My Dividend Investing Journey

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Includes: EMR, HAS, TROW
by: Jacob Larkee

Summary

Establishing a long-term investing strategy.

Reviewing progress from 2014 to now.

Three undervalued stocks on my watch list.

About one year ago, I wrote my first quarterly update and highlighted an investing strategy that I would follow in order to hopefully put myself on track for an early retirement. Today, I would like to review my yearly progress and examine some stocks on my watch list moving forward.

Overview:

After a year and a half of investing in stocks without much direction, I bought a couple books and developed my own investing strategy focused on long-term dividend growth. My goal is to buy companies at a discount to fair value which pay an increasing dividend and will be around in 20-30 years. Rather than create a large nest egg and sell assets in order to generate income in retirement, I plan on creating an income stream that is enough to supplement my salary once I retire.

After reading my books and many articles on Seeking Alpha, I developed specific buying and selling guidelines which I stick to and which allow me to filter through stocks that I wish to buy and sell. I will adjust them as I learn, and also when I think my strategy needs to change.

Buying Guidelines

  1. Does the stock pay a dividend?
  2. Is the stock increasing the dividend yearly?
  3. Is the P/E less than 20?
  4. Is the dividend higher than 2.5%?
  5. Is the payout ratio under 70%?

Selling Guidelines

  1. Dividend is frozen or cut.
  2. Dividend growth rate slows significantly.
  3. The stock becomes overvalued.

When I started out, I had more than a few selling guidelines, but over time, I began to realize there is almost never a time when I would want to sell any of my dividend growth stocks. Occasionally, I may feel a stock is overvalued and will sell to raise cash, but primarily, I am buying stocks to hold for 20-30 years. Keep in mind that this is just a pre-screen; once I narrow this part down, I will then look into the companies' cash and debt levels, forward P/E and Return on Equity (ROE), just to name a few.

I divided my portfolio into three parts - I have my dividend growth portion, to which I wish to allocate between 70-80%; my growth and speculative portion, which will be between 10-20%; and cash, which will be between 0-10%. I contribute to my portfolio every two weeks, therefore my cash position will fluctuate based on when I last made a purchase. Ideally, though, I would like to have enough cash on hand to make two purchases (about $1000) at any time in order to take advantage of market corrections. Even though I primarily invest in dividend growth stocks, I still believe it is important to have a higher growth aspect to the portfolio, which is why that is between 10-20%.

Last Year to Now:

When I wrote my first update (March 31, 2014), my portfolio value was $6,076.95. Today (March 1, 2015), its value is $10,602.74. Here is my portfolio as of March 31, 2014:

Company

Shares

Market Value

Portfolio Weight

Quarterly Dividend/Share

Annual

Dividend

GE

47.105

$1,219.55

20.07%

.22

$41.45

AMD

250

$1,002.50

16.50%

0

$0

AAPL

2.041

$1,095.49

18.03%

3.05

$24.90

CVX

8.069

$959.48

15.79%

1.00

$32.28

LMT

4.033

$658.35

10.83 %

1.33

$21.28

HAIN

5

$457.15

7.52%

0

$0

Cash

$684.43

11.26%

Total

$6,076.95

100%

$119.91

And here is the portfolio as of March 1, 2015:

Company

Shares

Market Value

Portfolio Weight

Yield

Yield on Cost

Quarterly Dividend / Share

Annual Dividend

AAPL

14.552

$1,869.35

17.63%

1.46%

3.16%

0.47

$27.36

GE

48.773

$1,267.61

11.96%

3.54%

3.88%

0.23

$44.87

CVX

8.286

$883.95

8.34%

4.01%

3.42%

1.07

$35.46

LMT

4.128

$825.81

7.79%

3.00%

3.81%

1.5

$24.77

HAIN

10

$625.30

5.90%

0.00%

0.00%

0

$0.00

WFC

10.267

$562.53

5.31%

2.56%

2.78%

0.35

$14.37

(NYSE:TGT)

10.157

$780.36

7.36%

2.71%

3.60%

0.52

$21.13

HCP

24.779

$1,049.64

9.90%

5.34%

5.41%

0.565

$56.00

AIG

9.041

$500.24

4.72%

0.90%

0.92%

0.125

$4.52

COP

6.065

$395.44

3.73%

4.48%

4.17%

0.73

$17.71

BMY

10

$609.20

5.75%

2.43%

2.11%

0.37

$14.80

EOX

450

$499.50

4.71%

0.00%

0.00%

0

$0.00

Cash

$733.82

6.92%

Total Value

$10,602.74

2.64%

Est. Annual Dividend

$260.99

(Spreadsheet from Two Investing)

As you can see, the portfolio is much larger, and the dividends are really starting to add up. My yield on cost will continue to increase over time as I get a couple years of dividend increases in the stocks I own. My biggest winner so far is Apple, with over 110% in unrealized gains since I purchased two shares back in 2013. I have put an order in to take to profits off the table, as I want to lock in some of those gains, but I am very pleased with how the portfolio has grown in just under a year.

