We have all heard it... Stodgy, for old people, yawn, boring! These have all been used to describe investing in dividend growth stocks. Nevertheless, I am a firm believer in dividend growth stocks for building a bullet-proof retirement portfolio. Study after study has shown that most of the historical stock market returns have come from reinvested dividends.
My core portfolio contains traditional dividend growth stocks that are found in virtually every dividend growth portfolio. Why? Because not only do they provide a growing income, but their total return over time usually beats the market. Consider these:
McDonald's Corp. (MCD)
Current Yield: 2.9% | Yield On Cost: 4.1%
First Purchased: 10/2007 | Average Annual Return: 22.8%
Genuine Parts Co. (GPC)
Current Yield: 3.0% | Yield On Cost: 4.5%
First Purchased: 5/2009 | Average Annual Return: 32.9%
The Coca-Cola Company (KO)
Current Yield: 2.7% | Yield On Cost: 4.5%
First Purchased: 7/2007 | Average Annual Return: 25.8%
3M Co. (MMM)
Current Yield: 2.6% | Yield On Cost: 4.9%
First Purchased: 3/2009 | Average Annual Return: 35.4%
I could go on, but you get the idea. This works incredibly well if you have some time to wait, but what can investors do it they need a higher income today?
One concept I've toyed with over the years is adding income focused ETFs. For the most part, this failed miserably (you can read about it here.)
However, I did have a few successes (and one additional failure) with some high-yield funds. They were originally purchased to pump up the yield of my dividend growth portfolio, while I waited for it to grow over time. First, let's look at the two successes:
Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO)
The Fund seeks high total return through investment in global common and preferred securities. I originally purchased this fund in July 2008. It cut its distribution in January 2009, but i continued to hold it because the yield was still attractive.
Distribution Yield: 7.27% | Yield On Cost: 7.78%
Current Discount: 12.8% | Total Return: 9.9%
Alerian MLP Infrastructrure ETN (MLPI)
The investment seeks to replicate, net of expenses, the Alerian MLP Infrastructure Index which provides exposure to the infrastructure component of the Master Limited Partnership asset class. It is important to note this is not a fund, but instead an exchange traded note. I originally purchased MLPI in May 2010. Unlike ETO above, MLPI has increased its distribution each year that I've held it.
Distribution Yield: 4.73% | Yield On Cost: 5.86%
Current Premium: 0.03% | Total Return: 21.2%
That leaves my failure...
Alpine Total Dynamic Dividend (AOD)
The Fund seeks high current income and capital appreciation through investment in global equity securities. I first purchased this fund in December 2007. At that time it was paying an $0.18 per share dividend (11.3% yield). Then in March 2009 it cut its dividend to $0.12 per share, and cut it again to $0.055 per share in July 2010. Over time I have sold virtually all of this investment, but I still hold a very small position in it as an intellectual curiosity.
Distribution Yield: 14.16% | Yield On Cost: 9.19%
Current Discount: 7.39% | Total Return: -12.4%
There are better options than AOD and I am currently reviewing several of them.
My portfolio philosophy is that the core portfolio should follow a time-tested path that will provide the best opportunity for a successful retirement. For me, this is a conservative dividend growth stocks approach. However, I am always looking to improve my situation. For this I have allocated a small portion of my portfolio to experiment with. Understanding that a significant number of experiments will fail I limit this portion of my portfolio to a defined percentage, and I don't increase it no matter how well the investments perform.
Full Disclosure: Long MCD, GPC, KO, MMM, ETO, MLPI, AOD in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.