DGI For The DYI: 2015 Recap

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Includes: ABBV, ABC, AMGN, COST, CVS, D, GILD, HD, KMI, LOW, MCD, MDP, MDU, MMM, O, OHI, PSX, SBUX, STAG, T, THO, V, WEC, WSO, XOM
by: Eric Landis

Summary

A New Year brings a new name to the ongoing series covering my journey towards future retirement with "Dividend Growth Investing" as a "Do-it Yourself Investor".

A large dividend cut and a shift to higher quality positions leads to my first ever drop in quarterly dividends received.

I share my trades for the fourth quarter and prospects for 2016.

A New Year And A New Portfolio Name

The beginning of 2016 marks the 3-year point in my transition into dividend growth investing. The new year also brings a new name for the portfolio, as it has been changed from "401k Reconstructed" to "DGI for the DYI".

There are a couple reasons for me doing so, the first of which I'm a bit embarrassed to admit. First and foremost, after several years of calling this a 401(k) account, I have come to the realization that I was mistaken, and it is in fact a Simple IRA account. This was an oversight on my part as we've always just called it our 401(k) at the office and, being a bit naive to the differences between the two, I never thought twice about it or questioned the terminology.

However, when recently looking at an account statement from my brokerage, there at the top of the document I saw "Simple IRA" staring back at me, and the light bulb went on that I've been using the wrong definition in describing the account. This may have caused confusion in the past on how I've been able to invest funds in individual securities, as there is generally not that option available to people with 401(k) accounts. For that I apologize, as it was never my intent to mislead, rather it was simply an embarrassing mistake on my part.

Secondly, I have been considering a name change because the type of account it resides in really isn't the important part of the story, the methodology behind creating a dividend growth portfolio is. I enjoy sharing my experiences, successes, and yes, mistakes with readers and feel that labeling it simply as a "Do-it-Yourself" portfolio is a more all-encompassing and all-inclusive title. Do-it-yourself investors have many different types of accounts from which they work towards their goals, and I felt having the "401(k)" label on it kind of took away from the big-picture.

When I first began this series three years ago, I was starting from scratch and didn't have a clue about dividend growth investing (some would say I still don't), but I hope that this series has helped others learn along with me in my journey. So once again, I apologize for any confusion, and plan to continue writing and sharing my thoughts on portfolio building and dividend growth investing in the months and years ahead.

Now on to the fun stuff!

Market Overview And Portfolio Highlights

The market was a volatile one during Q4 as we came off the August correction and rocketed back towards the 18,000 level on the DOW, only to end the year back on the downside. Here is a chart of the DOW and S&P 500 for the full-year 2015; hopefully you don't get motion sickness from the roller-coaster ride.

^DJI Chart

^DJI data by YCharts

The portfolio didn't fare quite as well as the market, due mostly to poor performances from my energy and industrials holdings. In all, the portfolio's value is $2,700 higher than a year ago, but when factoring in $4,028 in contributions during the year, actually saw about a 3% drop in value year over year.

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In addition to a lower value, the portfolio also saw its first ever quarterly decline in income during the fourth quarter. This was due to a few reasons, including: a special dividend paid by Cracker Barrel in Q3; a shift in dividend payout dates by Flowers Foods and Digital Realty Trust that resulted in two payments from FLO in Q3 and no payments from DLR during Q4; and some trades that were made out of higher yielding companies like Meredith Corp. (NYSE:MDP) into other positions. So while my income did fall a slight amount during the quarter, this was the result of one-time events and does not signal any long-lasting problem with the portfolio.

Looking at the year-over-year results, the numbers look much better, as dividend income increased by nearly 27% on an annual basis and by 22% when looking at the fourth quarter only.

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Now to my favorite part of the quarterly updates, the announced dividend increases! The fourth quarter is generally the busiest one of the year in this regard, and it didn't disappoint. There were 16 announced increases during the quarter, many of which were 10% or higher.

