My K.I.S.S. Dividend Portfolio: 3rd Quarter 2017 Update

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Includes: AAPL, AFL, AMGN, AMP, APD, ARLP, AVA, BA, BDX, BLK, BPL, CBRL, CINF, CMI, CSX, CVS, CVX, D, DE, DLR, DRI, EMR, FCPT, FLIC, GD, GE, HAS, HRS, IBM, ITW, JNJ, LLL, LMT, MCD, MGA, MSFT, NHI, NLY, NSC, NUS, NVS, O, OHI, OKE, PAA, PAYX, PEP, PG, PRU, PTY, QCOM, RTN, RY, SDY, SKT, SO, SPY, SYY, TGT, TROW, TUP, UGI, UTX, VDIGX, WBA, WEC, WFC, WMT, WPC
by: The Part-time Investor

Summary

A successful DGI portfolio can be created using very simple criteria.

Just a couple of hours every quarter is all that is necessary to manage a well-designed DGI portfolio.

My K.I.S.S. portfolio continues to provide acceptable (to me) dividend growth, and continues to beat "The Market" in terms of total return.

I’m always looking for more ways to create income from my retirement accounts. The more income I’m able to produce, the more money I’ll have to finance whatever lifestyle I hope to have once I retire, and the less likely it is that I will have to liquidate any of my portfolio. So for the past 6 months I’ve been learning more about trading options. I’ve been learning low-risk/high-probability techniques to produce more profit and reliable monthly income. For those interested in learning more about option trading, I recommend going to Optionalpha.com and/or Tastytrade.com. Both offer extensive education about trading options for free.

The reason I mention this is that while I’ve been spending a lot of time learning about options, I have given almost no thought to my KISS portfolio. It has simply been chugging along, day after day, month after month, dividend payment after dividend payment, with no management from me at all. And this is exactly how it is supposed to be! The whole point of my KISS portfolio is that it takes just a few hours at the beginning of each quarter to make new purchases, and then it can be left alone for the next three months. Only an announcement of a dividend cut would force me to take any actions in the middle of a quarter. I can go on living my life, pursuing other interests, while the bulk of my retirement account, my KISS portfolio, continues to prepare me for retirement and beyond.

But now that we are at the end of another quarter it is time for me to review my portfolio, make new purchases, and present my update. So without further ado, here we go.

To start with, if you wish to review my previous quarterly updates, you can find them here:

My K.I.S.S. Dividend Portfolio: 3rd Quarter 2016 Update

My K.I.S.S. Dividend Portfolio: 4th Quarter 2016 Update

My K.I.S.S. Dividend Portfolio: 1st Quarter 2017 Update

My K.I.S.S. Dividend Portfolio: 2nd Quarter 2017 Update

Review of First-Quarter Contributions and Dividends

These are the total dividends I received over the past three months and the comparison (in parentheses) to the same months during 2016:

July: $2,773.46 ($2,473.53) (+12.13%)

Aug: $4,782.60 ($4,327.91) (+10.51%)

Sept: $5,488.11 ($4,595.53) (+19.42%)

Total dividends collected in the first quarter:$13,044.17, an increase of 14.45% over the $11,396.97 I collected during the third quarter of 2016. $2,431.74 of this was immediately reinvested back into the stocks that paid them through the DRIP plans in my Optionsxpress accounts.

In addition to this, I had two regular quarterly 401K contributions this quarter of $13,500 each (one was late from last quarter) and two catch up contributions of $1000 each. Therefore, with a little cash left over from last quarter, I had$39,969.12 available for investment this quarter.

The K.I.S.S. System

Over the past three years, I have been developing and refining my Keep It Simple, Stupid (K.I.S.S.) system for creating a dividend growth portfolio. The system I developed has been discussed in my previous updates, but as a quick summary, my criteria for buying stocks are as follows:

For Purchase of Regular Stocks

  • The stock is on the Dividend Champions, Contenders and Challengers ( C.C.C.) list (as compiled by David Fish);
  • The payout ratio < 60%;
  • For stocks with a yield between 2.0 and 2.5%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >16;
  • For stocks with a yield between 2.5 and 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >14;
  • For stocks with a yield greater than 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >12;
  • A credit rating of BBB+ (investment grade) or better from S&P (found on FASTGraphs); and
  • F.A.S.T. Graph shows a 10-year uptrend in earnings and the F.A.S.T. Graph shows that the stock is not overvalued.