Stock Picks:

Identifying stocks that provide good value has become more and more difficult in today's environment. We have had a bull market that has lasted almost 7 years now. This, coupled with the Fed doing everything they can to keep interest rates low has caused many of the coveted dividend growth stocks to become way overvalued. Yield-starved investors are more and more willing to pay a premium for the high-quality dividend-paying stocks, which has driven up their valuations over the last few years. I believe that Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB) can be solid core holdings in a long-term dividend portfolio, but I am not willing to pay a high premium for those stocks when I believe there are others that present excellent value elsewhere in the market. Below, I will go into detail on a few stocks I would buy in today's environment.

Stock

Price

Dividend Yield

P/E

Forward P/E

5 year DGR

Payout Ratio

ROE

HAS

$62.31

2.95%

19.47

15.48

18.11%

53%

25.54%

EMR

$57.92

3.25%

18.50

14.41

6.57%

56%

21.88%

TROW

$82.60

2.52%

18.15

15.35

21.60%

38%

24.08%

(All data from Yahoo Finance)

Hasbro Inc.

Hasbro offers play and personal entertainment solutions to children and families through its multiple brands. The company operates in three segments" U.S. and Canada, International and Entertainment and Licensing. The company's brands include Magic: The Gathering, Marvel Products, My Little Pony, Nerf, Playskool and Transformers. (Summary from Reuters.)

Hasbro Inc. is off to a fantastic start this year, up over 13% year-to-date. The company had a solid earnings report, despite missing the revenue estimates by $30M. It also increased its quarterly dividend to .46 a share, a 6.9% increase. This means that despite the recent run-up, the stock is still sporting an almost 3% yield. Although it is trading at the upper range of what I want a stock to be when I buy it (19.47 P/E), the forward P/E is about 15 meaning, that it is undervalued moving forward. The 5-year dividend growth rate is very solid, and given the low payout ratio, it still has room to grow. The low payout ratio also gives the company flexibility moving forward, as it has not committed all of its cash flow to paying the dividend.

Emerson Electric

Emerson Electric Co. is engaged in offering technology and engineering together that provides solutions for customers in industrial, commercial, and consumer markets around the world. The company operates through five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. The Process Management segment provides measurement, control and diagnostic capabilities for automated industrial processes. The Industrial Automation segment provides integrated manufacturing solutions to its customers at the source of manufacturing their own products. The Network Power segment designs, manufactures, installs and maintains products providing grid-to-chip electric power conditioning. The Climate Technologies segment provides products and services for the climate control industry. The company's Commercial & Residential Solutions segment offers a range of tools, storage products and appliance solutions. (Summary from Reuters)

Emerson Electric is a well-known dividend champion which has been growing its dividend every year since 1957 (58 years). This is a pretty amazing feat, given all of the different markets it has had to deal with over the years. Many of today's Dividend Champions are trading at a high premium to the overall market, and generally only go on sale during bear markets. However, EMR appears to be undervalued in today's market, based on fundamental valuations. The company has come down in the last few months along with oil, but I tend to think this is a buying opportunity. It isn't often that you get the chance to buy a company that has paid a growing dividend for 58 years that isn't overvalued. The company currently trades at a P/E ratio of 18, which is fairly valued, but the forward P/E is only 14. The company has a much lower 5-year DGR than the other two stocks I am looking at, but given its history of growing dividends, I want to own this company as a core holding in my portfolio. EMR has proven itself during bull and bear markets, and that is one of the most important things to me as a long-term investor.

T. Rowe Price

T. Rowe Price Group, Inc. is a financial services holding company, which provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios, including separately managed accounts, sub-advised funds, and other sponsored investment funds offered to investors outside the United States and through variable annuity life insurance plans in the United States. (Summary from Reuters)

T. Rowe Price is the last company on my buy list. Although the company currently sports the lowest yield of the three, it has the highest 5-year dividend growth rate and the lowest payout ratio. This, however, doesn't take into account the $2 special dividend that it recently announced, which will be paid out in April. This, along with the quarterly dividend, gives the company a yield of almost 5% for 2015 at current prices. Although it doesn't have the dividend history of Emerson Electric, T. Rowe Price appears to be well positioned to weather any downturns in the future. The company has no debt, and that, along with the payout ratio of only 38%, puts the company in a great position moving forward. I am hoping for a little more of a pullback before I pull the trigger, and recently put an order in to buy 7 shares at $80.00.

Conclusion:

I enjoy looking back at the progress I have made so far and seeing how just by taking some time and educating myself on investing, I can generate solid returns on my money. Moving forward, I plan on maintaining my current savings rate for the foreseeable future, and will look to increase it next year. Although I have a long ways to go, I am very confident in the fact that my investing strategy will produce long-term gains and allow me to one day (hopefully sooner rather than later) retire comfortably.

Disclosure: The author is long AAPL, GE, CVX, LMT, HAIN, WFC, TGT, AIG, COP, BMY, EOX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial planner or a professional trader. I am not advising you to sell or to buy a stock. Prior to buying or selling a stock mentioned in my article, please do your own diligence and talk to your financial advisor or security professional.

I may initiate a long position in TROW over the next 72 hours.