Seeking Alpha

August Update: Dividend Growth Investing Is A March, Not A Sprint

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Includes: AAPL, ABT, AFL, BA, D, GILD, GIS, MA, PM, QCOM, T, TGT, V, VFC, XOM
by: The Dividend Bro
Summary

Dividend growth investing takes time.

Our portfolio gets a name.

We added to two core holdings in August.

Dividend income continues to climb higher.

One argument that you’ll hear against dividend growth investing is that it takes too long to be successful. When you watch CNBC, hosts and guests are often discussing whatever high flying growth stock that is the current flavor of the day. If they do talk about dividend growth investing, it's often to disparage it. Many times, I’ve heard certain traders mock DGI by saying something to the effect, “If a stock yields 3% and it drops 3% in one day, there goes your dividend for the year”. Every time I hear a statement like that, I just shake my head. These traders think short term and maybe they are successful at it. But for the average investor, the long haul should be our goal. We have to know ourselves and use a strategy that is successful for us. I know that trading in and out of stocks is not my strong suit. I tried it when I first started investing and I figured out very quickly that it was not for me.

Over time, I’ve learned to be patient and dividend growth investing demands that you be patient. You aren’t going to become wealthy overnight with dividend growth investing. Upon becoming a DGI, I wasn’t too impressed with my initial income levels. A few dollars every 3 months didn’t seem all that wonderful. What’s a fraction of a share when I have big aspirations for my portfolio? How am I going to be able to retire one day on a little bit of income? Funny thing happened over the course of just a few years, the income started to rise. And rise dramatically. What started off as just a few dollars turned into a little bit more the next year and then more the following year and so on. I’ll go into more detail later in this article, but I expect us to receive at LEAST 35% more income this year than we did last year. Going back to 2015, our dividends should be up at least 70% more. Going back even further to 2014, I estimate that our dividend income should grow by at least 160%. Just by making regular monthly investments and reinvesting dividends, our income has really started to take off. Every time I check these numbers, it hits me again that dividend growth investing isn’t a sprint to retirement. It’s not a get rich quick type of investing philosophy. Dividend growth investing is a march towards retirement, done step by step over the course of many years.

In 20 years, my wife and I should have enough dividend growth income to cover all of our living expenses. At that point, we will have the ability to be free from working if we so choose. We’ll be free from worrying about saving for retirement. Free from the worry of “will we have enough to last us in retirement?" For this reason, I’ve decided to start calling our portfolio, “The March to Freedom” portfolio. The name represents what we are trying to accomplish from our investing philosophy.

August Results

When you include dividends, the March to Freedom portfolio is up 9.22% this year. As always, this doesn’t include new money added. The S&P 500 is up 11.53% when dividends are added to the return. This year, we’ve lagged the market. I’m still satisfied with our portfolio’s performance, as dividend income has always been my main concern. A 9%+ gain is nothing to scoff at either. Now let’s look at our top and bottom 5 performers for the year.

Boeing (BA) continues to be our best performing stock this year, having climbed almost 54% through the end of August. Boeing, which is one of our largest positions, has been a major contributor to our portfolio’s success this year. This is evidence to me that working to make sure that your positions are of a proper size is vital to a portfolio’s success.

Apple (AAPL) maintains its second spot in our top 5 performers, having given investors a 41.56% return year to date. Excitement is starting to build for the iPhone 8 launch later this month. Expectations are running high that this 10th anniversary phone will lead to a “super cycle” of upgrades by consumers. If the phone is a success, Apple should rise higher. If the phone cycle is just okay or falls short of expectations, the stock might retreat from these record levels. Apple is just short of full position status and was one of the stocks I hoped to purchase more of at the beginning of 2017. I hesitated at the beginning of the year. The next time I get the chance to purchase more shares of the largest company in the world, I’ll be ready.

Visa (V) and MasterCard (MA) take the next two spots on our countdown, having returned 32.68% and 29.10% in 2017, respectively. With debit and credit cards replacing cash in more and more wallets around the world, and with consumers moving more to online shopping, the top two players in the space should continue to reward shareholders. While MasterCard is a full position in our portfolio, I would very much like to add to Visa. We bought more Visa back at the beginning of February and the stock is again on my short list to purchase. I consider Visa to be a core holding, so I am willing to overpay to acquire shares, but I wouldn’t be upset if the price dropped from here. Philip Morris (PM), which in past years couldn’t get away from unfavorable exchange rates, has been one of our best performers all year long. Through the end of August, the stock has gained almost 28% as the U.S. dollar has declined.

Normally, I just discuss our top 5 performers, but I wanted to highlight a few other stocks that might surprise some with how well they have done this year. Supplemental insurance provider Aflac (AFL) has gained 18.61% for this year. You might consider Aflac’s business to be a boring investment, but that type of gain is anything but boring. V.F. Corp. (VFC) has rocketed up almost 18% in 2017, quite a positive mark for being in the left for dead apparel industry. We added to our V.F. Corp. holdings on 2/31/2017 at $52.32. We’ve been nicely rewarded for that trade. Not yet a full position, V.F. Corp. is definitely a candidate for purchase.