The use of different Chowder Number requirements is a change I made to my criteria over the past few years. I prefer to have stocks with higher yields, but if the rest of the story is compelling enough, I am willing to buy stocks with yields in the 2.0% to 3.0% range if their DGRs and Chowder Numbers are higher, as shown in my criteria above. Please see the previous article I wrote about different yields, DGRs and Chowder Numbers to read about my thinking on this topic.

For Purchase of MLPs, REITs, Utilities and Telecoms (High Yielders)

  • The stock is on CCC list;
  • Yield > 4%;
  • Chowder Number > 8%;
  • DGR for all time periods (1-yr., 3-yr., 5-yr. and 10-yr.) at least 3.5%;
  • F.A.S.T. Graph shows a 10-year uptrend (or for the life of the company, if less than 10 years) in funds from operations ("FFO"); and
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.

The time it takes to run this screen is only about 1-2 hours per quarter since most of the work has already been done for us by David Fish (the CCC list), Chuck Carnevale (F.A.S.T. Graphs) and S&P (The S&P Credit ratings).

My criteria for selling a stock are also very simple. I will only sell if the stock cuts its dividend. I do not look at anything else when deciding whether or not to sell. Therefore, the only other work that needs to be done during the quarter is to watch for the dividend announcement from each company, and put in a sell order if there is a dividend cut. One caveat, as I mention below: I will sell spin-offs from my stocks if those new companies don't have dividend policies I'm comfortable or familiar with. Again, it comes down to the dividend.

Sales

As none of my stocks cut their dividend, there were no sales this quarter.

Purchases

After running my screen, I bought the following stock:

CVS Health Corporation (CVS)

Yield 2.5%, Payout Ratio 39.84%, Chowder Number 30.19%, S&P Rating BBB+

As the FAST graph shows it has a beautiful earnings curve that moves higher and higher year after year, and the stock is trading well below the fair value line.

I bought 294 Shares at $80.40 per share (Commission of $8.82) for a total of $23,646.42.

PAAY and Reinvesting

When reinvesting I put my available cash not back into the stocks that paid the dividend but instead into more shares of my most undervalued positions. This is where my "Percent Above Average Yield" (PAAY) system comes in. (I discussed how I use PAAY in a previous article.) Please note that I use PAAY only to rank the companies already in my portfolio for purposes of reinvesting my dividends, not for new purchases. (It would be too difficult to calculate the PAAY for all stocks under consideration for purchase.) After buying CVS I still had funds left over, so I used those available funds to buy the following amount of these 10 stocks:

STOCK

SHARES

PRICE

COMM

COST

BPL

27

$59.05

$0.81

$1,595.16

GE

65

$24.41

$1.95

$1,588.59

IBM

11

$147.02

$0.33

$1,617.55

ITW

11

$151.16

$0.33

$1,663.09

OHI

50

$31.54

$1.5

$1,578.50

PAA

75

$21.23

$2.25

$1,594.49

PEP

15

$110.52

$0.45

$1,658.25

QCOM

30

$52.06

$0.90

$1,562.70

TGT

27

$58.60

$0.81

$1,583.01

WBA

21

$76.81

$0.63

$1,613.64

As mentioned above some of my stocks are held in two Optionsxpress accounts. I received the following shares of these stocks due to DRIP plans I've set up in these accounts. (Most of my portfolio is held in a Univest account that does not offer DRIPs):

STOCK

SHARES

Alliance Resource Partners LP (NASDAQ: ARLP)

21.09

Avista Corp. (NYSE: AVA)

3.26

Chevron Corporation (NYSE: CVX)

0.231

General Electric Company (NYSE: GE)

3.607

Annaly Capital Management, Inc. (NYSE: NLY)

40.529

ONEOK Inc. (NYSE: OKE)

5.871

Plains All American Pipeline, L.P. (NYSE: PAA)

1.666

PIMCO Corporate & Income Opportunity Fund (NYSE: PTY)

31.891

W.P. Carey Inc. (NYSE: WPC)

3.278

Following these transactions, this is the present composition of my portfolio (prices as of market close 10/5/17):

Shares

Last Price

Lot Value

Div/Share

Forward Annual Div Yield

Est. Ann. Income

Apple Inc. (AAPL)

170

$155.39

$26,416.30

2.52

1.62%

$428.40

Aflac Incorporated (AFL)

245

$82.49

$20,210.05

1.72

2.09%

$421.40

Amgen Inc. (AMGN)

149

$186.85

$27,840.65

4.60

2.46%

$685.40

Ameriprise Financial, Inc. (AMP)

234

$150.55

$35,228.70

3.32

2.21%

$776.88

Air Products and Chemicals, Inc. (APD)

119

$153.31

$18,243.89

3.80

2.48%

$452.20

Avista Corporation (AVA)

