My K.I.S.S. Dividend Portfolio: 1st Quarter 2016 Update

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Includes: AAPL, AFL, AMP, APD, ARLP, AVA, BA, BBL, BDX, BLK, BPL, CBRL, CCC, CINF, CMI, COP, CSCO, CSX, CVX, D, DE, DLR, DRI, EMR, FCPT, FLIC, GD, GE, HAS, HRS, IBM, ITW, JNJ, KSS, LLL, LMT, MCD, MSFT, NHI, NLY, NSC, NUS, NVS, O, OHI, OKE, PAA, PAYX, PEP, PG, PTY, QCOM, RTN, RY, SDY, SO, SPY, SYY, TGT, TROW, TUP, UGI, UTX, VDIGX, WBA, WEC, WFC, WMT, WPC, WPZ
by: The Part-time Investor

Summary

A successful DGI portfolio can be created using very simple criteria.

Just a couple of hours every quarter is all that is necessary to manage a well-designed DGI portfolio.

My K.I.S.S. portfolio continues to provide acceptable (to me) dividend growth, and it has started to catch up from its underperformance from last year in terms of total return.

As I discussed in my last update, 2015 was a tough year for my K.I.S.S. portfolio. I entered the year over weighted with energy stocks, and the weakness of the whole sector through 2015 significantly affected my overall portfolio returns. I trailed the S&P 500, as measured by the SPDR S&P 500 Trust ETF (SPY), and the other dividend benchmarks I use, the SPDR Dividend ETF (SDY) and the Vanguard Dividend Growth Fund (VDIGX), in terms of total return throughout the year. But 2016 is a new year and already my portfolio has been turning things around. Energy stocks have at least stabilized, and in some cases turned around. But I'll discuss my returns this quarter later on. For now I will remind everyone that my portfolio is a dividend growth portfolio, and by this metric it continues to perform very well. Since dividend income is my ultimate goal, and it is this income that will support me in retirement, I'm quite comfortable with my portfolio's performance last year. And as the energy sector continues to rebound in the future I expect my total return will continue to improve.

Having said that, allow me to present my 2015 year-end portfolio update, and the details of the K.I.S.S. portfolio's performance.

Review of Fourth-Quarter Contributions and Dividends

These are the total dividends I received over the past three months, and the comparison (in parenthesis) to the same months during 2015:

January: $2,401.49 ($2,534.04) (-5.23%)

February: $3,466.61 ($2,787.79) (+24.33%)

March: $4,617.57 ($3,434.87) (+34.43%)

Total dividends collected in the fourth quarter: $10,485.16, an increase of 19.74% over the first quarter of last year.

Total fourth-quarter 401K contributions added to the account, including catch-up contributions: $1,500.

So the total funds available for investment this past quarter was $11,752.44, not including the funds from my stock sales.

The K.I.S.S. System

Over the past three years, I have been developing and refining my Keep It Simple, Stupid (K.I.S.S.) system for creating a dividend growth portfolio. The system I developed has been discussed in my previous updates, but as a quick summary, my criteria for buying stocks are as follows:

For Purchase of Regular stocks

  • The stock is on the Dividend Champions, Contenders and Challengers (NYSE:CCC) list (as compiled by David Fish)
  • The payout ratio < 60%
  • For stocks with a yield between 2.0-2.5%, the Chowder Number (Dividend yield + 5yr dividend growth rate) >16
  • For stocks with a yield between 2.5-3.0%, the Chowder Number (Dividend yield + 5yr dividend growth rate) >14
  • For stocks with a yield greater than 3.0%, the Chowder Number (Dividend yield + 5yr dividend growth rate) >12
  • A Quality Rating of A- or better from S&P
  • F.A.S.T. Graph shows a 10-year uptrend in earnings
  • F.A.S.T. Graph shows that the stock is not overvalued.

The use of different Chowder Number requirements is a change I made to my criteria over the past year. I prefer to have stocks with higher yields, but if the rest of the story is compelling enough I am willing to buy stocks with yields in the 2.0% to 3.0% range if their DGRs and Chowder Numbers are higher, as shown in my criteria above. Please see the previous article I wrote about different yields, DGRs and Chowder Numbers to read about my thinking on this topic.

