DGI For The DIY: Q2 2017 Review

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Includes: AAPL, AMP, CBRL, FLO, GIS, IBM, LOW, O, OHI, SKT, STAG, TGT, WSO, XOM
by: Eric Landis

Summary

With the market at all-time highs, the DGI For The DIY portfolio followed suit by hitting a new valuation record.

In addition to capital appreciation, dividend income rose by 18.9% over 2016 levels, and reached a milestone of $2000 in projected annual income.

I highlight my purchase made during Q1 and look at potential targets for Q2.

"DGI For The DIY" is my effort to provide an example for do-it-yourself investors who are interested in the dividend growth investing strategy.

The portfolio highlighting this effort is an IRA that represents a substantial portion of my retirement savings. I took control of this portfolio in early 2013 when I sold out of passive mutual funds and plunged head-first into the dividend growth investing strategy.

The goal of this portfolio is to produce a steadily increasing dividend income over the next 25+ years, which will eventually be used to fund a portion of my future retirement.

I am an engineer in my late 30s with a mortgage, a growing family, and limited resources to put towards investing; a situation that many other young investors can relate to.

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

Market Overview

The stock market continued its slow and steady ascent in Q2, as the major indices all hit new all-time highs during the month of June and saw 2-4% gains during the quarter.

Chart ^SPX data by YCharts

The portfolio lagged the indices on a total value basis, as it increased by about 1.1% (less cash contributions) over Q1. This was likely due to weakness in oil & gas, retail, and real estate, which have higher exposure in my portfolio than the general indices.

I'm not too concerned about it though, as my primary goal is income growth, and that metric performed just fine, as we will see below.

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

DGI For The DIY: Q2 2017 Portfolio Update The portfolio value continues to march higher along with the market, and in line with the portfolio's goals, my income continues to grow as well. This is skewed a bit as Digital Realty pays out twice in Q1, causing my Q over Q number to be lower, but when looking at the big picture the trend is clear.

DGI For The DIY - Q2 2017 Dividend Progress While income dropped on a sequential basis, it was up nearly 19% compared to Q2 of 2016. Looking at the annual pace, I've already collected nearly 60% of last year's total, and with more dividend increases and dividend reinvestment forthcoming, I think the $2,000 income mark is possible for 2017.

Speaking of dividend increases, here were the announcements made during Q2:

Date Company Ticker Previous Payout Rate New Payout Rate Sequential Increase Year Ago Payout Rate YoY Increase Dividend Yield

4/13/2017

Omega Healthcare Investors Inc (OHI) $0.6200 $0.6300 1.61% $0.580 8.62% 7.52% LINK
4/24/2017 Ameriprise Financial, Inc. (AMP) $0.7500 $0.8300 10.67% $0.750 10.67% 2.47% LINK
4/25/2017 International Business Machines Corp. (IBM) $1.4000 $1.5000 7.14% $1.400 7.14% 3.90% LINK
4/25/2017 Watsco Inc (WSO) $1.0500 $1.2500 19.05% $1.050 19.05% 3.31% LINK
4/26/2017 Exxon Mobil Corporation (XOM) $0.7500 $0.7700 2.67% $0.750 2.67% 3.82% LINK
5/2/2017 Apple Inc. (AAPL) $0.5700 $0.6300 10.53% $0.570 10.53% 1.68% LINK
5/2/2017 Stag Industrial Inc (STAG) $0.1167 $0.1175 0.71% $0.117 0.71% 5.06% LINK
5/23/2017 Cracker Barrel Old Country Store, Inc. (CBRL) $1.1500 $1.2000 4.35% $1.150 4.35% 3.08% LINK
5/25/2017 Flowers Foods, Inc. (FLO) $0.1600 $0.1700 6.25% $0.160 6.25% 3.89% LINK
6/2/2017 Lowe's Companies, Inc. (LOW) $0.3500 $0.4100 17.14% $0.350 17.14% 2.16% LINK
6/14/2017 Target Corporation (TGT) $0.6000 $0.6200 3.33% $0.600 3.33% 4.62% LINK
6/15/2017 Realty Income Corp (O) $0.211000 $0.2115 0.24% $0.1995 6.02% 4.49% LINK
6/28/2017 General Mills, Inc. (GIS) $0.4800 $0.4900 2.08% $0.480 2.08% 3.65% LINK
Averages: 6.60% 7.58%

This quarter saw similar results to last, as the average annual increase was about 7.6%. This is a bit lower than historical dividend growth numbers for the portfolio, but when combined with a portfolio yield of 3.15%, more than meets my total income growth goal of 10%.