601.04

$52.05

$31,284.13

1.43

2.75%

$859.49

The Boeing Company (BA)

199

$258.89

$51,519.11

5.68

2.19%

$1,130.32

Becton, Dickinson and Company (BDX)

137

$197.25

$27,023.25

2.92

1.48%

$400.04

BlackRock, Inc. (BLK)

40

$464.43

$18,577.20

10.00

2.15%

$400.00

Cracker Barrel Old Country Store, Inc. (CBRL)

212

$153.95

$32,637.40

4.80

3.12%

$1,017.60

Cincinnati Financial Corporation (CINF)

324

$77.39

$25,074.36

2.00

2.58%

$648.00

Cummins Inc. (CMI)

221

$171.71

$37,947.91

4.32

2.52%

$954.72

CSX Corporation (CSX)

709

$52.35

$37,116.15

0.80

1.53%

$567.20

CVS Health Corporation (CVS)

294

$80.90

$23,784.60

2.00

2.47%

$588.00

Chevron Corporation (CVX)

172.23

$118.58

$20,423.03

3.71

3.13%

$638.97

Dominion Energy, Inc. (D)

219

$76.81

$16,821.39

3.02

3.93%

$661.38

Deere & Company (DE)

193

$128.01

$24,705.93

2.40

1.87%

$463.20

Digital Realty Trust, Inc. (DLR)

281

$118.41

$33,273.21

3.72

3.14%

$1,045.32

Darden Restaurants, Inc. (DRI)

365

$79.72

$29,097.80

2.52

3.16%

$919.80

Emerson Electric Co. (EMR)

337

$63.98

$21,561.26

1.92

3.00%

$647.04

Four Corners Property Trust, Inc. (FCPT)

138.03

$25.53

$3,523.91

0.97

3.80%

$133.89

The First of Long Island Corporation (FLIC)

944

$30.95

$29,216.80

0.60

1.94%

$566.40

General Dynamics Corporation (GD)

198

$213.45

$42,263.10

3.36

1.57%

$665.28

General Electric Company (GE)

846.64

$24.54

$20,776.55

0.96

3.91%

$812.77

Hasbro, Inc. (HAS)

348

$96.58

$33,609.84

2.28

2.36%

$793.44

Harris Corporation (HRS)

253

$134.79

$34,101.87

2.28

1.69%

$576.84

International Business Machines Corporation (IBM)

110

$146.72

$16,139.20

6.00

4.09%

$660.00

Illinois Tool Works Inc. (ITW)

168

$151.50

$25,452.00

3.12

2.06%

$524.16

Johnson & Johnson (JNJ)

159

$133.19

$21,177.21

3.36

2.52%

$534.24

L3 Technologies, Inc. (LLL)

146

$189.41

$27,653.86

3.00

1.58%

$438.00

Lockheed Martin Corporation (LMT)

144

$314.58

$45,299.52

8.00

2.54%

$1,152.00

McDonald's Corporation (MCD)

161

$158.80

$25,566.80

4.04

2.54%

$650.44

Magna International Inc. (MGA)

290

$54.18

$15,712.20

1.10

2.03%

$319.00

Microsoft Corporation (MSFT)

495

$75.97

$37,605.15

1.68

2.21%

$831.60

National Health Investors Inc. (NHI)

256

$77.59

$19,863.04

3.80

4.90%

$972.80

Norfolk Southern Corporation (NSC)

174

$131.12

$22,814.88

2.44

1.86%

$424.56

Nu Skin Enterprises, Inc. (NUS)

394

$61.91

$24,392.54

1.44

2.33%

$567.36

Novartis AG (NVS)

240

$85.64

$20,553.60

2.72

3.18%

$652.80

Realty Income Corporation (O)

386

$57.03

$22,013.58

2.54

4.45%

$980.44

ONEOK, Inc. (OKE)

505.47

$56.70

$28,660.15

2.98

5.26%

$1,506.30

Paychex, Inc. (PAYX)

438

$63.25

$27,703.50

2.00

3.16%

$876.00

Pepsico, Inc. (PEP)

177

$110.45

$19,549.65

3.22

2.92%

$569.94

The Procter & Gamble Company (PG)

166

$92.03

$15,276.98

2.76

3.00%

$458.16

Prudential Financial, Inc. (PRU)

125

$109.26

$13,657.50

3.00

2.75%

$375.00

QUALCOMM Incorporated (QCOM)

425

$52.35

$22,248.75

2.28

4.36%

$969.00

Raytheon Company (RTN)

198

$187.18

$37,061.64

3.19

1.70%

$631.62

Royal Bank of Canada (RY)

