A Bulletproof Dividend Growth Portfolio For 2014

Includes: JNJ, PG, XOM
by: Bob Johnson


In May of this year, I published an article titled, A Disaster Proof Dividend Growth Portfolio. This was based on ideas of Tim McAleenan and included the below portfolio, which was created using screens I developed to implement his ideas. The objective of this article is to keep a promise made at the end of the May article, "Additional details will be presented in a follow-on article."

This is that article. We will examine the selection process, the composition of the portfolio by attributes such as cap size, yield and dividend growth rates and much more. This article will enable the reader to construct a similar portfolio, customizing it to his or her own needs. We will look at the portfolio's 2013 performance, and try to get an idea of the prospects for 2014. Rather than call it disaster proof, I choose to call it Bulletproof, for 2014. Stocks will come under fire from various directions this year. These companies will continue to provide increasing dividends.

The Idea

Studies show, Tim related, that individual investors usually do not perform as well as the market does. Rather than get an average 7% rate of return like the S&P 500 does over time, individuals often average only 3% annually. One study says this may be due to selling low, attributed to the fear of losing more money in a down market. Tim's hypothesis suggests that part of the reason is that investors do not have confidence in their stocks. That is, the kind of confidence that one might have in perennial performers, blue chips like Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG) and Exxon (NYSE:XOM).

The Solution

Tim says, "Almost all misery in the stock market for income investors could be avoided if you:

1. Limit your exposure to the financial industry to 10% or below.

2. Own companies that have been raising dividends for 20-plus years.

3. At the time of purchase, own companies that have been growing earnings and dividends by 5% annually for the past decade.

4. Diversify into 20-plus holdings across 6-plus sectors that share those characteristics (20-plus years of dividend growth, and 10-year track records of at least 5% earnings and dividend growth) with limited exposure to the financial sector."

Based on those criteria I presented the below table, which is sorted in order of yield, that ranges from 4.82% to 2.42% and averages 3.0%.

The Screens

  • 20-plus years of annual dividend increases… To find a number of stocks with this attribute, I used David FIsh's CCC Spreadsheet. I selected all Champions, and then I added all Contenders with between 20 to 24 years of dividend increases.
  • I selected from the above all stocks with a 10-year dividend growth rate of over 5%.
    • From that list I selected all which also had a 5-year growth rate of 5% or higher.
    • I eliminated those which had both a 3 year and 1 year dividend growth rate under 5%
    • I eliminated those which did not have an estimated 5% earnings growth rate for a 10 year period
  • Identified sectors of all candidates and made selections that would include at least 6 sectors
    • Did not allow that selection to include more than two stocks from the financial sector


This time of year, a question on the tip of the tongue of many investors that you encounter will be how did your portfolio perform? That is a difficult question to answer. If you met your investment goals, then it performed perfectly. If you are comparing your portfolio to an index, then you may or may not have beat that particular index this year. Richard Shaw posted an excellent article near the end of the year. He reported which groups of stocks performed best and worst in 2013. If you are a dividend growth investor, your stocks might be,

  • high quality
  • low volatility
  • value style
  • dividend focus
  • mega-cap

The total return of this kind of investment is rising but is currently underperforming the S&P 500. The Bulletproof Portfolio consists of stocks like those described above. Certainly, the high dividends, nearly 50% higher than the S&P 500 average dividend of less than 2%, are one reason you own them. The lower volatility increases the Sleep Well At Night - SWAN - factor. In addition, you are less likely to sell the stock in a downward swing that is milder than that of the market. Finally, these firms are giants and enjoy tremendous credit ratings and stability, often having the shelter of large economic moats to buffer competitive advances. The best thing about their underperformance compared to the market in 2013 is the fact that many are fairly valued, and are candidates for purchase today. That said, let us look at the 2013 performance of each of the stocks and of the total portfolio.

