DGI For The DYI: Q1 2016 Recap

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Includes: BDX, CHD, CLDT, DLR, DPS, GILD, GIS, GME, KO, O, OHI, OXY, PII, QCOM, ROST, XEL
by: Eric Landis

Summary

A market rebound and increasing crude prices drive my DGI portfolio to new all-time highs.

In addition to those capital gains, a new record quarterly dividend income is achieved as well.

I'll share my trades made in the quarter and provide an look at what is on the radar going into the second quarter of 2016.

A Roller Coaster Quarter Ends With New Portfolio Highs

What a quarter for the stock market!DGI For The DYI Logo

The beginning of the New Year wasn't too kind to investors, as January produced an ~8% market decline that left many wondering if we were about to head into recession. Along with the stock market decline was a washout in the commodities that saw crude briefly touch the high $20s.

The DJIA saw an intraday low of around 15,500 on February 11th and has been on a tear ever since, rallying to close out the quarter at just a tick below the open for the year.

^DJI Chart

^DJI data by YCharts

As mentioned, crude oil prices also bottomed out during the quarter before starting on a strong rally in the second half of February, which continued into the end of the quarter. This resulted in a strong performance of many of the oil & gas and industrial companies in the portfolio.

CVX Chart

CVX data by YCharts

These and other large gains from utilities and REITs helped the portfolio to outperform the market by a large margin, and led it to an increase of over 6% compared with the generally flat market.

DGI For The DYI: Q1 2016 Update Click to enlarge

This outperformance underscores the benefits of having a diversified portfolio, as the gains from the sectors mentioned offset price declines from some of the healthcare and financials. Overall, I'm quite happy with how the portfolio is performing, and am comfortable with my current holdings.

The Dividend Growth Train Keeps Chugging

The paper gains are nice, as it's fun to watch the portfolio value increase, but with this being a dividend growth portfolio, the focus continues to be on the dividend income it produces.

It was a successful quarter for dividend growth, as the drop seen in the fourth quarter was overcome, and the portfolio once again saw new all-time highs for dividend income.

DGI For The DYI_Q1 2016 Dividends Click to enlarge

Dividend income for the quarter was up nearly 16% year over year and up 1.25% from the previous all-time high set in Q3 of 2015. This was accomplished through a combination of organic dividend increases, reinvestment of dividends, and new contributions into the portfolio.

The first quarter is generally the one that sees the most activity for dividend increases; here are the ones received so far this year:

Date Company Ticker Previous Quarterly Rate New Quarterly Rate Sequential Increase Year Ago Dividend YoY Increase Dividend Yield LINK
1/14/2016 Omega Healthcare Investors Inc (NYSE:OHI) $0.5600 $0.5700 1.79% $0.530 7.55% 6.78% LINK
1/14/2016 Realty Income Corp (NYSE:O) $0.1910 $0.1985 3.93% $0.189 5.03% 4.04% LINK
1/28/2016 Polaris Industries Inc. (NYSE:PII) $0.5300 $0.5500 3.77% $0.530 3.77% 2.25% LINK
2/2/2016 Church & Dwight Co., Inc. (NYSE:CHD) $0.3350 $0.3550 5.97% $0.335 5.97% 1.56% LINK
2/2/2016 Gilead Sciences, Inc. (NASDAQ:GILD) $0.4300 $0.4700 9.30% $0.430 9.30% 1.85% LINK
2/11/2016 Dr Pepper Snapple Group Inc. (NYSE:DPS) $0.4800 $0.5300 10.42% $0.480 10.42% 2.45% LINK
2/17/2016 Digital Realty Trust, Inc. (NYSE:DLR) $0.8500 $0.8800 3.53% $0.850 3.53% 4.11% LINK
2/17/2016 Xcel Energy Inc (NYSE:XEL) $0.3200 $0.3400 6.25% $0.320 6.25% 3.52% LINK
2/18/2016 The Coca-Cola Co (NYSE:KO) $0.3300 $0.3500 6.06% $0.330 6.06% 3.21% LINK
2/23/2016 GameStop Corp. (NYSE:GME) $0.3600 $0.3700 2.78% $0.360 2.78% 4.58% LINK
3/1/2016 Chatham Lodging Trust (NYSE:CLDT) $0.1000 $0.1100 10.00% $0.100 10.00% 6.27% LINK
3/1/2016 Ross Stores, Inc. (NASDAQ:ROST) $0.1175 $0.1350 14.89% $0.118 14.89% 0.94% LINK
3/8/2016 QUALCOMM, Inc. (NASDAQ:QCOM) $0.4800 $0.5300 10.42% $0.480 10.42% 4.10% LINK
3/8/2016 General Mills, Inc. (NYSE:GIS) $0.4400 $0.4600 4.55% $0.440 4.55% 3.06% LINK
3/21/2016 Realty Income Corp O $0.1985 $0.1990 0.25% $0.190 5.01% 4.05% LINK
Click to enlarge

At an average annual increase of just over 7%, this was one of the lowest rates of dividend growth since the portfolio was created. Several companies including: Polaris, Church & Dwight, and GameStop saw much lower growth than normally seen in their recent history.

A 7% growth rate from stocks averaging a 3.5% yield is still pretty respectable, though. And considering I am reinvesting dividends back into those companies, my income will actually increase by better than 10% year over year.