225

$78.11

$17,574.75

2.91

3.73%

$654.75

Tanger Factory Outlet Centers, Inc. (SKT)

514

$25.01

$12,855.14

1.37

5.48%

$704.18

The Southern Company (SO)

341

$49.36

$16,831.76

2.32

4.70%

$791.12

Sysco Corporation (SYY)

372

$54.29

$20,195.88

1.32

2.43%

$491.04

Target Corporation (TGT)

384

$58.38

$22,417.92

2.48

4.25%

$952.32

T. Rowe Price Group, Inc. (TROW)

326

$91.75

$29,910.50

2.28

2.49%

$743.28

Tupperware Brands Corporation (TUP)

205

$61.38

$12,582.90

2.72

4.43%

$557.60

UGI Corporation (UGI)

568

$46.79

$26,576.72

1.00

2.14%

$568.00

United Technologies Corporation (UTX)

108

$118.17

$12,762.36

2.80

2.37%

$302.40

Walgreens Boots Alliance, Inc. (WBA)

250

$76.95

$19,237.50

1.60

2.08%

$400.00

WEC Energy Group, Inc. (WEC)

336

$64.07

$21,527.52

2.08

3.25%

$698.88

Wells Fargo & Company (WFC)

384

$55.39

$21,269.76

1.56

2.82%

$599.04

Wal-Mart Stores, Inc. (WMT)

184

$79.41

$14,611.44

2.04

2.57%

$375.36

W. P. Carey Inc. (WPC)

273.49

$68.20

$18,652.02

4.02

5.89%

$1,099.43

High Yielders

Alliance Resource Partners, L.P. (ARLP)

1,383.05

$19.55

$27,038.63

2.00

10.23%

$2,766.10

Annaly Capital Management, Inc. (NLY)

1,617.25

$12.38

$20,021.56

1.20

9.69%

$1,940.70

Buckeye Partners, L.P. (BPL)

222

$59.10

$13,120.20

5.05

8.54%

$1,121.10

PIMCO Corporate & Income Opportunity Fund (PTY)

1,209.84

$16.98

$20,543.08

1.56

9.19%

$1,887.35

Plains All American Pipeline, L.P. (PAA)

683.73

$21.49

$14,693.36

2.20

10.24%

$1,504.21

Omega Healthcare Investors, Inc. (OHI)

569

$31.59

$17,974.71

2.56

8.10%

$1,456.64

Cash

$1,320.40

$1,591,077.84

3.20%

$50,960.90

Returns

My portfolio has increased in value this first quarter from $1,478,310.10 to $1,591,077.84. Not including all the 401K contributions I received, this is a return of 5.24% for the quarter. In the same time period, the "market," as represented by SPY, was also up 5.24%. For the YTD, I am up 15.6% while the S&P is up 15.51%.

I publish these updates to show how a simple DGI portfolio can be easily created and easily managed, and to show not only that a DGI portfolio can produce a high-quality stream of increasing dividends, but that it can also produce market-matching (possibly even beating) returns. But in order to get people unfamiliar with DGI to believe that DGI can be a successful way to produce total return, I have to show them the results compared to what they could otherwise be doing. By showing my results compared to some common benchmarks, I can demonstrate how effective DGI can be. This is why I always show the comparisons to some benchmarks.

Based on articles written and comments made on SA, I have chosen to use three different entities as my benchmarks, the SPDR S&P 500 Trust ETF ( SPY), the SPDR S&P Dividend ETF ( SDY) and the Vanguard Dividend Growth Fund ( VDIGX). By using these benchmarks, I can compare my portfolio to the market as a whole, to a dividend growth ETF, and to a dividend growth mutual fund. These are the indices I’ve seen most often mentioned on SA as the ones that DGIers should be putting their money into by those who don't believe that individuals can beat an index.

To make the comparisons accurate, I run three paper portfolios made up of each of the three indices above. For each of these portfolios, whenever I have cash contributions put into my real-life account, I also put the same amount into the paper portfolios and "buy" more shares of the individual indices. And when SPY, SDY or VDIGX pays a dividend, it gets reinvested into more paper shares, just like I reinvest my real-life dividends in my portfolio. As far as I can tell, this is the most accurate way I have to compare their performances.

This quarter's and the year to date returns of my benchmarks were:

SPY 5.24%, 15.51%

SDY 4.39%, 9.73%

VDIGX 3.91%, 12.74%

As a reminder my result for this quarter was 5.24%, and YTD is 15.6%.

