DGI For The DIY: Q1 2017 Review

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Includes: CHD, DLR, DPS, GILD, GME, KO, NKE, NSC, O, OHI, PII, QCOM, ROST, XEL
by: Eric Landis

Summary

The "Trump Rally" has continued into 2017, with the major indices all trading higher during Q1.

Capital gains are good, but dividend income is better, and my portfolio income increased by 26.6% over Q1 2016 and 18.2% over the prior quarter.

I highlight the lone stock purchase made during Q1, and provide an outlook for Q2.

DGI For The DIY Logo "DGI For The DIY" is a real-life portfolio that is being chronicled in an effort to show how a do-it-yourself investor with limited funds can build a dividend growth portfolio for retirement.

The portfolio is an IRA representing a large portion of my retirement savings. I took active control of it in early 2013, when I sold out of mutual funds and plunged head-first into the dividend growth investing strategy. My goal is to grow my dividend income over the next 25+ years to eventually fund my retirement.

I am an engineer in my late 30's with a mortgage, a growing family, and limited resources to put towards investing; a situation that many Millennial/Gen X'ers can relate to.

This series of articles is a way for me to document my decisions, maintain discipline by sharing them publicly, learn more about investing, and inspire others to take control of their own finances and future retirement.

If you are interested in reading through the history of the portfolio's progress, I've put together a listing of the quarterly update articles at DGIfortheDIY.com for easy reference.

Market Comparison

The "Trump Rally" has continued into 2017, with the three major indices all trading higher during Q1.

^SPX Chart

^SPX data by YCharts

The portfolio also had a solid quarter, as it saw a 3.62% increase in value (less cash contributions) since the end of 2016. On a total dollar basis, the portfolio value increased 5.26%, from $59,308 to $62,249.

Here is the quarterly progress of the portfolio since its inception:

The portfolio value has been on a steady, upward trajectory, which is to be expected in an ongoing bull market. More important to me is that my income has been steadily growing as well.

Dividend income during Q1 was $490.55, an 18.2% increase over the prior quarter and a 26.6% increase over Q1 of 2016.

Here is the dividend income history in tabular form:

This 26.6% increase comes from a combination of factors, including: new stock purchases from cash contributions into the portfolio, reinvestment of dividends that increased share count, and increased dividend payments from stocks held.

The portfolio is well on pace for over $2000 in dividends paid in 2017; which would be 20%+ growth over last year. This is a surprising development for me, as I was expecting my income growth to continue slowing from the 15.6% increase seen last year.

Speaking of increasing dividends, here are the increase announcements during Q1:

Date Company Previous Quarterly Rate New Quarterly Rate Sequential Increase Year Ago Dividend YoY Increase Dividend Yield
1/12/2017 Omega Healthcare Investors Inc (NYSE:OHI) $0.610000 $0.6200 1.64% $0.5700 8.77% 7.16% LINK
1/17/2017 Realty Income Corp (NYSE:O) $0.202500 $0.2105 3.95% $0.1985 6.05% 4.08% LINK
1/24/2017 Norfolk Southern Corp. (NYSE:NSC) $0.5900 $0.6100 3.39% $0.590 3.39% 2.17% LINK
1/26/2017 Polaris Industries Inc. (NYSE:PII) $0.5500 $0.5800 5.45% $0.550 5.45% 2.91% LINK
2/7/2017 Church & Dwight Co., Inc. (NYSE:CHD) $0.1775 $0.1900 7.04% $0.178 7.04% 1.50% LINK
2/7/2017 Gilead Sciences, Inc. (NASDAQ:GILD) $0.4700 $0.5200 10.64% $0.470 10.64% 3.14% LINK
2/9/2017 Dr Pepper Snapple Group Inc. (NYSE:DPS) $0.5300 $0.5800 9.43% $0.530 9.43% 2.36% LINK
2/16/2017 The Coca-Cola Co (NYSE:KO) $0.3500 $0.3700 5.71% $0.350 5.71% 3.42% LINK
2/22/2017 Xcel Energy Inc (NYSE:XEL) $0.3400 $0.3600 5.88% $0.340 5.88% 3.21% LINK
2/28/2017 Ross Stores, Inc. (NASDAQ:ROST) $0.1350 $0.1600 18.52% $0.135 18.52% 1.00% LINK
3/1/2017 GameStop Corp. (NYSE:GME) $0.3700 $0.3800 2.70% $0.370 2.70% 6.67% LINK
3/1/2017 Digital Realty Trust, Inc. (NYSE:DLR) $0.8800 $0.9300 5.68% $0.880 5.68% 3.29% LINK
3/7/2017 QUALCOMM, Inc. (NASDAQ:QCOM) $0.5300 $0.5700 7.55% $0.530 7.55% 4.33% LINK
3/14/2017 Realty Income Corp $0.210500 $0.2110 0.24% $0.1985 6.30% 4.09% LINK
Averages: 6.27% 7.37%

This quarter was a bit lower than usual for dividend growth, as the average increase was just 6.27% on a sequential basis, and 7.37% on a year-over-year basis.

This was due to smaller than normal increases from the likes of Polaris Industries, Norfolk Southern, GameStop, Coca-Cola, and Digital Realty Trust.

That said, I'm not going to complain about a 7.4% annual increase in dividends. With a portfolio yield of around 3.1% adding more shares through dividend reinvestment, I'm still well on pace for double-digit overall income growth with the increases.

Portfolio Transactions

It was a very quiet quarter for transactions in Q1, as there were zero sales and just one buy in the portfolio. I expect this to be fairly normal going forward, as I am becoming more and more a reluctant seller.

