DGI For The DIY: Q3 2017 Portfolio Update

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Includes: CMI, D, GME, LMT, MCD, MO, MSFT, O, OHI, OXY, PM, WBA
by: Eric Landis

Summary

DGI For The DIY is my real-life example of how a DIY investor can use dividend growth investing to save for retirement.

It was another successful quarter for the portfolio, as dividend income once again hit a new record.

This article documents my recent purchases, and highlights a few stocks on the radar for the fourth quarter of 2017.

DGI For The DIY "DGI For The DIY" is a real-life portfolio that was created in early 2013 when I liquidated the mutual funds in my retirement account and used the proceeds to invest in a collection of dividend paying individual stocks.

I've written quarterly updates on the portfolio ever since as a way to share my experiences in learning about the dividend growth investing "DGI" strategy as a do-it-yourself "DIY" investor.

First Birthday Cake I am a thirty-nine year old engineer with a wife and three young kids; your typical middle-class Gen X'er.

Like many of my generation, we have a mortgage, student loans (getting close to being done!), daycare expenses, and everything else that goes along with raising a family.

Of course, what makes those financial struggles completely worth it are the priceless moments like the one pictured above, which was my daughter's first taste of cake at her recent first birthday.

However, despite having little left at the end of the month, my experience has shown that even with just a few hundred dollars a month of savings, one can build a successful portfolio that throws off ever increasing amounts of dividends.

This series of articles is a way for me to document my decisions, maintain discipline by sharing them publicly, and learn more about investing through the discussion that follows them. My hope is that by sharing my journey as a DIY investor, I can help others learn about investing, and give them the courage to take control of their own path to retirement.

Market Overview

The stock market continued its march higher during Q3, as the three major indices all printed new all-time highs. NASDAQ lead the way with a 5.79% increase over the quarter, while S&P had the smallest gain at 3.96%.

Chart ^SPX data by YCharts

The portfolio was also higher during the quarter, gaining just over 4% (less cash contributions). On a total dollar basis, the portfolio increased by 5.03%, from $63,936 to $67,149.

Here is the quarterly progress of the portfolio since its inception in early 2013:

Portfolio History The portfolio continues to move higher in both total value and in dividends collected. The $530 in dividend payments is a new record for the portfolio, and is 22.2% more than what was collected during Q3 of 2016.

This has been a recurring trend for the portfolio, as Q1 income was up 26.6% YOY and Q2 increased by 18.9%.

DGI For The DIY - Dividend History The strong quarter brings the dividend total to $1,503.69 for the year, which means I have an excellent chance of reaching the $2,000 milestone for dividend income in 2017.

Dividends should could continue to grow in Q4 as well, as there were ten new dividend increase announcements made by my holdings.

Announce Date Company Ticker Previous Payout Rate New Payout Rate Sequential Increase Year Ago Payout Rate YoY Increase Dividend Yield
7/11/2017 Cummins Inc. (CMI) $1.0250 $1.0800 5.37% $1.025 5.37% 2.47% LINK
7/12/2017 Walgreens Boots Alliance Inc (WBA) $0.3750 $0.4000 6.67% $0.375 6.67% 2.37% LINK
7/13/2017 Occidental Petroleum Corporation (OXY) $0.7600 $0.7700 1.32% $0.760 1.32% 4.76% LINK
7/13/2017 Omega Healthcare Investors Inc (OHI) $0.6300 $0.6400 1.59% $0.600 6.67% 8.01% LINK
8/24/2017 Altria Group Inc (MO) $0.6100 $0.6600 8.20% $0.610 8.20% 4.07% LINK
9/13/2017 Philip Morris International Inc. (PM) $1.0400 $1.0700 2.88% $1.040 2.88% 3.80% LINK
9/13/2017 Realty Income Corp (O) $0.211500 $0.2120 0.24% $0.2020 4.95% 4.46% LINK
9/19/2017 Microsoft Corporation (MSFT) $0.3900 $0.4200 7.69% $0.390 7.69% 2.17% LINK
9/21/2017 McDonald's Corporation (MCD) $0.9400 $1.0100 7.45% $0.940 7.45% 2.44% LINK
9/28/2017 Lockheed Martin Corporation (LMT) $1.8200 $2.0000 9.89% $1.820 9.89% 2.51% LINK
Averages: 5.13% 6.11% 3.71%

The announced increases averaged 5.13% sequentially and 6.11% annually, which is the smallest increase in some time for the portfolio.

The average was brought down by small increases from Occidental Petroleum (1.32%) and Philip Morris International (2.88%). However, even outside of those, there wasn't a single double-digit increase announcement in the group.

Lockheed Martin had the biggest increase at 9.89%, and Altria had a respectable 8.2% increase, but growth was fairly limited otherwise.

On the bright side, 6.11% average growth still far outpaces the inflation rate. Also, when adding in the reinvestment of dividends at an average 3.71% yield and taking into account new cash contributions to the portfolio, I will still easily exceed my 10% income growth goal for the quarter.

Portfolio Transactions

My lack of activity on the trading front continued during the quarter, as there were just one sale and two purchases made during Q3.