Dividends

During the third quarter of 2017, I collected $13,044.17 in dividends. This is an increase of 14.45% over the third quarter of 2016. Considering the declared dividends for each of my companies, the amount of dividends I expect to collect in the next 12 months (ED12) is $50,960.90. As of the end of last quarter, my ED12 was $48,424.99, so in the past 3 months, my ED12 has increased by 5.23%. This, of course, does not include the dividend income I will receive when I invest the 401K contributions I'll receive over the next year, and as many of my stocks continue to increase their dividends over the coming year, I expect that the dividend growth and my ED12 will actually be even higher. (It is important to note that the growth in my ED12 is due both to the dividends expected from new contributions, as well as the actual organic dividend growth of the stocks in my portfolio.) The present yield of my portfolio is 3.20%. This has dropped over the past few years due to the increase in the portfolio value, not due to a drop in dividends.

As shown in the following graph, my dividend income continues to grow year by year.

Conclusion

I have many things going on in my life, including a full time job and taking care of my family, so I don’t have the time to be studying the financial reports of hundreds of companies to figure out what to invest in, nor do I really have the knowledge or experience to understand that stuff anyway. I am not a financial professional and have no formal training in finance, economics or investing. I do it in my spare time as a hobby, hence my Seeking Alpha screen name “Part-time Investor”. I also do it because I trust only myself to look after my financial interests. I still believe that I will do a better job looking out for my future than anybody else will, including the “professionals”. Most of what I know I have learned here on Seeking Alpha. And if I can produce dividend income and total returns that match, or even beat the market, then anybody can. All you have to do is take the time to read about D.G.I. from some of the best contributors here on SA (David Van Knapp, Chowder, Mike Nadel, Bob Wells, etc.), set up a system that you are comfortable with, and stick to that system. And try to keep it as simple as possible. The more complicated it is, the harder it is to follow, and in my opinion, the worse your results will be in the end.

As I've already said, but must reiterate, my mindset is to grow the dividend income produced by my portfolio, and not necessarily to focus on growing the size of my portfolio. I know this is a controversial statement to some (dividend growth vs. total return), but it is how I look at my investing, and how I analyze my results. In the long run, by maintaining my discipline and carrying out my K.I.S.S. criteria, I believe in the end I will beat "the market". So far this has been shown to be true. I've continued to at least match the market this third quarter of 2017, and over the life of this portfolio I have outperformed the market. Over the next 20-30 years, as long as they continue to increase their dividends, I believe my stocks will continue to perform well.

I’ve been a dedicated dividend growth investor for over four and a half years now, and I’ve been posting my portfolio updates since then to show how it can be done. My focus is on growing my dividend income, but secondarily, I want to have a good total return. I believe that using dividend growth investing I can achieve BOTH strong dividend income AND strong total return. And since 2013, when I started posting my portfolio, I’ve been waiting for something to happen. I've been waiting for the “experts” to prove me wrong. I’m waiting for the “professional” fund managers to show that they know how to invest better than me, a layperson with no formal training in finance or investing. To show that a simple, straight forward investing method based on dividends can’t possibly beat the “market” or a more complex dividend growth fund.

But it hasn’t happened yet. On a total return basis, I continue to beat the benchmarks, and the market, while only needing about 1-2 hours every month to manage my portfolio. And this is while my dividend income continues to increase quarter after quarter, year after year, leading me towards retirement. It continues to support my contention that a simple dividend growth technique, with simple rules followed without emotion, can help to achieve my goal of a safe and comfortable retirement funded by my dividend income.

D.G.I. has taught me to have a long-term focus, and for that focus to be on the dividends, not on price movement. The prices of some of my stocks may fall from time to time, but as long as the dividends continue to rise, I know the stock prices will eventually recover. More importantly, while waiting for that to happen, I will continue to collect dividends from those stocks and reinvest them. In fact, I as mentioned earlier, I expect to reach another milestone this year. I should pass $50,000 in dividends collected this year for the first time ever. And as the dividends increase, if the prices stay low, it will just give me even more opportunities to buy more shares of undervalued stocks, as I did with my PAAY stocks this quarter. I'm already enjoying some of the benefits of my patience, as I was able to buy shares at depressed prices, which means I will collect even more dividends in the coming years.

So my plan going forward is to continue to focus on the dividends and to follow my simple K.I.S.S. rules. They have been working very well so far. I believe my results continue to support my hypothesis: that by using simple, straightforward, easy-to-understand criteria for buying and selling, and by using the hard work of other people (thank you David Fish, Chuck Carnevale, S&P and all the wonderful SA contributors I have learned from!), someone can achieve excellent investment results without having to put an inordinate amount of time into the process.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am/we are long CVS.

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.

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