My Dividend Growth Portfolio

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Includes: AGNC, ARR, CCP, CLDT, CMI, COP, CVX, D, DLR, DUK, EMR, EPR, F, GIS, JNJ, KHC, KMB, KMI, KO, LADR, LTC, MCD, MITT, MO, MSFT, O, OHI, PEP, PG, SO, STAG, T, VER, VGR, VTR, XOM
by: PendragonY

Summary

Here is a real DGI portfolio.

I am on track to get just over 11% of income growth this year.

I share the lessons I have learned so far.

I have been interested in the stock market for many years, so many it makes me feel very old when I total them up. My interest in the stock market first developed back when I was in the 8th grade (around 1975 or so) when a class I was taking had a class project to pick a stock or stocks and see how much money it would make over a 1-month period. I ended up putting my "money" into 2 stocks, US Steel (NYSE:X) and IBM (NYSE:IBM).

I invested in US Steel in part because it paid a good dividend and in part because I had just finished reading a book about the life of its founder. I ended up doing well in the contest, better than any of my classmates that didn't put all their "money" into IBM.

I realized then that while US Steel might have been a good dividend-paying stock, picking it was not a good match for the goals of the contest. That contest taught me that a good stock was only the right investment when it helped achieve your goals.

I found SA during 2009. While I had been investing in mutual funds for many years (since I started a 401(k) back in 1988), I had only been investing in individual stocks since 1999. I was pretty much a value investor, but I also considered dividends to be important. I just didn't have any systematic plan on how to evaluate the dividends I was collecting.

That's where SA came in and where I discovered DG investing. I learned a lot from the Davids (David Corsetti , David Van Knapp, and David Fish), the Bobs (Bob Wells and Bob Johnson), Robert Allen Schwartz and Chowder. Their articles and many other fine articles on SA helped me develop my plan for investing and gave me a good methodology (and data) to determine which companies to select for my portfolio.

While I learned how to do DGI in my taxable account, a job change in early 2014 gave me the chance to put a large amount of cash into an IRA where I could fully implement a DGI strategy from the start. In mid-March, I opened the IRA with $160,000 and added another $100,000 from a couple of other 401(k)s in the first week of April.

I slowly bought the companies from my watch list as they came into my buy range. That initial buy in process lasted until the last week of June. Since then, I have added no new outside cash. Below is what the portfolio looks like after a bit more than two years. This year, 2016, I should collect almost $20,000 in dividends.