This has been the norm of late, as ~$300 per month in contributions and ~$500 per purchase allows for just one or two buys per quarter. Beyond that I am a reluctant seller and generally don't like trading, so my portfolio turnover has been pretty low.

That said, I did end up making a swap in late July, as I finally cut GameStop Corp. (GME) loose and used to the proceeds to add Altria Group Inc. (MO) to the portfolio.

Altria is a company that I've wanted to add for a while now, and when an opportunity to buy it on a big sell-off presented itself, I couldn't resist taking the plunge. If you are interested in reading the play-by-play on the buy, check out my article: Altria: Buying 'Big MO' At A 4% Yield.

Here is the info on the GameStop sale:

DGI For The DIY - Q3 2017 Sells Here is the info on the Altria purchase and my add-on purchase of Dominion:

DGI For The DIY - Q3 2017 Buys GameStop was a position I struggled with for some time, and considered selling for the last couple of years. As you can see, the share price has continued to trend lower as EPS growth stagnated in 2017 and now is in decline.

GME FAST Graph I gave up some yield by selling it and moving into Altria, but I should more than make up for it over time with growth, and I certainly sleep better having Altria in my portfolio instead.

MO FAST Graph The move has paid off thus far, as GameStop has dropped an additional 5.55% since the sale, while Altria is just 0.92% below my purchase price.

The other transaction was the purchase of 6 additional shares of Dominion Energy (D), which brings it up to a full position in the portfolio.

I see Dominion Energy as one of the most attractive dividend growth opportunities in the utility sector, so I was happy to add more shares at a near 4% yield.

D FAST Graph For my rationale behind the purchase, please read: Recent Buy: Dominion Energy.

Current Portfolio

Here is how the portfolio stands as of the end of Q3.
DGI For The DIY - Portfolio1
DGI For The DIY - Portfolio2 The portfolio continues to do well, bolstered by some outstanding capital gains from the likes of Apple, Digital Realty, Lockheed Martin, Microsoft, and Thor Industries.

Not only has Lockheed Martin been a great capital gains story, but it has provided tremendous dividend growth as well. With its recent dividend increase it crossed the 10% yield on cost mark, making it the first to do so in the portfolio. Omega Health will also hit that mark with the next dividend reinvestment.

Not bad at all considered both were purchased in 2013!

Here is a breakdown of the portfolio by total value and income by sector:

DGI For The DIY - Portfolio Weighting The Real Estate Sector continues to dominate the portfolio, especially when looking at income, but otherwise I am quite happy with my weightings.

At my age of thirty-nine, I still have 25+ years until retirement, so I like having some "growthier" names in the portfolio. At the same time, I think the portfolio has a nice core of stable companies as well, with utilities, healthcare, and consumer staples taking up about 1/3 of the value of the portfolio.

On The Radar

The portfolio will actually be seeing a big change next month, as it will soon be seeing its last cash contribution made to the account. The small engineering company I've worked at for the last 15 years was recently acquired by a larger regional firm, so with that my Simple IRA will end and a new 401k will begin.

My goal is to hit $25,000 in dividend income from this portfolio by the age of 65, and to do so requires annual income growth of around 10%. With cash contributions stopping, I may need to move out of some slower growers into higher ones to keep up the pace.

At this time I intend to continue reinvesting dividends and running the portfolio just like I always have, but with no fresh cash coming in, I will only be able to add new positions by selling old ones.

I don't plan to become a trader by any means, but there are still several companies that I would like to own, and I have some potential targets to sell to make room for them.

Some of the names I'm still interested in owning include: NextEra Energy Inc. (NEE), American Water Works Company (AWK), MasterCard Inc. (MA), Johnson & Johnson (JNJ), UnitedHealth Group Inc. (UNH), Pepsico Inc. (PEP), McCormick & Company Inc. (MKC), and The Home Depot Inc. (HD).

Some of the names I've considered selling to free up cash include: AmerisourceBergen Corp. (ABC), Chatham Lodging Trust (CLDT), General Electric Co. (GE), The Coca-Cola Company (KO), MDU Resources Group Inc. (MDU), Polaris Industries Inc. (PII), Tanger Factory Outlet Centers Inc. (SKT), and Wells Fargo & Company (WFC).

Obviously I won't sell all of those names, and might not sell any of them, but I can find a reason to consider doing so with each of them.

Feel free to chime in with your thoughts in the comments section below, I love hearing other people's thoughts on what I'm thinking about.

Conclusion

Changes outside of my control will be ending the cash contributions coming into this portfolio, but it is comforting to know that dividends will keep rollin' on in despite the change.

As we head down the stretch run of 2017, the portfolio remains on an excellent trajectory. Through Q3, dividend income is up 22% over 2016's numbers, and should easily pass the $2,000 mark for the year.

Announcements in Q4 are also off to a great start, with Thor Industries and Visa already announcing double-digit dividend increases, and Starbucks and AbbVie likely to do the same soon.

Hopefully this update finds you well, and you are having similar success with your portfolio. Happy Investing in Q4!

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, IBM, KMI, KO, LMT, LOW, MCD, MDU, MO, MSFT, NKE, NSC, O, OHI, OXY, PII, PM, QCOM, ROST, SBUX, SKT, STAG, T, TGT, THO, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM, HD.

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.