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I am an electrical engineer currently employed in the defense industry. I have been a minor partner in a local business for the past eleven years, where I keep the books. I have followed and studied the stock market for over 20 years, developing a trading style which suits my personality. My... More
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  • My First Year of Dividend Growth Investing: Not So Bad 9 comments
    Dec 31, 2011 12:54 PM
    Back in January of 2011 I decided to dip my toes in the Dividend Growth (DG) investing waters.  I had been reading a good number of the articles written in the Investing for Income section of SeekingAlpha and it made sense to me.  Buy shares in well established and steadily expanding companies that make it a habit to share increasing profits with their stockholders via increasing dividends.

    At the time I had some cash sitting in my brokerage account with no 'typical' stocks that I might normally buy to be found.  So, I thought, why not give this DG stuff a test run for a year and see how it goes?

    Over the course of the year I kept reading and studying and every now and then I'd buy a DG stock that I found or read about which seemed attractive.  I bought my first DG shares in late January (ABT).  Another in February (MO), March (AVA), June (CTL), July (INTC), August (more CTL on the market dip), and October (NUE).

    That gives me a modest portfolio of 6 DG stocks which make a habit of sending me dividends.

    One of my annual chores is to review my portfolio at the start of each year.  So with the long holiday weekend, I sat down to look over my DG mini-portfolio and see how I did.

    As of the close of 2011, my 6 stock DG portfolio is showing me a capital gain of 14.29%.  In comparison, the S&P 500 closed 2011 unchanged in price from the close in 2010.

    The total of the current dividends over the course of a year produce a yield of over 5.5% on the total money used to purchase my shares (some of which is reinvested dividends).  Since I didn't get any dividends until Q2 of 2011 my actual income was only 3.4% of the money invested (4.5% annualized).  In comparison the current S&P 500 yield is 2.0%.

    In summary:  DG portfolio = up 14.29%  /  S&P 500 = unchanged
    ....................   DG portfolio = 5.5% yield  /  S&P 500 = 2.0% yield

    As 2012 progresses, I expect most of my shares will announce an increase in their dividend payment amount, which should drive further share price gains and increase my stream of income.

    All in all, my DG experiment has proven to be very successful, even with the frequent whipsaws in the market over the past year.  I wish I had a lot more cash sitting around so I could buy more shares in DG companies.  Going forward, as my savings and dividends accumulate I plan to add more DG shares and continue to build my replenishing stream of income.  By the time I retire the income my stocks generate should be considerable.

    If you're not sure about the method you might want to use for investing your savings, I'd encourage you to investigate the Dividend Growth approach.  Take a few months to read and learn on the Investing for Income section of SA.  There are several authors and commentors who are very knowledgeable and willing to share what they know to help you learn.

    I'm glad I did.  It seems to be working very well for me.

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Comments (9)
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  • Smarty_Pants--What a great success story. In a flat year your portfolio produced a 14% return. The important part comes when there is a down year. Dividend growth stocks hold up better than other stocks and bounce back quicker after the market swoon.

     

    Good Luck with your investing!
    31 Dec 2011, 01:33 PM Reply Like
  • Author’s reply » Thank You Norman. I learned a great deal from a number of people and was fortunate enough to have money available when there were bargains to be had.

     

    My chief weakness seems to be developing sufficient patience to sit on cash until a suitable stock is available at a bargain price. Your insistence on waiting for a 4% yield before buying any stock has been an important reminder for me to slow down and think twice before pressing the Buy button.

     

    It wouldn't surprise me to learn that a significant portion of my capital gains resulted from buying at a good price rather than due to outstanding profitability. Snatching a $37 stock at $34 on market weakness really helps boost the capital gains number when normalcy returns.
    31 Dec 2011, 01:39 PM Reply Like
  • Smarty_Pants--The key to the secular bear market is the cyclicality of all stocks.

     

    http://yhoo.it/sXBUnk=

     

    You can even tell when the market is about to collapse and save up the funds to buy at the bottom. I think it will hit 1550 again before the next collapse in 2013.
    31 Dec 2011, 03:12 PM Reply Like
  • Smarty-Pants,
    Great story about your DG success...and an excellent example to other prospective DG investors. I think you'll enjoy continuing this method, which is not only logical, but very profitable!
    31 Dec 2011, 03:22 PM Reply Like
  • Author’s reply » Thanks for both the encouragement and the immense help you provide via the CCC spreadsheet David. Your compilation of top notch DG stocks is a priceless aid to making the whole process work.
    31 Dec 2011, 05:15 PM Reply Like
  • Smarty_Pants - Thanks for your post and congratulations. I am wondering how did you compute your returns? Suppose you bought stocks at various intervals then do you compute Internal Rate of Return or something else? Do you account for cash sitting with the broker and not earning anything?