Date Company Previous Quarterly Rate New Quarterly Rate Sequential Increase Year Ago Dividend YoY Increase Dividend Yield LINK
10/1/2015 (NYSE:THO) $0.2700 $0.3000 11.11% $0.270 11.11% 2.36% LINK
10/14/2015 (NYSE:OHI) $0.5500 $0.5600 1.82% $0.520 7.69% 6.40% LINK
10/21/2015 (NYSE:KMI) $0.4900 $0.5100 4.08% $0.440 15.91% 14.42% LINK
10/21/2015 (NYSE:V) $0.1200 $0.1400 16.67% $0.120 16.67% 0.76% LINK
10/27/2015 (NYSE:WSO) $0.7000 $0.8500 21.43% $0.700 21.43% 3.03% LINK
10/27/2015 (NYSE:STAG) $0.1150 $0.115833 0.72% $0.113 2.51% 2.58% LINK
10/28/2015 (NASDAQ:AMGN) $0.7900 $1.0000 26.58% $0.790 26.58% 2.71% LINK
10/29/2015 (NASDAQ:SBUX) $0.1600 $0.2000 25.00% $0.160 25.00% 1.38% LINK
10/30/2015 (NYSE:ABBV) $0.5100 $0.5700 11.76% $0.490 16.33% 4.23% LINK
11/6/2015 (NYSE:ABC) $0.2900 $0.3400 17.24% $0.290 17.24% 1.45% LINK
11/10/2015 (NYSE:MCD) $0.8500 $0.8900 4.71% $0.850 4.71% 3.05% LINK
11/12/2015 (NYSE:MDU) $0.1825 $0.1875 2.74% $0.183 2.74% 4.30% LINK
12/3/2015 (NYSE:WEC) $0.4575 $0.4950 8.20% $0.423 17.16% 3.82% LINK
12/15/2016 (NYSE:O) $0.1905 $0.1910 0.26% $0.183 4.13% 1.46% LINK
12/17/2015 (NYSE:D) $0.6475 $0.7000 8.11% $0.648 8.11% 4.03% LINK
12/18/2015 (NYSE:T) $0.4700 $0.4800 2.13% $0.470 2.13% 5.65% LINK
10.16% 12.47%
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Overall, the 16 increases came to an average of 10.16% on a sequential basis and 12.47% on an annual basis. This is a slight uptick compared with what has been seen in previous quarters, and is also still well above my target of around 9%.

It wasn't all good news this quarter, however, as Kinder Morgan followed up its October increase with a 75% dividend cut in December. I will share my thoughts on this company and the dividend cut in the transactions section below.

Portfolio Transactions

It was a fairly quiet quarter for the portfolio as there was just one sale and two purchases during the period.

First of all, here was the sale and buys that were made:

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As you can see, I sold out of my position in Phillips 66 (NYSE:PSX) to start a new position in Exxon Mobil (NYSE:XOM) on the last day of the year. I made the trade for a few reasons. First because I have some concerns about PSX's refining margins now that the crude export ban has been lifted, as I believe this could lead to WTI trading more in-line with Brent crude prices. Secondly, while PSX has shown a strong trend of being shareholder-friendly, it yields just 2.7%, which is too low in my mind for a cyclical company.

On the flip side, I see Exxon Mobil as the blue chip of the integrated oil companies, and with it trading near 52-week lows and with a yield nearing 4%, I felt this was a great time to start a long-term position in the company. Exxon Mobil also offers a diversified business in comparison to Phillips 66, and offers more upside when the crude oil price recovers.

In my mind this was a win-win-win, as I instantly increase my yield by over 1%, swap out to a more diversified and AAA-rated company, and get a chance at more upside with the future oil recovery.

The Kinder Morgan purchase ended up being too early, as I made the buy on Friday, December 4 after the company reiterated its guidance of 6%-10% DCF growth for 2016, only to follow up with a 75% dividend cut announcement on the following Tuesday. My initial reaction was to sell on the dividend cut announcement, but after putting more thought to the matter, decided that the long-term prospects for the company are still strong, and selling at this point would simply be locking in losses at the low point in the business cycle.