For Purchase of MLPs, REITs, Utilities and Telecoms (High Yielders)

  • The stock is on CCC list
  • Yield > 4%
  • Chowder Number > 8%
  • DGR for all time periods (1-yr., 3-yr., 5-yr. and 10-yr.) at least 3.5%.
  • F.A.S.T. Graph shows a 10-year uptrend (or for the life of the company, if less than 10 years) in funds from operations ("FFO").
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.

My criteria for selling a stock are also very simple. I will only sell if the stock cuts its dividend. I do not look at anything else when deciding whether or not to sell.

Sales

BHP Billiton (NYSE:BBL) cut its dividend almost 74%. I, therefore, sold all of my shares.

I sold 255 shares of BBL at an average price of $19.6838, and a total commission of $15.25 (it took multiple sales in different accounts), for a total of $5,216.215.

ConocoPhillips (NYSE:COP) cut its dividend almost 66%. I, therefore, sold all of my shares.

I sold 297 shares of COP at an average price of $38.37, and a total commission of $16.82 (it took multiple sales in different accounts), for a total of $11,396.95.

Purchases

After running the above KISS screen, although many passed my criteria, none of them were compelling enough for me to purchase. With over 60 stocks already in my portfolio a stock has to seem to me to be a really amazing value for me to buy it. Therefore I did not purchase any new stocks. I will say that I strongly considered Kohl's (NYSE:KSS) and Cisco (NASDAQ:CSCO), but they both have only B+ quality rankings for S&P, and I chose to stick to my criteria.

PAAY and Reinvesting

Since I made no new purchases I reinvested all of my available cash into some of the stocks I already own. When reinvesting I put my available cash, not back into the stocks that paid the dividend, but instead into more shares of my most undervalued positions. This is where my "Percent Above Average Yield" (PAAY) system comes in. (I discussed how I use PAAY in a previous article). Please note that I use PAAY only to rank the companies already in my portfolio for purposes of reinvesting my dividends, not for new purchases (it would be too difficult to calculate the PAAY for all stocks under consideration for purchase).

This quarter, the following companies were highest-ranking stocks in my portfolio ranked by PAAY, and therefore, the most undervalued (in alphabetical order): Alliance Resources Partners (NASDAQ: ARLP), Ameriprise Financial (NYSE:AMP), Boeing (NYSE:BA), CSX Inc. (NASDAQ: CSX), Cummins Inc. (NYSE:CMI), General Dynamics (NYSE:GD), Novartis (NYSE:NVS), Plains All American (NYSE:PAA), Qualcomm (NASDAQ: QCOM), and Williams Partners LP (NYSE:WPZ).

Therefore, I used my available funds to buy the following amount of these 10 stocks:

 

SHARES

PRICE

COMM

COST

ARLP*

240

11.35

$17.90

$2,741.90

AMP

30

93.86

$0.90

$2,816.70

BA

22

127.81

$0.66

$2,812.48

CMI

26

110.14

$0.78

$2,864.42

CSX

111

25.56

$3.33

$2,840.49

GD

19

132.85

$0.57

$2,524.72

NVS

40

72.75

$1.20

$2,911.20

PAA

138

20.82

$4.14

$2,877.30

QCOM

56

51.06

$1.68

$2,861.04

WPZ

143

19.86

$4.29

$2,844.27

Click to enlarge

* ARLP was bought in my Optionsxpress account and was made as two separate purchases. This is why the commission was so much higher than for my other purchases.

I also received the following shares of some of my stocks due to DRIP plans in my Optionsxpress account (most of my portfolio is held in a Univest account which does not offer DRIPs):

Stock

Shares

Alliance Resource Partners

45.05

Annaly (NYSE: NLY)

43.82

Avista (NYSE: AVA)

3.94

Chevron (NYSE: CVX)

.26

General Electric (NYSE: GE)

2.98

ONEOK (NYSE: OKE)

11.48

PIMCO Corporate (NYSE: PTY)

25.65

Plains All-American (NYSE: PAA)

2.35

W.P. Carey (NYSE: WPC)

3.42

   
   
Click to enlarge

Following these transactions, this is the present composition of my portfolio (as of market close 4/4/16):

 

Shares

Price

Market Value

Divs.

