM

$.65

60.22

$39.14

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (January 2011-January 2012).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 479.75 $367.34 16.15
INTC 11/03/11 $0.21 475.63 $99.88 $24.20 4.13 $11,610.05
08/03/11 $0.21 471.09 $98.93 $21.81 4.54 $10,373.42
05/04/11 $0.18 467.49 $84.62 $23.50 3.60 $11,070.64
02/03/11 $0.18 463.60 $83.91 $21.57 3.89 $10,083.76
Totals 380.74 $254.71 9.83
MSFT 11/15/11 $0.20 377.92 $75.58 $26.74 2.83 $10,181.06
08/16/11 $0.16 375.55 $60.09 $25.35 2.37 $9,580.18
05/17/11 $0.16 373.11 $59.70 $24.52 2.43 $9,208.39
02/15/11 $0.16 370.91 $59.35 $26.96 2.20 $10,059.08
Totals 61.24 $175.78 1.02
IBM 11/08/11 $0.75 61.00 $45.75 $187.25 .24 $11,467.66
08/08/11 $0.75 60.72 $45.54 $166.22 .27 $10,139.12
05/06/11 $0.75 60.46 $45.34 $168.89 .27 $10,255.71
02/08/11 $0.65 60.22 $39.14 $166.05 .24 $10,038.67

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

INTC

$83.91

$84.62

$98.93

$99.88

MSFT

$59.35

$59.70

$60.09

$75.58

IBM

$39.14

$45.34

$45.54

$45.75

Totals

$182.40

$189.66

$204.56

$221.21

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:


(Click to enlarge)

It can be seen from the table that the income for the year was $797.83. On an investment of $30k, this was 2.65% yield. It can also be seen from the Total Portfolio Value chart that the ending portfolio value was $33,258.77. This computed out to a gain of $3,258.77 or 10.86%. The capital gain was due mostly to IBM and INTC. IBM took off in the last 2 years (culminating in Warren Buffett's purchase of 5% of the company on November 14, 2011).

When compared to SPY, these technology stocks outperformed capital gain wise over the 5-year period shown on the chart. Since the dividends were reinvested, the 2.65% yield went into the total return.

Conclusion: Retirement investing is a long-term proposition. A broadly diversified portfolio is necessary in order to mitigate risk of loss (don't put all your eggs in one basket). Over the course of an investing career, one can purchase 30-50 stock positions and limit risk of loss in any one position. I try to maintain position size of 2% of the portfolio. However, many of my long-term holdings exceed the 2% limit. Technology is a large sector in the U.S. Economy (17.46% of SPY) and my portfolio is short of that allocation. I foresee my allocation to technology stocks rising to the level of SPY over the longer term through strategic purchase of positions at 4% yield. I am well on my way with 4.7% position in INTC. I believe there is time to ease into long term holds, by dripping the current stocks and making strategic purchases of selected stocks when the yield is attractive. In retirement, I have found that current income is more important to me than future growth. Safety of principal is also a major consideration. I have also found through the cyclical crashes of 2001 and 2008 that all stocks go down together and correlation tends toward 100%. After the crash, dividend paying stocks that continue to raise their dividends through the downturn, rebound the fastest and the dividends reinvested during the downturn provide increased numbers of shares when compared to a rising market.

Disclosure: I am long INTC.

Source: Retirement Portfolio Using Technology Stocks