Tending The Dividend Garden - January Update

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Includes: CVX, MCD, MSFT, NKE, O, TGT
by: DJ Habig

Summary

Gardening and investing require similar attributes.

I like to diversify my investment holdings much like my garden.

Grouping stocks like I would crops helps guide me toward a balance.

As I wrote previously in "Tending the Dividend Garden," I like to think of building my stock portfolio the same way I would think about planting my garden. I see a lot of similarities between gardening and investing in dividend paying stocks. They both require a lot of work and patience up front, but when done correctly, can provide a great return. I like the idea of grouping stocks based on their yield and dividend growth rate (DGR) into comparable crops from my garden.

As a refresher, apple tree stocks have yields below 2.5% with 1-, 3-, 5-, and 10-year DGRs over 10%. Like apple trees, they don't have the highest initial returns, but they will make up for them over coming decades. Strawberry stocks have yields between 2.5% and 4%. Their DGRs are usually between 7% and 15% but can exceed that. Strawberries produce great harvests from their first year and actually spread very easily, ensuring future great harvests. Green bean stocks have the same yields, but DGRs between 5% and 10%. They're an extremely reliable crop that produces very similar results year in and year out. Watermelon stocks have yields over 4% with DGRs under 5%. Watermelon vines produce very few fruits but will make up for the lack of growth with their massive size. Spinach stocks would be any stock with a monthly payout. Spinach is easily the crop I pick the most. At its peak, I need to harvest some every other day. Potato stocks would be any stock with no dividend or no meaningful DGR. The major harvests with potatoes are after they have died, which I equate to only generating a return with the sale of the stock.

This month, I decided to incorporate comparisons between the 5-year and 10-year DGRs. I believe these numbers will aid in my analysis of stocks because they will show whether the dividend growth is accelerating or decelerating. Any number less than 1 means the DGR has been falling over the last 5 years when compared with the 10-year average. Any number greater than 1 means the DGR is increasing faster over the last 5 years than its 10-year average. With the new year, I also updated all of the DGRs themselves. I also had a few investment changes to include with this update.

Shares Yield 1 year DGR 3 year DGR 5 year DGR 10 year DGR 5/10 year
Apple trees
DIS 13.2936 1.45 10.4 25.7 30.1 18.8 1.60
MSFT 11.4478 2.49 14.0 14.9 16.7 14.8 1.13
NKE 9.5654 1.39 14.3 15.1 15.6 14.7 1.06
Strawberries
ADM 51.0476 2.62 7.1 16.4 12.9 11.6 1.11
CAT 26.5166 3.28 4.8 9.6 11.3 10.8 1.05
TGT 18.9126 3.30 7.4 13.7 16.1 18.1 0.89
Green beans
CVX 29.425 3.68 0.2 3.2 6.8 7.9 0.86
INTC 25.5381 2.86 8.3 5.0 5.9 10.3 0.57
JNJ 16.9288 2.76 6.8 6.7 7.0 8.0 0.88
MCD 13.1315 3.14 4.9 5.0 7.4 13.7 0.54
PEP 7.4582 2.87 5.3 9.1 7.9 10.0 0.79
Watermelons
T 21.7905 4.60 2.1 2.2 2.2 3.7 0.59
VZ 21.7641 4.23 2.6 3.1 3.0 3.4 0.88
Spinach
N/A
Potatoes
N/A

The new 5/10-year DGR column I included hasn't done much to change my categorization of stocks, but it is a nice bit of information. I believe the ratios are a bit skewed due to the time periods they cover. The 10-year DGR would include the Great Recession and possibly reflect that with a lower number. The 5-year DGR covers what has generally been viewed as a fantastic bull market that could've led to higher DGRs than would typically be expected. These data combine to artificially inflate the ratio of 5/10-year DGR. Therefore, I don't exactly think a higher ratio is all that impressive, but a lower ratio seems a bit ominous. For example, McDonald's (NYSE:MCD) has a ratio of 0.54, meaning the 10-year DGR is nearly double the 5-year. Upon further investigation, you can see a decreasing DGR from its 10-year DGR to its 1-year. I don't think this is news to any avid dividend investors, but seeing the numbers was a bit surprising to me.

As you can see by comparing January with December, I received a few more shares of Chevron (NYSE:CVX), Target (NYSE:TGT), and MCD through their DRIPs. I also moved Microsoft (NASDAQ:MSFT) to the apple tree category. This was in part due to the fall in yield because of the rise in MSFT's stock price. Another reason I chose to move it was because I've changed my definitions a bit. I've redefined apple trees as having double-digit DGRs across the four times I look at. The previous definition of over 20% 5-year DGR wasn't inclusive enough and is a bit too backward-looking when trying to make new investment decisions.

The biggest change to my portfolio was a new investment in Nike (NYSE:NKE). I purchased 9.5654 shares over two purchases in December. NKE's relatively low yield and high DGR landed the stock squarely in the apple tree category. It was a stock I had been watching for some time because I love best-of-breed stocks. 2016 was horrible for NKE especially when compared with the overall market. I'm not certain if it was truly bottoming or not, but I knew I was comfortable with the price. If the stock does slide, I'd happily average down as I work towards a full position.

My portfolio experienced a small amount of change through December. I added a DGR acceleration/deceleration metric, partial shares were added through DRIPs, and a new position was initiated in NKE. With the purchase of NKE, I fulfilled a previous goal of adding an apple tree. One area I plan to address in January is the lack of a spinach-type stock with monthly payouts. I've been watching Realty Income (NYSE:O) for a few months and wouldn't be surprised to find myself owning it before the end of the month. Thanks for reading.

Disclosure: I am/we are long ADM, TGT, VZ, T, CAT, CVX, MSFT, INTC, NKE, DIS, MCD, JNJ, PEP.

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.