     

    As an example, I have $10,000 with the broker on Jan 1. I might buy $2400 worth of Stock 1 on Jan 2nd. Then $4000 worth of Stock 2 on March 20 and then $3000 worth of Stock 3 on Nov 15. How do I compute my annual return on Dec 31?

     

    Thanks.
    31 Dec 2011, 04:29 PM Reply Like
  • Author’s reply » "I am wondering how did you compute your returns?" - guraaf

     

    I didn't do anything fancy and the figures I cited were only for the money I actually invested in DG stocks. Any other stocks or cash in my brokerage account were ignored for these calculations.

     

    After I bought my third DG stock I realized that I needed to start keeping track of what I was doing or I would never know how things were going. So I put together a spreadsheet where I kept track of each DG stock I bought.

     

    On one tab I maintained a list of each stock purchased including the price paid, number of shares, date purchased, dividend at the time, etc. I also included aggregate figures using all the DG stocks so that I would know how much money was invested in my 'virtual' DG portfolio (where the word "invested" means only the money actually used to buy the shares). I added columns where I could update the current price, dividend, and date and use that to calculate things like the rates of dividend growth, and take the current value, compare it to the invested value, and determine the gain/loss of all the DG stocks both individually and in total. The gain figures do not include any rate of return information based on how long I've owned them, just a cumulative gross gain since they were purchased.

     

    On another tab I set up a table of dividend payments for each stock with dates on the left axis and one stock per column. Each time I receive a dividend the amount gets recorded in the proper column with the associated date. In the right-most column I put a box to record each quarterly dividend total (for calculating my Chowder Index next year).

     

    This morning I went through the spreadsheet to update it for 2011 Year End values and I figured that some might find it interesting to see how I fared given that this DG stuff is new to me. I also saved a copy of the final spreadsheet for YE_2011 so I can compare it with future revisions at the end of next year, etc. That way I can review how I got where I am over many years of changes.

     

    Hope that helps explain what the result numbers mean. Much like Dave Crosetti in his real-life portfolio example I was surprised at the growth of dividend income over such a short span and it was plain to see that most of my capital gains were due to making purchases at good prices (whether intentional or accidentally). Several of the regular authors (David Van Knapp, Norman Tweed, and Chuck Carnevale among them) stress this point but you don't really "get it" until you see it for yourself.

     

    One of the nice side-effects of the whole exercise was not having to worry so much about the price of my stocks collapsing ruinously like they might with a high flying growth stock. You might be concerned that they drop a bit, for a while, or that they don't grow as quickly as you'd like, but I didn't lose one wink of sleep wondering if Abbott Labs or Altria would be in business tomorrow, or if they would stop sending me a dividend every quarter.

     

    When you add that to a 5.5% yield and a 14.2% capital gain, you find out that sleeping comes a bit easier.
    31 Dec 2011, 05:42 PM Reply Like
  • Author’s reply » "As an example, I have $10,000 with the broker on Jan 1. I might buy $2400 worth of Stock 1 on Jan 2nd. Then $4000 worth of Stock 2 on March 20 and then $3000 worth of Stock 3 on Nov 15. How do I compute my annual return on Dec 31?" - guraaf

     

    In your example my "annual return" figure would have been

     

    AR = (value of all stocks now) / (total value of all stocks when purchased)

     

    I didn't account any for duration of each investment so my AR would have been the same whether I purchased Stock 1 on January 3rd or on December 30th.

     

    I'm just happy the total value went up over the year. I'm not going to worry about how fast it's growing based on the time it's been in use like an Internal Rate of Rreturn would calculate.
    31 Dec 2011, 05:50 PM Reply Like
  • Thanks Smarty_Pants. This is really useful. I track my investment using spreadsheets in a similar manner. I actually have a sheet with one tab to keep track of all transactions. I label transactions as buy, sell, dividend, split. Then using conditional formulas, a column records only dividends. Using this info, I have another tab in the spreadsheet that tells me how much total dividend I received every quarter.

     

    I want to enhance my portfolio tracking to compute the rate of return as well. I just now saw that David Fish has a pointer to an open source software. I think I will try that next.

     

    Thanks again for your detailed post.
    1 Jan 2012, 07:56 AM Reply Like
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