This lower growth was the result of some lackluster increases from the likes of STAG Industrial, Exxon Mobil, Cracker Barrel, Target, and General Mills. I don't have any worries about dividend safety from those five companies, but the lower growth is noted, and will likely keep my from adding any additional capital to those positions at this time.

Portfolio Transactions

In what has become a recurring theme, there was little trading activity in the portfolio during the quarter, with zero sales and just one purchase made. I'm actually excited that this is the case, as my urges to tweak things are becoming less frequent and I am content to simply let the companies I hold do their thing.

The purchase that was made was of a company that wasn't on my radar when Q1 ended, but came to my attention while I was doing research for The Top 10 REITs For Dividend Growth And Income, on which it ranked #6.

That mystery company is Tanger Factory Outlet Centers Inc. (SKT), which was caught up in a combination of weakness among REITs and a sell-off in the retail sector driven by fears that Amazon is going to take over the world.

Here is the info for that transaction:

SKT Purchase Info

Tanger provides excellent value at current prices, and I was ecstatic being able to pick it up at a 5% yield. The stock is trading 36% below its 52-week highs, and that sell-off puts shares at a valuation level not seen since the "Great Recession."

This is highlighted by the pink line on the F.A.S.T. Graph below, which shows the 11 P/FFO ratio over the last 11 years. As you can see, this is the first time shares have reached that level since 2008. This seems crazy to me, as the company is expected to grow by 2% this year and a 4-6% rate going forward.

SKT 10YR FAST Graph Tanger has a 24-year streak of dividend growth, meaning it has continued to raise dividends through the last two recessions. It also has a relatively low payout ratio at just 57% of expected FFO, and solid finances as shown by its BBB+ S&P credit rating.

REIT guru Brad Thomas also likes the company, as he's written positive coverage of the company twice in the last month.

I will admit that buying another REIT wasn't really on my agenda for the portfolio, but I like to take advantage of opportunities when they present themselves, and this seems like a good one. It may not have the growth that other prospects do, but starting at a 5% yield is nice, and I think there is a good chance it will produce 4-6% dividend growth going forward.

Current Portfolio

With the addition of Tanger Factory Outlet Centers, the portfolio now contains 53 positions. Here is the portfolio's composition as of quarter's end:DGI For The DIY - Portfolio1 DGI For The DIY - Portfolio2 As mentioned previously, the projected annual income for the portfolio has now passed the $2,000 mark, which is $92.65 higher than the amount from the Q1 update. Tanger was responsible for $41.10 of that increase, with the remainder coming from dividend increases and dividend reinvestment purchasing more shares in the companies I hold.

Here is the breakdown of the portfolio by value and income at quarter's end:

DGI For The DIY - Portfolio Weightings The addition of Tanger does skew my weighting towards REITs even higher, especially on the income side, where they now produce nearly 1/4th of the dividends for the portfolio.

I realize this isn't ideal, and were I closer to retirement, the portfolio would likely be re-balanced more towards staples and utilities. However, with 25 years until retirement I have plenty of time to make that shift, and with this being an IRA, I don't have to worry about capital gains affecting those decisions when the time comes.

On The Radar

I see healthcare, utilities, and staples as sectors I would like to add to, but they aren't being very cooperative in providing attractive prices for the companies I'd like to own.

In healthcare I am interested in adding to my position in Becton, Dickinson and Co. (BDX) or opening a new position in Johnson & Johnson (JNJ) or UnitedHealth Group (UNH).

Among utilities I am looking to either add to my position in Dominion Energy Inc. (D) or open a new position in NextEra Energy Inc. (NEE), American Water Works Co. (AWK) or Aqua America Inc. (WTR).

Finally, for consumer staples I am most strongly considering General Mills Inc. (GIS) at its 3.6% yield, but would consider adding to either my Church & Dwight Co. (CHD) or Dr Pepper Snapple Group (DPS) if prices drop. I am also looking at Hormel Foods (HRL), Altria Group (MO), and McCormick & Company (MKC) as potential adds.

Needless to say, I have plenty on the wish list!

Conclusion

It was another good quarter for the portfolio, as its valuation hit new highs and I reached a new milestone for projected dividend income. I was also able to add another quality company to the fold at an attractive valuation, further diversifying my real estate sector holdings.

I am patiently waiting for fresh cash to hit the account so I can go shopping again for more shares. I'll be sure to provide an update in the comment section below when the trade is made.

Happy Investing!

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, SKT, STAG, T, TGT, THO, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM.

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 a Civil 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.