After being in the investing doghouse for much of the past few years, Gilead (GILD) has jumped almost 17% since the start of the year. Much of this gain has been in response to the company’s decision to FINALLY make an acquisition and buy Kite Pharma (KITE) for $11.9 billion in cash. Kite offers Gilead some promising drugs in the cancer immunotherapy field. Analysts predict that the acquisition won’t improve Gilead’s earnings for about three years. Gilead has been in “show me mode” for us as I wanted to see if the company had plans to improve upon its widely successful, but slowing HIV and Hepatitis C offerings. Even with this robust share price improvement, I still have the stock as undervalued. There is a good chance that I will add to our position when funds become available later this month.

Now onto our laggards. And here, as with our top performers, the song remains the same. Target (TGT) has lost almost 25% since the start of the year. After a slight bump after earnings, the stock has continued its decline. Qualcomm (QCOM) can’t seem to get out of its own way this year. The stock is down almost 20% year to date. Much like Gilead, Target and Qualcomm are in “show me” mode. I wouldn’t mind adding to either of these beaten down names if they can demonstrate some positive news. For Target, that would mean improving store comps. If Qualcomm can close its acquisition of NXP Semiconductors (NXPI), which has come under fire from European Union antitrust regulators, or have some resolution with its lawsuits with Apple, which Morningstar believes will take at least a few more quarters, I’d be willing to add to our holdings. Exxon Mobil (XOM) and General Mills (GIS) take up the next two spots on our countdown, having lost 15.42% and 13.78%, respectively, in 2017. We make monthly investments of Exxon Mobil through computershare.com and General Mills through shareowneronline.com. Both are core holdings for us and I am happy to continue buying more every month. AT&T (T) rounds out our bottom five, having declined almost 12% in 2017. AT&T is our 5th largest holding and a core holding in our portfolio. I am more interested in building our smaller positions to size, but at some point AT&T becomes very interesting to me. Around $36, the yield would be almost 5.5%. I might have to pull the trigger at that price.

August Purchases

We were able to make two purchases this month, both to core holdings. As I detailed in my last article, “Getting Defensive”, we added to our positions in both Dominion Energy (D) and Abbott Laboratories (ABT). Both holdings are now at a half position. I go into more detail on both purchases, but I had Dominion Energy at about 3% overvalued at the time of purchase. Since I consider Dominion a core holding, I am willing to over pay for a quality company. Abbott, on the other hand, was about 3.5% undervalued at the time we pulled the trigger. I consider Abbott to be a core holding as well. Both of these companies continue to be on our watch list as I want to have my core holdings be among the largest in our portfolio.

Current Positions

Our portfolio consists of the following 39 companies:

3M (MMM), Abbott Laboratories, AbbVie (ABBV), Aflac, Altria (MO), Apple, AT&T, Boeing, Chevron (CVX), Cisco (CSCO), Coca-Cola (KO), Costco (COST), Cummins (CMI), CVS Health (CVS), Disney (DIS), Dominion Energy (D), Exxon Mobil, General Mills, Gilead Sciences, Honeywell International (HON), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Lockheed Martin (LMT), MasterCard, McCormick & Company (MKC), Microsoft (MSFT), Nike (NKE), PepsiCo (PEP), Philip Morris, Procter & Gamble (PG), Qualcomm, Realty Income (O), Southern Company (SO), Starbucks (SBUX), Target, Ventas (VTR), Verizon (VZ), V. F. Corp. and Visa.

August Dividends

Another month, another new dividend record. This was our best August for dividends ever. Compared to August 2016, our dividend income was up 37.66%. Stacked against August 2015, our dividend income was up 44.78%. Going back to August of 2014, our dividend income was up 154.84%. Year to date, our dividend income is up 39.15% from last year, up almost 70% from 2015 and up nearly 155% from 2014.

Going back to what I said at the beginning of this update, dividend growth investing is a march, not a sprint. It takes time, but once the income machine starts reviving its engines, it can really take off. These results remind me of this fact.

10 companies paid us dividends this month: AT&T, General Mills, Verizon, CVS Health, MasterCard, AbbVie, Procter & Gamble, Apple, Realty Income and Starbucks. We purchased Abbott Laboratories after the ex-dividend date so we did not receive the company’s August dividend.

Conclusion

August brought us another record for dividends and our income so far in 2017 has greatly exceeded other years. Our total return is slightly behind the S&P 500, but still up more than 9%. The March to Freedom portfolio has been successful because of purchasing stocks that were at or below their fair values and then reinvesting those dividends into more shares. This strategy should have our expenses covered in retirement. What do you think of our buys for this month? What are you buying? Feel free to leave a comment. If you liked what you read, feel free to hit the “follow” button at the top of the page.

Disclosure: I am/we are long ABBV, AFL, CMI, CVX, GILD, GIS, HON, JPM, KO, XOM, MA, MMM, MO, MSFT, PG, PM, QCOM, T, TGT, V, VFC, VTR, AAPL, BA, CSCO, CVS, DIS, JNJ, O, PEP, SBUX, VZ, NKE, LMT, D, COST, ABT, MKC, SO. 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.