Symbol

Name

Shares

Share/Cost

Cost Basis

Div. Rate

Annual Dividend

ARR PRB

ARMOUR RESIDENTIAL REIT PF B

255.00

$23.31

$5,944.05

$1.920

$489.600

CCP

CARE CAP PPTYS INC COM

522.7572

$29.07

$15,197.57

$2.280

$1,191.886

CLDT

CHATHAM LODGING TR COM

753.7562

$21.18

$15,964.99

$1.320

$994.958

CMI

CUMMINS INC

93.3841

$106.51

$9,946.49

$4.100

$382.875

CVX

CHEVRON TEXACO CORP

100.0000

$114.05

$11,405.22

$4.280

$428.000

D

DOMINION RESOURCES INC

166.1333

$71.83

$11,933.74

$2.800

$465.173

DLR

DIGITAL REALTY TRUST INC

150.0000

$58.39

$8,758.61

$3.520

$528.000

DUK

DUKE ENERGY CORP

87.7831

$79.92

$7,016.00

$3.440

$301.974

EMR

EMERSON ELEC CO COM

233.1459

$48.78

$11,373.56

$1.900

$442.977

EPR

EPR PROPERTIES TRUST

138.6810

$77.22

$10,708.92

$3.840

$532.535

F

FORD MOTOR COMPANY

839.3432

$13.51

$11,337.17

$0.600

$503.606

GIS

GENERAL MLS INC COM

150.0000

$51.86

$7,778.38

$1.920

$288.000

JNJ

JOHNSON & JOHNSON

122.2788

$100.89

$12,336.68

$3.200

$391.292

KHC

KRAFT HEINZ CO COM

170.0000

$57.34

$9,747.09

$2.300

$391.000

KMB

KIMBERLY CLARK CORP

100.0000

$106.54

$10,654.48

$3.680

$368.000

KMI

KINDER MORGAN INC DEL COM

600.0000

$30.29

$18,174.90

$0.500

$300.000

KO

COCA COLA CO

466.0208

$38.72

$18,042.03

$1.400

$652.429

LADR

LADDER CAP CORP

490.4467

$11.24

$5,512.00

$1.100

$539.491

LTC

LTC PROPERTIES INC

279.7369

$45.79

$12,809.68

$2.160

$604.232

MCD

MCDONALDS CORP

105

$101.00

$10,605.03

$3.560

$373.800

MITT PRB

AG MTG INVT TR INC PFD SER B 8

275

$24.82

$6,825.50

$2.000

$550.000

MO

ALTRIA GROUP INC

225

$40.94

$9,210.85

$2.260

$508.500

MSFT

MICROSOFT CORP

50.637

$47.93

$2,426.81

$1.440

$72.917

O

REALTY INCOME CORP

400

$41.26

$16,503.83

$2.418

$967.200

OHI

OMEGA HEALTHCARE INVESTORS

700

$33.12

$23,182.93

$2.400

$1,680.000

PEP

PEPSICO INC

21.5219

$97.14

$2,090.62

$3.010

$64.781

PG

PROCTER & GAMBLE CO

190

$81.54

$15,492.42

$2.678

$508.820

SO

SOUTHERN CO

242.1683

$47.18

$11,425.67

$2.240

$542.457

STAG

STAG INDL INC COM

1,114.88

$21.51

$23,982.93

$1.390

$1,549.677

T

AT&T INC

550

$34.33

$18,881.04

$1.920

$1,056.000

VER

VEREIT INC COM

750.00

$11.71

$8,785.36

$0.550

$412.500

VER PRF

VEREIT INC PFD SER F

280

$24.25

$6,796.95

$1.680

$470.400

VGR

VECTOR GROUP LTD

828.5458

$20.45

$16,942.62

$1.600

$1,325.673

VTR

VENTAS INC

275

$55.29

$15,205.96

$2.920

$803.000

XOM

EXXON MOBIL CORP

129.3078

$85.07

$11,000.00

3.0000

$387.923

CCC List members

General Mills (NYSE:GIS), Johnson & Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Altria (NYSE:MO), PepsiCo (NYSE:PEP), Procter & Gamble (NYSE:PG) and AT&T (NYSE:T) are straight picks from the CCC list. They are solid DG stocks that are frequently part of a DG portfolio. I got them at prices I thought were good values. I will keep them as long as they keep increasing dividends and don't get too overvalued. The positions with whole share counts are positions that I have trimmed back and haven't bought new shares in since I trimmed.

Cummins (NYSE:CMI), Emerson Electric (NYSE:EMR), and Microsoft (NASDAQ:MSFT) are also DGI stocks but they are more cyclical or volatile in their share prices. I buy more when I see them at a good discount to fair value. MSFT is such a small position because after I first bought it, the price ran up well beyond what I wanted to pay for more shares.

Chevron-Texaco (NYSE:CVX) and Exxon Mobil (NYSE:XOM) are my energy stocks. I once had ConocoPhillips (NYSE:COP) but I sold that at the start of the year when I saw that low oil prices put its dividend at risk. I put about a third of that cash each into CVX and XOM.

Dominion Resources (NYSE:D), Duke Energy (NYSE:DUK), and Southern Company (SO ) are my utilities. These are solid companies that are growing nicely. Chowder's comments on them are what initially drew my interest. I once held WGL Holdings (NYSE:WGL), but its price ran up so high that its dividend yield fell too low, so I rolled the money from that position into D and DUK.

Kraft-Heinz (NASDAQ:KHC) is a stock I got from when Heinz acquired Kraft. Since the takeover, it has done as well for me as Kraft had done. I got almost $4,000 from the special dividend and invested that into other positions in the portfolio.

REITs

Chatham Lodging (NYSE:CLDT), Digital Realty Trust (NYSE:DLR), EPR Properties Trust (NYSE:EPR), LTC Properties (LTC,) Reality Income (NYSE:O), Omega Healthcare Investors (NYSE:OHI), STAG Industrial (NYSE:STAG) and Ventas (NYSE:VTR) are my core eREIT stocks. Brad Thomas originally pointed them out in various articles he has written over the years. They provide a good solid base of dividend payments, which I tend to invest in companies that grow faster. CLDT, EPR, O and STAG pay monthly. I used about a third of the cash I got when I sold COP to add to my LTC position.