While nobody likes a dividend cut, I believe the move was the right choice for the company and its future as it allows Kinder Morgan to maintain its investment grade credit rating, frees up funds for de-leveraging of the balance sheet, and allows cash flows to be used to buy assets on the cheap during the downturn. Even though things look bleak right now, I remain bullish on the long-term prospects of the American energy industry, and think Kinder Morgan will continue to play a big part in its future growth.

Another purchase was for Montana Dakota Utilities on December 31. MDU was one of the higher ranked companies for future income in my recent article covering the Top 10 Utility Stocks For 2016 and also had the highest projected total returns in the group. The MDU share price has been hit hard during the crude price downturn as one of its business units, Fidelity Exploration, resulted in lower reported earnings for the company and high uncertainty for future growth prospects. This negative was removed in November, however, as the company announced the sale of the subsidiary.

With that overhang now gone, I expect growth to be more consistent going forward. Analysts are currently projecting 5%-8% annual growth over the next 5 years, which is attractive when combined with the current 4.4% dividend yield.

The other purchase this quarter was on October 19th for 5 shares of Gilead Sciences (NASDAQ:GILD). Gilead remains one of the most undervalued companies in the market as it trades at just 8 times earnings. I believe this is primarily due to concerns that its recent growth with its Hepatitis C drugs, Harvoni and Sovaldi, is coming to and end. However, with a large pipeline of drugs in the HIV, Hepatitis B, liver disease, and oncology areas, and huge cash flow generation that could lead to a future acquisition, I think the future remains bright for the company.

Current Holdings

With those trades complete, this is how the portfolio stands as of the end of 2015. For some background, this portfolio was first created during the first quarter of 2013 and currently holds 50 positions. There are monthly contributions being made to the portfolio and a new purchase is made when $500 is accumulated. All dividends are automatically reinvested back into the company that paid them so I can continue to build positions in everything I own.

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Here is the current composition of the portfolio by sector:

While I am pretty comfortable with the portfolio as it currently stands, the technology and consumer discretionary sectors remain a bit higher than I desire and I probably will not be adding any additional purchases this year. If oil prices remain low, I may add to my energy holdings, and I would also like to add some more to my health care and utilities.

On The Radar

I will be looking to add more quality positions in 2016 and may do a bit of shuffling as the year goes on. There are still some excellent companies out there that I would still like to own, with CVS Health (NYSE:CVS), 3M Company (NYSE:MMM), Costco (NASDAQ:COST) and either The Home Depot (NYSE:HD) or Lowe's Companies (NYSE:LOW) at the top of my list.

Valuations vary among those listed, so I will continue to monitor them and see if an opportunity presents itself to make them a part of the portfolio.

Conclusion

2015 was the most challenging year thus far for the portfolio, as the energy and industrial sector pullbacks hit the portfolio hard. However, despite a few dividend cuts and capital losses in the portfolio, my dividend income was up substantially for the year.

As a do-it yourself investor, the dividend growth investing strategy remains my method of choice. Seeing my dividend income continue to rise despite turmoil in the market provides comfort and confidence that I will continue making progress towards my goal of funding a future retirement. This is a good feeling to have when hearing the gloom and doom from the talking heads on TV.

I hope this update finds you well, and I wish you happy investing in 2016!

Disclosure: I am/we are long AAPL, ABBV, ABC, AMP, CBRL, CHD, CLDT, CMI, CVX, D, DE, DLR, DPS, EOG, FLO, GE, GILD, GIS, GME, IBM, KMI, KO, LMT, MCD, AMGN, MDU, MNK, MSFT, NSC, NXPI, O, OHI, OXY, PII, PM, QCOM, ROST, SBUX, STAG, T, TGT, THO, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.