Updating Our Dividend Growth Portfolio: Adding Pepsi

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Includes: PEP
by: The Dividend Bro

Summary

Pepsi announced a 7.1% dividend increase for the 2nd quarter.

The company now has 44 straight years of dividend increases.

Companies that pay and raise dividends will provide income in retirement.

Shares were near our price target and we recently initiated a position.

As dividend growth investors, my wife and I are constantly on the lookout for stocks that hit our target price. When a company we want to own reaches our target price, we like to be ready to pull the trigger. To see how we come up with a price target, click here. Basically, we use the average of Morningstar fair value, S&P Capital's twelve-month price target and fair value. We then compare the current share price with this average to determine how far above or below fair value a stock is.

On January 12th, 2016, I wrote an article discussing five dividend paying stocks that my wife and I don't yet own in our portfolios, but would like to (you can read the article here). Last month, we purchased Visa (NYSE:V) very close to our price target of $72. A few days after that purchase, we were able to pick up shares of Cisco (NASDAQ:CSCO) at $23.68, below our price target of $25. For our most recent purchase, we again went back to our shopping list and bought shares of soda and snack food giant Pepsi (NYSE:PEP) on Friday, February 12th at $99. This was slightly above our target price of $98.

Pepsi reported quarterly earnings on February 11th. The company's revenue for the fourth quarter of 2015 was $18.59 billion. This was almost a 7% drop compared to the same quarter in 2014, but this was mainly due to the impact of foreign currency exchange rates. Sales for North American Frito-Lay and beverages were up 2%. This is fairly strong growth with the rumored demise of sugary soft drinks and unhealthy snacks. Even with the currency impact, Pepsi had 4% overall organic growth. This is a fairly impressive performance for a large multinational soda and snack company in a strong U.S. dollar environment.

Perhaps of more note for dividend investors is that Pepsi announced a 7.1% dividend increase for the June dividend. The first quarter dividend will remain $0.7025 per share. If Pepsi's dividend history repeats itself, there will then be three quarterly dividends of $0.7525, for a total of $2.96 per share for 2016. At current prices, that gives us a 3.00% yield. When we retire, we plan to live off the income that dividends provide. To ensure that we have enough funds to cover expenses, we will need to have a portfolio made up of companies that pay reliable dividends as well as offer annual dividend increases. If you count this announced increase, Pepsi has now raised dividends forty-four years in a row. That is the kind of income stability we want in our portfolio.

Current Positions

Our total portfolio now consists of thirty companies: 3M (NYSE:MMM), AbbVie (NYSE:ABBV), Aflac (NYSE:AFL), Altria (NYSE:MO), Apple (NASDAQ:AAPL), AT&T(NYSE:T), Boeing (NYSE:BA), Chevron (NYSE:CVX), Cisco , Coca-Cola (NYSE:KO), ConocoPhillips (NYSE:COP), CVS Health (NYSE:CVS), Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE), General Mills (NYSE:GIS), Gilead (NASDAQ:GILD), Johnson & Johnson (NYSE:JNJ), JPMorgan (NYSE:JPM), MasterCard (NYSE:MA), Microsoft (NASDAQ:MSFT), Pepsi, Philip Morris (NYSE:PM), Procter & Gamble (NYSE:PG), Realty Income (NYSE:O), Southwest Airlines (NYSE:LUV), Starbucks (NASDAQ:SBUX), Target (NYSE:TGT), Ventas (NYSE:VTR) Verizon (NYSE:VZ) and Visa . Our goal is to have thirty to thirty-five positions.

Updated Sector and Dividend Allocation

The following table contains our portfolio breakdown as well as the estimated dividends for 2016. Ideally, no sector should account for more than 20% of the portfolio or dividends. The only issue that we currently have is that consumer staples make up almost a quarter of our estimated dividends for the year. If this were another sector, I would be worried that we were overexposed to this area of the economy. This portion of the portfolio consists of companies that produce tobacco (Altria and Philip Morris), sodas and snacks (Coke and Pepsi), processed food (General Mills) and consumer products such as deodorant and laundry detergent (Procter & Gamble). That is diversified collection of comapnies within this sector. Going forward, we may stay away from purchasing more shares of companies in consumer staples sector until we have more balance on where our dividends come from.

 

% of Portfolio

% of 2016 Estimated Div

Consumer Discretionary

6.72%

4.16%

Consumer Staples

19.69%

23.75%

Energy

6.75%

8.87%

Financials

9.27%

6.26%

Healthcare

13.56%

14.12%

Industrials

9.10%

9.75%

REITs

7.51%

11.93%

Technology

7.94%

6.85%

Telecommunications

8.90%

14.58%

NY Life 403b

9.76%

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Cash

0.79%

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Click to enlarge

Future Purchases

As previously stated, we would like to have thirty to thirty-five positions in our portfolio. We've spent much of the past few months expanding our holdings. Going forward, we are more likely to add to our current holdings than initial new ones. However, if another company on our shopping list hits a target price we may choose to further expand the portfolio.

Conclusion

The market has been in the midst of a large sell off to start 2016. The S&P 500 is already down 8.77% and seems to be having a tough time rallying. This sell off has caused the stocks of quality companies that consistently raise dividends to reach our price targets. This has already been the case with Visa and Cisco and now we've added Pepsi to our dividend growth portfolio. We will be looking to add to these and other positions at prices we want.

Disclosure: I am/we are long PEP, CSCO, V, BA, AFL, ABBV, COP,GILD,GIS,JPM,KO,XOM,MA,MMM,MO,MSFT,PG,PM,T,TGT,VTR,GE,JNJ,LUV,O,SBUX,VZ AAPL, CVS, CVX.

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: We are not investment professionals. Please do your own research before making an investment decision.