Care Capital Properties (NYSE:CCP) is a REIT that I first got shares when they were spun off from VTR. I liked the dividend and built it up to a full position. At this point, I am monitoring them to see if they can do well in their market. At some point, I might sell and roll some of the cash into OHI, which is in a very similar market.

Vereit (NYSE:VER) is a REIT I own due to owning both of the REITs that merged to form it. Because of a lot of issues, including accounting fraud and a total switch out of management the price of this is down a lot. Brad Thomas had given advance warning that something wasn't right with the company, but I failed to act. I am not buying any more of this stock, and as it makes sense, I am reducing my exposure to it.

MLPs

Kinder Morgan (NYSE:KMI) is my sole remaining MLP. I once held Linn Energy (LNCO) as well, but sold out of it when they announced they were eliminating the dividend. Actually, neither LNCO nor KMI is technically an MLP, as both are C-Corps, but they are MLP adjacent and other than for tax purposes act much like MLPs.

I am still debating what to do with KMI, I wrote an article about one tactic I am trying in order to recover from the big price drop before and after they had to cut their dividend. In the Lessons Learned section, I cover what happened and what I learned from holding both KMI and LNCO.

Preferred Stocks

I hold several issues of preferred stock. ARR PRB and MITT PRB are preferred shares from ARMOUR Residential REIT (NYSE:ARR) and AG Mortgage Investment Trust (NYSE:MITT). Brad Thomas wrote about them and their good yield. I hold them mostly for the immediate income boost and because I see their dividend as a lot safer than the common shares of mREITs. For the most part, after holding several mREITs a few years back, I don't invest in mREITs because their share price and dividends are too volatile. Even though Scott Kennedy provides excellent articles on how to invest in mREITs and how the companies are performing, the time to manage then was just not worth the effort to me.

VER PERF is the preferred issue from Vereit (formerly ARCP). During the depths of its issues with accounting and the old management, I switched some of my common shares for the preferred shares to reduce my risk from the company. This has been a nice steady payer. I bought it below par, so I have a small profit on the shares, and from time to time, I have contemplated selling it. I'll most likely keep these and sell more of the common.

Experimental Stocks

Ladder Capital (NYSE:LADR) is an mREIT that does commercial lending. It is much simpler than those mREITs like ARR, MITT or AGNC Investment (NASDAQ:AGNC) that work with residential mortgages. Brad Thomas initially brought my attention to the company and I opened a half position in it. Right now, it's generating a good yield and I am watching it to see both how it does and how much time it consumes to monitor it. Usually, I don't worry much about price, but I am keeping an eye on the price as well (I am up 27%), just in case it doesn't work out and I sell it.

Ford Motor (NYSE:F) is another experimental stock. Several years ago, I bought several stocks because I liked something about what they were doing. One company, for instance, had an interesting technology, a novel and cheap way to clean water after it was used in fracking. I bought Ford because I liked that they didn't take a government bailout. For the most part these stocks didn't work out, although since I mostly kept the positions small, they didn't cost me a lot of money.

Ford was the only one that worked out, as it pretty much became a DG company. It isn't currently increasing its regular dividend, but it is issuing a special dividend that so far makes up for that. I'll likely hold this for another year as I monitor it to see how the dividend issue plays out.

Others

Vector Group Ltd. (NYSE:VGR) is a strange company that is part Tobacco Company, part real-estate Company. The thing that attracted me to it, was that every year it pays a stock dividend of 5%. Lots of articles have been written about it, most of them negative, but it has a long history of paying out $0.40 a share in quarterly dividends and that once a year 5% stock dividend. I have held it for several years, and it just keeps rolling along. The dividends help me grow other positions, because I don't add shares other than the stock dividend.

How I handle dividends

There have been a lot of articles on how to handle dividend reinvestment. Some like to just roll the dividends back into the companies that produced them. Since most brokers don't charge a commission for that, an argument can be made that this is the most efficient way. Others accumulate the dividends until they have $1,000 (or some other figure designed to minimize the impact of commission charges), and then use that cash to buy a stock from their watch list that is currently trading at the best value of their candidates.