Expected Income

Yield

Apple Inc. (AAPL)

145

$111.12

$16,112.40

$2.08

$301.60

1.91

Aflac Incorporated (AFL)

245

$63.59

$15,579.55

$1.64

$401.80

2.56

Ameriprise Financial, Inc.

171

$93.18

$15,933.78

$2.68

$458.28

2.83

Air Products and Chemicals, Inc. (APD)

111

$142.70

$15,839.70

$3.44

$381.84

2.37

Alliance Resource Partners LP (ARLP)

1,240.87

$11.08

$13,748.85

$2.70

$3,350.35

24.13

Avista Corp. (AVA)

552.352

$40.98

$22,635.38

$1.37

$756.72

3.31

The Boeing Company

152

$126.34

$19,203.68

$4.36

$662.72

3.43

Becton, Dickinson and Company (BDX)

137

$154.92

$21,224.04

$2.64

$361.68

1.72

BlackRock, Inc. (BLK)

40

$338.52

$13,540.80

$9.16

$366.40

2.67

Buckeye Partners, L.P. (BPL)

195

$64.57

$12,591.15

$4.75

$926.25

7.23

Cracker Barrel Old Country Store, Inc. (CBRL)

183

$150.56

$27,552.48

$4.40

$805.20

2.89

Cincinnati Financial Corp. (CINF)

310

$65.47

$20,295.70

$1.92

$595.20

2.91

Cummins Inc.

200

$109.09

$21,818.00

$3.90

$780.00

3.54

CSX Corp. (CSX)

709

$25.16

$17,838.44

$0.72

$510.48

2.81

Chevron Corporation (CVX)

170.841

$93.43

$15,961.67

$4.28

$731.20

4.54

Dominion Resources, Inc. (D)

219

$74.58

$16,333.02

$2.80

$613.20

3.71

Deere & Company (DE)

193

$75.90

$14,648.70

$2.40

$463.20

3.14

Digital Realty Trust Inc. (DLR)

281

$89.43

$25,129.83

$3.52

$989.12

3.93

Darden Restaurants, Inc. (DRI)

303

$67.34

$20,404.02

$2.00

$606.00

2.98

Emerson Electric Co. (EMR)

337

$54.11

$18,235.07

$1.90

$640.30

3.47

Four Corners Property Trust, Inc. (FCPT)

138.03

$17.38

$2,398.96

$0.97

$133.89

5.47

The First of Long Island Corporation (FLIC)

629

$27.52

$17,310.08

$0.80

$503.20

2.81

General Dynamics Corporation

181

$131.69

$23,835.89

$3.04

$550.24

2.3

General Electric Company (GE)

600.541

$31.23

$18,754.90

$0.92

$552.50

2.88

Hasbro Inc. (HAS)

300

$79.70

$23,910.00

$2.04

$612.00

2.58

Harris Corporation (HRS)

253

$76.99

$19,478.47

$2.00

$506.00

2.57

International Business Machines Corporation (IBM)

99

$152.07

$15,054.93

$5.20

$514.80

3.41

Illinois Tool Works Inc. (ITW)

157

$102.67

$16,119.19

$2.20

$345.40

2.13

Johnson & Johnson (JNJ)

159

$108.59

$17,265.81

$3.00

$477.00

2.75

L-3 Communications Holdings Inc. (LLL)

146

$119.40

$17,432.40

$2.80

$408.80

2.36

Lockheed Martin Corporation (LMT)

144

$224.13

$32,274.72

$6.60

$950.40

2.96

McDonald's Corp. (MCD)

128

$127.57

$16,328.96

$3.56

$455.68

2.8

Microsoft Corporation (MSFT)

495

$55.43

$27,437.85

$1.44

$712.80

2.59

National Health Investors Inc. (NHI)

242

$66.01

$15,974.42

$3.60

$871.20

5.43

Annaly Capital Management, Inc. (NLY)

1,409.60

$10.27

$14,476.62

$1.20

$1,691.52

11.61

Norfolk Southern Corporation (NSC)