Portfolio Transactions

It was another quiet quarter on the transaction front, and I am completely okay with that. Looking back at my early days of the portfolio, there was a lot more turnover of positions as I continued to tweak my holdings and fine-tune things.

Now, I am more than 3 years into the process, and have gotten to a point where I'm pretty well comfortable with what I own and what my expectations are for those holdings.

As a result, I had just one sale and two purchases this quarter.

DGI For The DYI: Q1 2016 Sales Click to enlarge

DGI For The DYI: Q1 2016 Buys Click to enlarge

I shared my thought process behind my decision to sell Mallinckrodt plc (NYSE:MNK) and replace it with Becton, Dickinson and Co. (NYSE:BDX) in early February. In short, Mallinckrodt was grandfathered into my portfolio following its merger with Questcor Pharmaceuticals in 2014, and considering it pays no dividend and is a more speculative stock, didn't quite fit with the vision of the portfolio.

On the other hand, at 43 years, BDX has one of the longest dividend growth streaks in the healthcare sector, and has a high quality product line with a much steadier growth profile than MNK. It doesn't quite have the expected growth rate that MNK did, but I feel in the long run, it will give me much less heartburn, and it pays a 1.87% yield on my cost to boot.

Thus far, the swap has worked out quite well for me, as BDX has seen a gain of more than 12% since its addition, while MNK was up just 3.7% since the sale.

My other purchase for the quarter, Occidental Petroleum Corp. (NYSE:OXY), was from cash contributions into the account. I believe that OXY is one of the top dividend growth stocks in the oil & gas sector as it has a strong balance sheet and a strong presence in the Permian Basin that sets up it up well for the crude recovery.

I was able to lock-in a nearly 4.5% yield on the buy, and seemed to have timed it well, as shares have advanced by more than 9% since the purchase. I am bullish long-term for a crude price recovery, as I believe production will fall materially in the second half of 2016, and expect OXY, Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), EOG Resources (NYSE:EOG) and Kinder Morgan (NYSE:KMI) to treat me well should that price recovery happen.

Current Portfolio

With those trades complete, here is where the portfolio stands as of the end of the quarter:

DGI For The DYI: Q1 2016 Holdings Click to enlarge

DGI For The DYI: Q1 2016 Holdings2 Click to enlarge

Here is a snapshot of the weightings by sector for the portfolio:

DGI For DYI_Q1 2016 Weightings

For the most part, I am comfortable with the weighting in the portfolio, although it remains a little heavy on the consumer discretionary side at 15.1%. I'm okay leaving financials at lower levels, but would look to healthcare and energy as potential targets for increased exposure.

I would point out that the healthcare weighting is a bit misleading, though, as Walgreens Boots Alliance (NASDAQ:WBA) is listed in the consumer staples and Omega Healthcare Investors is with the REITs despite both having significant ties to the healthcare sector.

On The Radar

There remain plenty of companies that I don't own, but would love to eventually have in the portfolio, including: Johnson & Johnson (NYSE:JNJ), Costco (NASDAQ:COST), CVS Health (NYSE:CVS), 3M Company (NYSE:MMM), Honeywell International (NYSE:HON), American Water Works (NYSE:AWK), Aqua America (NYSE:WTR), Paychex (NASDAQ:PAYX), The Home Depot (NYSE:HD) and Lowe's Companies (NYSE:LOW) to name just a few.

I've self-imposed a 50 position cap on this portfolio, and thus far have stuck to that limit. However, I'm struggling with that cap as there are many more great companies out there than what I have room for with that number.

Fellow contributor RoseNose recently wrote about these same struggles with her own portfolio, and I'm on the fence as to whether I'm making a bigger deal out of it than it needs to be. After all, it is just a number, right? Whether that number is 50 or 60 is a bit arbitrary to begin with, so I may end up expanding my options if any of those companies provide a good entry point.

As to potential purchases and looking at my current holdings, I am considering Chevron, Chatham Lodging Trust, EOG Resources, Dominion Resources (NYSE:D), Gilead Sciences and AbbVie Inc. (NYSE:ABBV) for when my next cash contribution hits the account. I believe they are all trading at relatively attractive levels and would be worth adding to at these levels.

Conclusion

Overall, it was another successful quarter for the portfolio as it set new highs in both capital levels and dividend income. Although it appears that dividend growth may be slowing a bit in 2016, the 7% increase seen in the first quarter is still pretty good, and when coupled with dividend reinvestment should continue to provide around a 10% income growth rate going forward.

I hope this update provides those who are considering dividend growth investing with a positive example for what you can accomplish as a do-it-yourself investor. It can be daunting to start a portfolio from scratch, but this is proof positive that you don't need to have a million dollars to start your own portfolio, just jump in and get the ball rolling!

Finally, a reminder that if you would like future updates for this portfolio and my other writings, please click follow next to my profile at the top of the page.

Happy Investing!

Disclosure: I am/we are long ABBV, AAPL, ABC, AMGN, AMP, BDX, CBRL, CHD, CLDT, CMI, CVX D, DE, DLR, DPS, EOG, FLO, GE, GILD, GIS, GME, IBM, KMI, KO, LMT, MCD, MDU, 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.