For a long time, I was in the DRIP crowd. It's simple and easy and not paying commissions is very attractive. It also has the added advantage of not missing any dividend payments from the new shares purchased. I still think it makes the most sense for smaller portfolios.

About a year ago, I determined that my IRA account had large enough dividend payments that the accumulate strategy might be cost effective. So looking at how much cash my dividends put into my account each month and the commission my broker charged, I decided I would accumulate dividend cash until I collected $1,500 and I would then make a targeted purchase from my watch list. However, I kept the drip on for any positions that were not a full position and for which I wanted more shares.

So MSFT, PEP and DUK are still currently dripping their dividends. I currently have more than $1,500 in cash, so I will be purchasing shares of VTR on December 6th. One feature I like that my broker, Sharebuilder, offers is that I can purchase a fixed dollar amount of shares every Tuesday. I use this to purchase shares with my accumulated dividends (this feature also has a lower commission charge).

So far, the accumulate method is working well. I have so far collected $17,581 in dividends up till the end of November. Last year I collected a total of $17,446. My goal for this year is $19,385. That leaves me about $1,800 short of the goal, with my December dividends roughly expected to be around $2,500. Since my goal was to grow dividends this year as much as last year (when I was doing all DRIP), I have most likely beaten that goal. My projected dividends (based on annual rates and shares currently held) for the next 12 months is $21,070 so I am well on my way to making my goal for 2017 of $21,538.

Lessons Learned

Over the time I have been managing this portfolio I have learned a number of important lessons. I share them in the hope that my experiences can save others the cost I incurred while learning them.

One big lesson I learned was gained by investing in mREITs like AGNC (I held others as well, but that was my biggest position). It's a fairly obvious lesson, or so it seems in hindsight. Never invest in a company where you don't understand, at least at a basic level, how they make their money. The problem I ran into with mREITs, is that I missed how the interest rate spread was far more important than what interest rate they were getting on the mortgages they were buying.

I also missed that their leverage was tied to the value of those mortgages. So I foolishly assumed that rising interest rates would allow them to pay more dividends. In part I based that assumption on the fact that when rates decreased they had to cut dividends, so I thought it was logical that with rising rates, they wouldn't have any trouble with income! Scott Kennedy pointed this out in his articles analyzing mREITs, but I discounted that information because I was so sure that increasing rates had to increase their income.

My next lesson was about companies that built an income stream very much dependent on hedges to get the price they needed for their products. Not being as wary of that issue as I should have been allowed me to be surprised by the problems that LNCO got into. Linn Energy built a massive infrastructure that generated lots of cash, provided they could get around $90 a barrel for oil (and similar high prices for natural gas).

They had plenty of hedges to ensure they got that price. Everything was fine until oil stayed low so long that Linn began to run out of hedges. It came down pretty quickly after that. From that experience, I learned that if a company can't be profitable at the current market price for their products, they aren't a good investment any longer if that low price lasts very long.

KMI taught me that while it is true that share price has little impact on the operations of most companies, that isn't true of all companies. How a company finances growth can impact how much influence share price has on the operations of the company. KMI is one of those companies that financed its growth by selling shares to get much of the cash it needed to grow. Many REITs are similar and so too are MLPs. Concerns about the price of oil and its impact on KMI's ability to pay the dividend had a huge negative impact on the price of its shares.

So much so that it became too expensive to sell shares to fund growth projects. At that point, credit agencies forced a cut in the dividend, so that cash flow could be used for internal funding (and some repayment of debt). From this I have learned that for some companies, share price is one of the fundamental metrics for the company.

Note: I hope you all got something out of this article. I do appreciate the time you took reading it. If you are one of those who follow me here, I appreciate it; if you'd like to include yourself amongst those individuals, please hit the "Follow" button next to my name as well as following other contributors whose work you enjoy. As always, please leave any feedback and questions you may have in the comments below.

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. The price I call fair valued is not a prediction of future price but only the price at which I consider the stock to be of value for its dividends.

Disclosure: I am/we are long GIS, JNJ, KMB, KO, MCD, MO, PEP, PG, T, CMI, EMR,CLDT, DLR, EPR, LTC, O, OHI, STAG, CCP, CVX, XOM,LADR, F, KMI, KHC, CLDT, DLR, EPR, LTC, O, OHI, STAG, VTR.

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.

Additional disclosure: I am long all the stocks listed in the portfolio table at the beginning of the article.

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