174

$82.49

$14,353.26

$2.36

$410.64

2.84

Nu Skin Enterprises Inc. (NUS)

394

$37.01

$14,581.94

$1.42

$559.48

3.65

Novartis AG

240

$72.73

$17,455.20

$2.76

$662.40

3.87

Realty Income Corporation (O)

369

$62.16

$22,937.04

$2.39

$881.91

3.84

Omega Healthcare Investors Inc. (OHI)

449

$34.96

$15,697.04

$2.28

$1,023.72

6.47

ONEOK Inc. (OKE)

473.882

$28.37

$13,444.03

$2.46

$1,165.75

8.56

Plains All American Pipeline, L.P.

600.724

$20.09

$12,068.55

$2.80

$1,682.03

13.61

Paychex, Inc. (PAYX)

438

$53.45

$23,411.10

$1.68

$735.84

3.1

Pepsico, Inc. (PEP)

162

$103.82

$16,818.84

$2.81

$455.22

2.71

The Procter & Gamble Company (PG)

166

$83.21

$13,812.86

$2.65

$439.90

3.17

PIMCO Corporate & Income Opportunity Fund (PTY)

1,051.16

$13.64

$14,337.82

$1.56

$1,639.81

11.9

QUALCOMM Incorporated (QCOM)

332

$50.65

$16,815.80

$2.12

$703.84

4.17

Raytheon Company (RTN)

198

$124.22

$24,595.56

$2.93

$580.14

2.38

Royal Bank of Canada (RY)

225

$57.19

$12,867.75

$2.44

$549.00

4.24

Southern Company (SO)

341

$51.53

$17,571.73

$2.17

$739.97

4.2

Sysco Corporation (SYY)

372

$46.99

$17,480.28

$1.24

$461.28

2.63

Target Corp. (TGT)

249

$82.30

$20,492.70

$2.24

$557.76

2.71

T. Rowe Price Group, Inc. (TROW)

220

$73.03

$16,066.60

$2.16

$475.20

2.92

Tupperware Brands Corporation (TUP)

205

$57.15

$11,715.75

$2.72

$557.60

4.69

UGI Corporation (UGI)

568

$40.18

$22,822.24

$0.91

$516.88

2.22

United Technologies Corporation (UTX)

108

$100.27

$10,829.16

$2.56

$276.48

2.56

Walgreens Boots Alliance, Inc. (WBA)

229

$86.31

$19,764.99

$1.44

$329.76

1.66

WEC Energy Group, Inc. (WEC)

336

$60.11

$20,196.96

$1.98

$665.28

3.3

Wells Fargo & Company (WFC)

246

$48.50

$11,931.00

$1.50

$369.00

3.1

Wal-Mart Stores Inc. (WMT)

184

$69.10

$12,714.40

$2.00

$368.00

2.9

W. P. Carey Inc. (WPC)

253.87

$61.82

$15,694.24

$3.90

$990.09

6.31

Williams Partners L.P.

398

$19.49

$7,757.02

$3.40

$1,353.20

17.12

Cash

   

$95.00

     
     

$1,081,008.32

 

$43,137.15

3.99%

Click to enlarge

Returns

My portfolio's value has increased in value this first quarter from $1,031,437.84 to $1,081,008.32. This includes cash contributions of $1,500. This comes out to a return of 4.78% for the quarter, or 19.11% on an annual basis.

Even though it has been suggested by some that it is foolish for a DGIer to do so, I compare my K.I.S.S. portfolio to benchmarks for two reasons. I want to know that the efforts I am putting into running my own portfolio are worthwhile. If I'm not doing as well as these benchmarks, then it would make more sense for me to simply buy SPY, SDY or VDIGX and save the effort I'm putting into my portfolio. Secondly, one of the reasons I post my portfolio for all to see is so that others can learn how well DGI can (hopefully) work. I believe that DGI will deliver superior results, both in terms of total dividend income AND total return over the long term. But in order to get people unfamiliar with DGI to believe that DGI can be successful, I have to show them the results compared to what they could otherwise be doing. By showing my results compared to some common benchmarks, I can demonstrate how effective DGI can be.

