- April, 2012: Spring Cleaning My Dividend Growth Portfolio
- July, 2012: Dividend Growth Portfolio: 2012 Mid-Year Update
The DGP contains real money and actual stocks, and it illustrates real decisions made in real time. It therefore suffers from no survivorship bias, cherry picking, data re-engineering, or any of the other maladies of back-tested hypothetical portfolios. It demonstrates how one person (me) has executed strategies and tactics of dividend growth investing. Successes and mistakes are there for everyone to see and comment upon. My hope is that these periodic articles and comment streams will help to enrich SA's ongoing discussion about the dividend growth strategy.
The discipline of conducting semi-annual formal Portfolio Reviews is designed to force me to think about the portfolio strategically, as well as to review the performance of each stock and take appropriate actions. The formal reviews are part of a buy-and-monitor strategic principle that helps avoid the pitfalls of a passive buy-and-forget approach.
About a year ago, Abbott Labs (NYSE:ABT) announced its intention to split into two companies. I did not like that, and I wrote two articles about it:
- Abbott: Still a Dividend Growth Stalwart? (October, 2011)
- Why I Have Abbott on a Stop-Loss Order (May, 2012)
I basically gave the company a year to convince me that the uncertainty created by the decision to transform the company and abandon its integrated business model was not a sufficient reason to sell it. I placed the burden on the company to provide reasons for me to keep it, not on myself to think of reasons to keep it. That is in keeping with the standard that I use when considering a new purchase. In my opinion, the company did not meet that burden. The 2012 dividend increase of 6.3% was not bad, but it was the lowest since 2008 during the Great Recession. The company released little information about its future dividend intentions, other than to say that the combined dividend for the two new companies would be about the same as the dividend for the current company.
So I put Abbott "on the clock," using an ever-tightening trailing sell-stop order that began at 7% in April and was tightened 1% per month. The order was at 2% in September when the stop price was hit and the order was executed. I sold the stock at $64.60, giving me a blended gain of about 24% on four purchases made in 2008-2009.
I know that my thinking in selling Abbott is not shared by all (or even most) here on SA. That's OK, different opinions make a market. I wish everybody who is holding the stock the best of luck. I may come back to it some day, who knows? But for now, it's in the rear-view mirror.
Diversifying the Portfolio
In May, just after the previous review, I used accumulated dividends to purchase a new stock for this portfolio, Intel (NASDAQ:INTC). In September, I used the cash from the Abbott sale to start new positions in BHP Billiton (NYSE:BBL) and Hasbro (NASDAQ:HAS). If you are keeping score, that is one stock removed and three new ones added, for a net gain of two stocks. That brings the number of holdings to 12.
As I wrote earlier this year, I have become convinced by the advocates of diversification that it is a very good idea in an income portfolio, better than the more concentrated approach that I previously followed. I intend to diversify slowly, via reinvesting accumulated dividends plus making occasional sales and swaps. My eventual goal is to hold 20-25 stocks instead of the previous "rule" that allowed as few as 10. I want to spread out the income risk, and I have no doubt that there are more than 20 terrific dividend investments out there. The trick, of course, is finding them at the right price.
On October 1, I used accumulated dividends to add to the Intel position. I do not automatically reinvest dividend in any stock. My rule-set for this portfolio is to accumulate incoming dividends until they reach $1000. Then I pick several "wish list" stocks from my current Top 40 Dividend Growth Stocks, make sure they are still good dividend growth investments, and check their current valuations. I know that Intel recently lowered guidance, but I still see the company as a solid long-term investment and well valued after their recent swoon. I picked up shares for $23.16 and about a 3.8% yield, the third lot I have purchased since May.
The Dividend Growth Portfolio's principal long term objective is to deliver 10% yield on cost within 10 years of inception, which is the same as saying that I want it to generate at least $4678 (10% of its initial value) in dividends in 2018. If the goal is reached, the portfolio will be delivering as much in dividends alone as the average long-term annual total return of the market.
Here's the dividend record since inception on June 1, 2008 through the end of September:
Yield on Cost
Increase from Prior Year
Next 12 months (projected)
The projected numbers for 2012 and the next 12 months are based on information known after the purchase of Intel on October 1. There may still be a couple more dividend increases this year, so the 2012 numbers may creep just a bit higher. Next year, I have every reason to believe that as more dividend increases are announced and dividend reinvestments are made, all the numbers will go up noticeably.
This portfolio is still quite young (it is just a baby at 4 years and 4 months), but it is nice to see a few stocks really getting their yields on my cost up. Kinder Morgan Energy Partners (NYSE:KMP) is at 8.7%, one lot of Realty Income (NYSE:O) is at 6.8%, and one lot of AT&T (NYSE:T) has reached 6.9%.
For total returns, the Dividend Growth Portfolio has been a good but not spectacular performer. Here are the stats as of the end of September:
- Inception value: $46,783 (June 1, 2008)
- Current value: $60,153
- Increase: +29% (6.0% CAGR)
- BHP Billiton (about 3% of portfolio)
- Alliant Energy (NYSE:LNT) (9%)
- AT&T (4%)
- Chevron (NYSE:CVX) (6%)
- Hasbro (3%)
- Intel (6%)
- Johnson & Johnson (NYSE:JNJ) (11%)
- Kinder Morgan Energy Partners (8%)
- McDonald's (17%)
- PepsiCo (NYSE:PEP) (18%)
- Realty Income (12%)
- Shaw Communications (NYSE:SJR) (3%)
Portfolio changes are probably done for 2012. I plan to write a recap of 2012 in January.