Project $3 Million is all about building an income stream that is reliable, predictable and increasing. The whole purpose of this portfolio is to earn enough income from the underlying assets, to replace the income currently being earned while employed.
The companies that are purchased for this portfolio, and those that remain in this portfolio, must all support the overall objective; they must contribute to that income stream we are trying to build.
We are not concerned with what the market is doing or will do; an income must be earned in all market conditions. Therefore, our focus remains on identifying companies that have a high probability of continuing to pay that dividend regardless of market or economic conditions.
In order to continue paying and raising the dividend, a company must be financially strong enough to survive all business conditions, all business cycles, and all economic and market conditions. In order to insure the dividend stream consistently grows in all market conditions, we focus on companies rated BBB+ or higher by Morningstar and/or S&P Capital IQ.
You can get company ratings free from both rating firms using the following links.
You will need to register with S&P, but it is free and they don't hassle you with e-mail spam.
In an article written by Bob Wells here on Seeking Alpha titled, What You Can Do To Perhaps Avoid Dividend Cuts, he states that since 2008, for companies with dividend increase strings of 5 consecutive years or more, that there were 71 dividend cuts. Of those 71, only 14 companies were rated BBB+ or higher. Of those 14, all but 3 were banks. As you can see if you have been following this portfolio since it was first published, there are no banks in this portfolio.
The 3 companies that cut the dividend, while being rated BBB+ or better were Pfizer (PFE), General Electric (GE) and Kimco Realty Corp (KIM). This portfolio has never held any of these 3 companies.
So quality has performed well for us, and I believe will continue to perform well.
We don't chase after yield either. I am not going to purchase a low rated company just to juice the yield. Low rated companies are speculative and I don't speculate for income. If I'm going to speculate, I'll speculate for capital appreciation. Share prices fall long before dividend cuts or eliminations come into play. Therefore, if I'm speculating, I can limit losses when the share price doesn't rise.
We didn't own Seadrill (SDRL) or LinnCo (LNCO) in this portfolio for example, with their very high yields that reached into double digits because they never passed the high quality criteria of achieving a BBB+ or better credit rating. We never purchased a high yielding BDC or mREIT with their high yields because they lack the high quality ratings that we require.
Companies we purchase are always purchased with the safety of the dividend in mind, regardless of market or economic conditions.
Other objectives we have for this portfolio are to achieve a 4% yield and to grow the income each year at double-digit rates. My double-digit rate objective is 15% and this is to include the dividends being reinvested, and to include the monthly cash contributions of $500 each and every month.
In 2014 the portfolio yield was 3.7% and the annual dividend growth rate was 8.4% and the total dividend growth with dividends reinvested was 22.3%. Please note that the 3.7% yield and 8.4% dividend growth provided a 12.1 Chowder Rule number. It was right on target!
Every company in the portfolio doesn't have to meet the Chowder Rule number once purchased, it's how all the pieces come together that counts.
I was very pleased with the dividend growth rate. For perspective, here are the dividend growth rates for the last few years:
2012 ... up 16.8%
2013 ... up 19.8%
2014 ... up 22.3%
We are falling short on hitting the yield objective, but there isn't much I can do about that without the market having a significant correction. I am not going to chase a higher yield if I have to accept a lower-quality rated company. So, I focused on what I could control in 2014. I accepted the fact that I might lose a little yield by purchasing companies with much higher dividend growth rates. If I can't get the yield now, I'll grow into it!
Portfolio value over the last few years:
2012 ... $84,710.60 ... up 20.6% over 2011
2013 ... $111,161.93 ... up 31.2%
2014 ... $136,286.81 ... up 22.6%
I added the following companies with a much higher dividend growth as that was the only thing I had control of. I added Deere & Co (DE) with its 5-year compounded annual growth rate of 15.77%. I added International Business Machines (IBM) with its 5-year compounded annual growth rate of 14.61% and I added Ross Stores (ROST) with its 5-year compounded annual growth rate of 29.86%.
With this in mind, here are the 2014 dividend growth rates. (Please note, some companies don't pay the same dividend all 4 quarters, so these numbers are year over year, not the announced dividend growth rate where some of those quarters haven't been paid yet.)
An example would be General Mills (GIS). They announced a 7.9% rate increase but actually paid a 13.4% increase year over year, and it's year over year that I track.
Feb 2013 .... $0.33
May 2013 ... $0.33
Aug 2013 ... $0.38
Nov 2013 ... $0.38
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Total ....... $1.42
Feb 2014 .... $0.38
May 2014 ... $0.41
Aug 2014 ... $0.41
Nov 2014 ... $0.41
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Total ....... $1.61 ... a 13.4% increase, not the announced 7.9%.
2014 Dividend Increases:
MMP .... 19.4%
ROST ... 17.6%
IBM ...... 14.9%
LMT ..... 14.9%
GIS ....... 13.4%
DEO ..... 12.4%
DE ........ 11.6%
PEP ...... 10.6%
ADP ..... 10.3%
PM ........ 9.5%
KMI ...... 9.0%
XOM .... 9.8%
KO ........ 8.9%
MO ....... 8.9%
CVX ..... 7.9%
PG ........ 7.0%
CL ........ 6.8%
D .......... 6.7%
JNJ ....... 6.6%
EPD ..... 5.9%
KMP .... 5.1%
MCD ... 5.1%
KMB ... 5.0%
KRFT .. 4.9%
HCN ... 3.9%
SYY ... 3.6%
SO ...... 3.5%
VZ ...... 3.1%
T ......... 2.2%
O ........ 2.1%
Looking forward for 2015, I'll make the first purchase in Project $3 Million in February. I will look to see who is selling at the better discounts to fair value first, but if there isn't anything promising, I'll simply add to a core position.
Companies I would like to add to the portfolio, if the proper valuations can be met are any railroad. I don't care which one. I would like to add Emerson Electric (EMR), Genuine Auto Parts (GPC), McCormick & Co (MKC), and VF Corp (VFC).
These are companies I "must own" one day. I want access to their product lines and how they assimilate with our society.
I'm looking at adding what some would consider a little more growth to the portfolio, but only if they meet the valuation criteria. These are not "must own" companies, but "would like" to own companies.
Foot Locker (FL), Starbucks (SBUX), Costco (COST), either Master Card (MA) or Visa (V), either Home Depot (HD) or Lowe's (LOW).
I have quite a few more companies on the watch-list I will purchase if the opportunity arrives at the time I have the cash to invest, but those listed above have priority in the selection process.
The Project $3 Million Portfolio with its objectives and results can be found here.