Based on articles written and comments made on SA, I have chosen to use three different entities as my benchmarks, the SPDR S&P 500 Trust ETF, the SPDR S&P Dividend ETF, and the Vanguard Dividend Growth Fund. By using these benchmarks, I can compare my portfolio to the market as a whole to a dividend growth ETF and a dividend growth mutual fund. These are the indices most often mentioned on SA as the ones that DGIers should be putting their money into by those who don't believe that individuals can beat an index. If I can't beat any of these indices over the long term, or at least come pretty close to them, then it would make more sense to just put my money into one of them.

To make the comparisons accurate, I run three paper portfolios made up of each of the three indices above. For each of these portfolios, whenever I have cash contributions put into my real-life account, I also put the same amount into the paper portfolios and "buy" more shares of the individual indices. And when SPY, SDY, or VDIGX pays a dividend, it gets reinvested into more paper shares, just like I reinvest my real-life dividends in my portfolio. As far as I can tell, this is the most accurate way I have to compare their performances.

This quarter the returns of my benchmarks were:

SPY 1.69%

SDY 8.57%

VDIGX 2.85%

These results show that dividend portfolios, including mine, after trailing the S&P last year, have started to catch back up over this past quarter and have outperformed the S&P. SDY has done especially well.

Dividends

During the first quarter I collected $10,485.16 in dividends. This was a new record for me. During 2015, I collected $39,567.34 in dividends. This is an increase of 34.16% over the $29,493.64 I collected in 2014. But now, with the declared dividends for each of my companies, the amount of dividends I expect to collect in the next 12 months (ED12) is $43,137.15, a 9.02% increase over what I collected in 2015. And as many of my stocks continue to raise their dividends I expect that dividend growth will be even higher. It is important to note that the growth in my ED12 is due both to the dividends expected from new contributions, as well as the actual organic dividend growth of the stocks in my portfolio. The present yield of my portfolio is 3.99%. As shown by the following graph my dividend income continues to grow year by year. The drop last quarter was due to a slight change in the composition of my portfolio and the months when some of the companies pay their dividends. On a yearly basis the total dividends continue to increase.

Conclusion

Every portfolio is going to have its ups and downs in terms of total return. And yet, in my case, you can see that by sticking with my dividend growth philosophy I have already started to make up for some of my underperformance from last year. There was no reason to panic. No reason to change my plan. I'm sticking with what I know will work long term and the magic of compounding to happen. Over a period of 20-30 years I expect that the dividend growth I focus on will lead to the kind of returns I'm hoping for.

The mindset of a dividend growth investor is to grow the dividend income produced by his (or her) portfolio, and not necessarily to focus on growing the size of the portfolio. I know this is a controversial statement to some, but it is how I look at my investing, and how I analyze my results. In the long run, by maintaining my discipline and carrying out my KISS criteria, I believe in the end I will beat "the market". The stocks in my portfolio that performed poorly last year have already started to come back strongly, and over the next 20-30 years, as long as they continue to increase their dividends, I believe they will continue to perform well.

DGI has taught me to have a long-term focus, and for that focus to be on the dividends, not on price movement. The prices of some of my stock may fall from time to time, but as long as the dividends continue to rise I know the stock prices will eventually recover. More importantly, while waiting for that to happen, I will continue to collect dividends from those stocks. And as the dividends increase, if the prices stay low, it will just give me even more opportunities to buy more shares of undervalued stocks. I'm already enjoying some of the benefits of my patience, as I was able to buy shares at depressed prices, which means I will collect even more dividends in the coming years.

So my plan going forward is to continue to focus on the dividends and to follow my simple K.I.S.S. rules. They have been working very well so far. I believe my results continue to support my hypothesis: That by using simple, straightforward, easy-to-understand criteria for buying and selling, and by using the hard work of other people (Thank you David Fish (CCC list), Chuck Carnevale (F.A.S.T. Graphs), S&P and all the wonderful SA contributors I have learned from!), that someone can achieve excellent investment results without having to put an inordinate amount of time into the process.

Thank you for reading my article. I welcome your comments and criticisms

Disclosure: I am/we are long ARLP, MSFT, IBM, AAPL, BA, QCOM.

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.