These quality stocks average 40 years of consecutive dividend increases. The statistics affirm their strengths. The average of the holdings, a 2.83% yield, 10.60% DGR and a payout ratio under 50%, describes a good yield and growing dividend. The Morningstar system designates ADP, GPC, KMB and MO as overvalued with two stars. Designated as undervalued and given 4 stars are four of my favorite stocks, KO, MCD, PEP and PG. In addition, my review of the stocks using F.A.S.T. Graphs, indicated that AFL, CVX and XOM might also be priced for purchase.

Steps Toward Purchase - Due Diligence

We might believe that stocks that have such a rich and consistent performance history as our selections could be assumed to possess the other attributes of exceptional firms. That might or might not be true, and often signs of future problems are found in numbers and trends. Other indicators of performance are easily quantified, yield or 5 year DGR, and might be part of the screening process. Some attributes of a stock, from insider buying to the basic story of the stock, fall into the general area of due diligence. An illustration of various screens and a guide to Due Diligence is found at "The Importance Of Due Diligence (Exemplified By Johnson & Johnson)."

The firm's annual report will prove to be a rich source of information. Other resources such as Morningstar are useful. I always look at the firm's fundamentals as compared to industry averages, as shown in the example below.

The stock is selling at a premium price compared to the industry. Revenue growth is only about half that of the industry. Is that a part of being a well-established mega cap firm? Income growth is in decline, even though margins are better than average. One way to evaluate these numbers further is by reviewing 10-year comparative figures and look for trends. (Not shown.) Regarding net income it appears that 2012 was a bad year and that 2013 was the turning point after a slow decline.

Valuation - An Example

You place your order to buy a stock at a point in time with real money or this is a purely theoretical exercise. Therefore, it is essential to calculate valuation so that one does not buy grossly overvalued stocks. There are many ways to report the valuation of a stock. Morningstar, for example, uses a proprietary Discounted Future Cash Flow Model based on earnings. Then they report fair value in dollars and indicate valuation with a Star system, which rates stocks from one to five stars. JNJ is a 3 star opportunity, which is within the “fairly valued” range. Morningstar Premium subscribers can see that the current fair value of JNJ is $90.00 and the current price is $91.85.

Another tool to "think with" when determining valuation is F.A.S.T. Graphs. Examples of a JNJ F.A.S.T. Graph is below. The graph is a Estimated Earnings and Return Calculator, which shows the stock price above the projected fair value (orange) price line. One might say the stock is a little ahead of itself.

JNJ is now selling at a P/E of 16.7, higher than its 10-year average P/E of 15.5. It becomes a personal investing decision concerning whether one chooses to add this stock to their portfolio at this time. If it fit my portfolio needs, I would probably make a purchase. I often open a position in a stock with a purchase of 40% to 50% of a full position, and look to add to it in price dips or in predetermined future dated purchases of 3 months to a year. The analyst rating is 2.30, a buy. The technical chart looks like below.

(click to enlarge)

I do not believe you can know too much about any stock that you buy. It is important to remember that you are buying an individual stock, not, as in the case of an index fund, the stock market. Therefore, your success is based on the sum of your decisions. There are always alternatives that are on sale if any given stock is overvalued. A large part of your total return over time hinges on your patience. It is usually better to select the best opportunities from a watch list, rather than buy the whole portfolio at once. However, the later alternative might serve some well. Individual needs and goals should be the deciding force, based on reasonable guidelines, not hard and fast rules applicable to all investors. Note: Data for this article came from a number of different sources. The reporting methodology differs from source to source and reported numbers may differ. You may wish to select one reliable data source for consistency when doing your due diligence.


Buy one of these superior stocks or buy several to build a portfolio that might eventually hold all of them. Adjust your criteria with a bias toward yield, or toward a high Dividend Growth Rate by developing screens to best fit your goals. Download the latest CCC Spreadsheet and discover your best opportunities for 2014.

May you have a healthy and prosperous New Year.

Disclosure: I am long CVX, JNJ, KMB, PG, MCD. 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.