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Transitioning To A Long Term Dividend Growth Reinvestment Model


I started transitioning my investing strategy from a "buy stocks that look good" to a Dividend Growth model over the last year. This meant that I would plan to sell most off my existing positions while keeping a few that stuck to my dividend growth reinvestment model and then start new positions to reach my goal of creating a self sustaining Dividend Growth portfolio.

Existing positions before transitioning to a Dividend Growth Model:

I held the below stocks before I decided to shift to a DGI model:

AAPL (NASDAQ:AAPL), Disney (NYSE:DIS), Cisco (NASDAQ:CSCO), Zynga (NASDAQ:ZNGA), Facebook (NASDAQ:FB), Kodiak Oil and Gas (NYSE:KOG), Conoco Phillips (NYSE:COP), EMC (EMC), Antares Pharma (NASDAQ:ATRS), Bristol Myers (NYSE:BMY), Southwest (NYSE:LUV), Starbucks (NASDAQ:SBUX), VMWare (NYSE:VMW), Citigroup (NYSE:C)

Out of these, I started a plan during thanksgiving last year to eventually sell off the non-dividend paying stocks by sometime this year and then reevaluate which dividend payers I wanted to keep and start buying companies I wanted to start new positions in.

Selling existing loosing positions: (FB), (ZNGA)

These were small speculative positions I started when I thought they had reached a bottom. They did go up a bit but then tanked back down. The more I thought about them, the more I realized that these stocks were not my type and they were losers. So I had them sold first.

The rest were performing well during the bull run but I decided to eventually sell them off and book profits and use the cash to add to my DGI portfolio.

Selling non dividend payers: (ATRS), (VMW), (EMC), (KOG)

These were stocks with no dividends (though EMC recently started paying a dividend). They were more or less speculative growth positions. They were good buys but I decided to book profits and use the cash for my DGI portfolio. You need to book profits at some point so I decided this would be it.

Selling dividend payers: (LUV), (C), (BMY), (CSCO), (SBUX)

  • C, LUV: Though Citibank and Southwest paid a dividend, they were sold off because the dividend was negligible and below my level of acceptance for a DGI model. They also had quite the run up from last fall to this summer. I also understood later that investing in an airline company may not always be a great long term strategy as this is a very volatile, highly competitive industry. Oil prices going down since last October helped strong companies like Southwest to perform well.
  • BMY: Bristol Myers Squibb was a stock I wanted to keep and was very rewarding with with a yield on cost of around 4.2%. However, I felt it started going way above my acceptable fundamental threshold level (Very high PE, very high payout ratio etc). BMY also had quite the run up during the spring rally.
  • CSCO: Cisco was a stock I liked and investors started showing love to this once fallen tech giant after they increased their dividend. But I decided that I would not invest in technology because the tech landscape is always changing and very competitive. Cisco had quite the run from last fall to spring.
  • SBUX: Starbucks is another company I debated before wanting to sell. I bought it during last year's mid year dip after a bad earnings report. I was so happy to hear the bad news and the sudden 15% drop in a few days. Soon after, it started rallying. Yield on cost was around 1.50% which was below my threshold but I regret selling my position because this was would have been a great add to the growth component of my DGI portfolio. They have some fine international growth plans. SBUX also had quite the run up from last year's dip to this summer so it does look expensive now if someone is considering to add SBUX to their portfolio.

Dividend Growth Positions I continued holding: (COP), (DIS), (AAPL)

  • Disney: Though DIS has a low yield on cost for me (~1.75%) with an unattractive annual pay date, I felt I should hold Disney to add to the growth component of my portfolio especially since Disney shot up since the Avengers success. There are lots of reasons to love Disney and I just couldn't think of selling off this company with an industry moat. I did stretch some of my some of fundamental analysis rules to hold on to stock. Nevertheless, I've decided to keep this stock. My suggestion to look at DIS is to look at it as a growth stock and not a dividend stock. The dividend is just a bonus to hold it long. I'm expecting more growth and Disney milking the Avengers and Starwars franchise.
  • Apple: After the stock started rotting since last September, I decided to eventually sell this stock off after a year or two basically because Apple has taught me that the tech landscape is a competitive, ever changing industry and no leader stays the leader for ever. And the nose dive in Apple proved it. I'm currently in the red for Apple but I'm not worried as a diversified portfolio covers up the losers. One of my DGI rules is to not buy companies whose sole business is in technology.

Dividend Growth Positions started over the last year:

My long term goal is to mainly invest in companies that address three areas that people will always need - Energy, Healthcare and Consumer staples and these would therefore a bit safer due to free cash flow during a bear market. There would also be a few outliers:

Hence, I added the following stocks in different quantities to my portfolio:

  • McDonalds (NYSE:MCD), Walmart (NYSE:WMT),Target (NYSE:TGT),Chevron (NYSE:CVX),Phillips 66 (NYSE:PSX),Abbvie (NYSE:ABBV),Medtronics (NYSE:MDT),Scana Group (NYSE:SCG), Wisconsin Energy Corporation (NYSE:WEC), Walgreens (WAG), Coca Cola (NYSE:KO) (the latter two were just added this week).
  • Dynex Capital (NYSE:DX): is an mREIT and this is a play on low interest rates. Any one who kept an eye on the mREIT sector would have noticed that these bombed. Dynex Capital had a yield on cost of around 11.5% and they increased dividends over the last 5 years. This was intended to add a bump to my Dividend growth however with the recent bombing of the mREIT sector, I will hold on a regularly monitor the macro environment while collecting the dividends to reinvest else where
  • Textainer Group Holdings (NYSE:TGH): is a play on the economy improving. This is a company involved in leasing modal containers in the shipping industry
  • Digital Reality (NYSE:DLR) is a REIT play on tech real estate considering the growth of data storage.
  • Time Warner (NYSE:TWX) is a consumer cyclical play on the expectation that Time Warner will do a great job with emulating Disney's success with the Marvel Avengers Franchise through the Justice League.

Current Dividend Growth Portfolio:

So my current portfolio consists of the following stocks in order of their composition along with the dividend yield on cost:

  1. Apple (AAPL) - 2.5%
  2. Conoco Phillips (COP) - 4.8%
  3. WalMart (WMT) - 2.5%
  4. Abbvie (ABBV) - 4.5%
  5. Phillips 66 (PSX) - 2.25%
  6. McDonalds (MCD) - 3.8%
  7. Disney (DIS) - 1.75%
  8. Dynex Capital (DX) - 12%
  9. Target (TGT) - 2.6%
  10. Digital Reality (DLR) - 5.6%
  11. Chevron (CVX) - 3.3%
  12. Time Warner (TWX) - 2%
  13. Medtronic (MDT) - 2.25%
  14. Scana Group (SCG) - 4.5%
  15. Walgreen (WAG) - 2.5%
  16. Coca Cola (KO) - 2.8%
  17. Wisconsin Energy (WEC) - 3.6%
  18. Textainer Group Holdings (TGH) - 5.4%
  • Average Yield on Cost (YoC): 4%
  • Average Beta: .85
  • Average Trailing PE: 13.65
  • Average Forward PE: 11.09

Future plans

  • Potential buys: Currently doing a fundamental analysis on CVS (NYSE:CVS) to add to the healthcare/retail segment of my portfolio.
  • Add to positions: New money will go into large cap blue chips
  • Dividend reinvestment will go into small cap high dividend paying riskier positions such as DLR, TGH (and not mREIT DX which will be held and monitored only for dividends)

Got some interesting stocks you think I should take a look and maybe add? Feel free to share your suggestions and thoughts.

Until next time, happy investing!