The portfolio gets about $300 per month in contributions, and I make purchases in ~$500 increments, which leaves room for one or two purchases per quarter.

This quarter I wanted to add another higher growth stock to the mix, and debated between several different companies, including: Mastercard Inc. (NYSE:MA), Tractor Supply Company (NASDAQ:TSCO), V.F. Corp. (NYSE:VFC), Nike (NYSE:NKE) and NextEra Energy (NYSE:NEE).

In the end, I felt that valuations were stretched in Mastercard, Tractor Supply, and NextEra Energy, which left the choice between V.F. Corp. and Nike. I had recently purchased V.F. Corp. in another account, and felt that Nike was trading at an attractive valuation, so I pulled the trigger and added 18 shares on March 23rd.

Here are the details:

Nike is a company I have been watching for several years, and I'm happy that it's finally made its way into the portfolio. I recently decided to expand my holdings beyond the 50 position mark, and am looking to add high quality names that can provide some more growth to my portfolio.

Nike has a long history of above average earnings growth. According to F.A.S.T. Graphs, it produced a 10.3% annual growth rate over the last 20 years, 12.6% over the last decade, and 14.0% over the last five years. So not only does it have a history of good growth, but that growth has been accelerating of late.

This growth has been a boon for investors, turning a $10,000 investment into $42,212 over the last decade, good for a 15.7% annualized return compared with just 5.7% from the S&P.

NKE 10YR FAST Graph

Valuation caused me to sit on the sidelines for several years waiting to open a position. I will admit, at a 23.5 PE on expected 2017 earnings, it is still far from cheap now.

However, with roughly 13% annual growth expected over the next 5 years, the multiple is reasonable, and is actually a discount to the normal PE of 24.8 over the last 5 years.

NKE FAST Graph

As I mentioned, Nike is a stock I've been watching for several years; really since I first built my portfolio in early 2013. Initially I avoided it due to a low dividend yield, and then after its price took off in late 2013, I avoided it due to high valuation.

However, the stock has sold off since peaking around $66 (with a 33 PE) in late 2015, and has now come down to a bit more reasonable valuation levels. There was a better opportunity to buy in late 2016, but in my stubbornness in waiting for my target price of ~$45, which was a 21 PE on 2016 earnings, I never bought.

I didn't want to make that mistake again when it sold off after Q4 earnings, and decided to take advantage of that opportunity to open my position.

Nike is an AA- rated company and is the dominant player in the sports apparel industry. It is a company I hope to hold for another 25+ years until retirement, and will likely add to several more times down the road.

It may not be a perfect price, but I think it is a perfect addition to my portfolio.

Current Portfolio

With the addition of Nike, the portfolio now has 52 companies. Here are my holdings, with prices as of quarter's end:

DGI For The DIY:Q1 2017

DGI For The DIY: Q1 2017

And here is the portfolio breakdown for total value and income by sector:

DGI For The DIY: Portfolio Weightings

Due to outperformance from several of my REITs, that sector has become the #2 sector by value and by far the biggest portion of my dividend income.

This is driven by substantial returns on Digital Realty Trust, which is the largest single position in the portfolio at a 5.09% weighting. Digital Realty also provides the second highest annual income in the portfolio behind another REIT, Omega Healthcare Investors.

Having such a large percentage of my income from REITs wasn't my plan, but at this stage of the game isn't something I'm too concerned with. As mentioned, I have another 25 years until retirement, so there is plenty of time for me to balance things out as new investments are added.

So for now, I have no intentions of doing any rebalancing, and will continue to let my dividends reinvest and positions build. I am still long-term bullish on data centers and healthcare, so I see no reason to trim my winners.

You can't have 10, 20, or 30 baggers if you don't hold positions long-term and let compounding do its work.

On The Radar

I see healthcare and utilities as two sectors I would like more exposure to, and may look there as potential adds later this year.

However, utilities remain quite expensive, and I am hesitant to pay up for lower growth positions. If there is a pullback, I would be looking to add to Dominion Resources, Xcel Energy, or WEC Energy Group. Other possible additions include: NextEra Energy , Aqua America (NYSE:WTR), and American Water Works (NYSE:AWK).

The healthcare sector offers much better value, and may be a stronger possibility. In addition to the names I hold, I would also consider Johnson & Johnson (NYSE:JNJ), Cardinal Health (NYSE:CAH), and UnitedHealth Group (NYSE:UNH) as potential additions.

Other names on my wish list include Mastercard, The Home Depot (NYSE:HD), 3M Company (NYSE:MMM), Hormel (NYSE:HRL), and Tractor Supply Company.

Conclusion

Now in year 5 of the portfolio, I am really content sitting back and watching things grow now. I have lessened the churn of positions, and am trying to be more patient with companies as they go through ups and downs of business cycles.

This has been working out well for me, as evidenced by the 26.6% increase in income over last year. On top of this, the companies I hold continue to raise dividends, leading to even more income growth going forward.

I hope this update finds you well, Happy Investing in Q2!

Disclosure: I am/we are long AAPL, ABBV, ABC, ABT, AMGN, AMP, BDX, CBRL, CHD, CLDT, CMI, CVS, CVX, D, DLR, DPS, EOG, FLO, GE, GILD, GIS, GME, IBM, KMI, KO, LMT, LOW, MCD, MDU, MSFT, NKE, NSC, O, OHI, OXY, PII, PM, QCOM, ROST, SBUX, STAG, T, TGT, THO, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM, VFC.

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 an engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.

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