My K.I.S.S. Dividend Portfolio: 4th 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 term of total return.

After 5 years of posting this portfolio I think I can say I've achieved the "proof of concept" of DGI.

Forgive me for being repetitive, but my introduction to last year's fourth quarter update still rings true to me, so I decided to just repeat it to open this quarter's update. Sorry if you've heard this before….

When I started writing these updates four years ago I had a few purposes in mind. First, I wanted to demonstrate that a DGI portfolio could be effectively and successfully managed using simple, easy to understand and to carry out rules that would not take an exorbitant amount of time. Second, I wanted to show that the results of such a portfolio could match the results that someone would get if they invested passively in a market ETF or mutual fund, but would produce more dividend income. Third I wanted to show that managing a DGI portfolio takes patience. It is not a system where you buy and sell stocks frequently. It is a buy and hold (and monitor) system. Transactions should be kept to a minimum, and when bought you should expect to hold on to your stocks for many years. I think my results this past year, and over the past five years have gone a long way in demonstrating these three principles.

Also, more personally for myself, by putting my system out there for everyone to see and comment on, and by making a public commitment to it, I thought it would make it more likely for me to stick to it. If I have to answer a question from someone as to why I did something that did not follow my plan I better be able to have a good explanation. Publicly disclosing my portfolio helps me to maintain my discipline in managing it.

Still, I will remind everyone that my portfolio is a dividend growth portfolio and that my main consideration is dividend income, not price appreciation. And by this metric it continues to perform very well. Dividend income is my ultimate goal and it is this income that will support me in retirement. But with this update I can show, once again, that a straight-forward dividend growth portfolio can produce market beating results.

If you wish to review my previous quarterly updates you can find them here:

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

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

Review of fourth-Quarter Contributions and Dividends

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

Oct: $1,336.14 ($4,960.12) (-73.06%)

Nov: $5,019.21 ($4,221.56) (+18.89%)

Dec: $4,535.23 ($1,535.95) (+195.27%)

Obviously there has been some changes to the composition of the portfolio as shown by the big decrease in dividends received in October, and the big increase in dividends received in December. This is due to changes caused by the sales and purchases I made over the past few months. But over all my dividend collections continue to increase.

Total dividends collected in the fourth quarter were $10,890.58, an increase of 1.61% over the $10,717.63 collected over the fourth quarter of 2016. $1,364.71 of this was immediately reinvested through DRIP plans in my Schwab accounts.

As of this writing I have not yet received my full fourth quarter pension contribution, but I have received $3000 in catch-up contributions. Therefore, including cash left over from the previous quarter, but not including funds freed up from this quarter's stock sales, the total the funds I had available for investment this past quarter was $12,834.87.

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 [CCC] 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 Quality Rating of A- or better from S&P
  • F.A.S.T. Graph shows a 10-year uptrend in earnings; 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 year. 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").
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.

Since most of the work has already been done for us by David Fish (the CCC list) Chuck Carnevale (FAST Graphs) and S&P (The S&P Quality rankings) the time that it takes to run this screen is only about 1-2 hours per quarter

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

Plains All American (PAA) cut its dividend for the second time in two years. I didn't sell after the first cut because the yield was still quite high. But two cuts in two years was simply too much for me to accept so I sold all of my PAA holdings.

I sold 683.726 shares of PAA at $21.56 per share, and a commission of $23.55, for a total of $14,717.31.

General Electric (GE) cut its dividend from $0.24 to $0.12, so I sold all of my shares.

I sold 846.637 shares of GE at $18.11 per share, and a commission of $18.72, for a total of $15,312.72.

Purchases

At the beginning of this quarter I had some positions that were not full positions, due to many reasons. In some cases it's because they were not initially bought as full positions, and in some cases it's because they had dropped in value. I decided to use my funds from my sales, and my accumulated dividends, to bring these positions up closer to full value. In all these cases the stocks I purchased seemed to be undervalued based on their PAAY, which compares their present yields to their historical yields. So In each case it seemed like a good buying opportunity for these stocks.

I used the proceeds from the sale of PAA to buy OHI and SKT.

I Bought: 282 shares of OHI at $28.37 per share, and a commission of $8.46, for a total of $8,008.80.

I Bought: 333 shares of SKT at $22.47 per share, and a commission of $9.99, for a total of $7,492.50.

I used the proceeds from the sale of GE to buy FCPT.

I Bought: 610 shares of FCPT at $26.18 per share, and a commission of $9.45, for a total of $15,979.25.

I used my accumulated dividends to buy BPL.

I Bought: 200 shares of BPL at $49.6 per share, and a commission of $6.00, for a total of $9,926.

As mentioned above some of my stocks are held in two Schwab accounts (formerly optionsXpress). 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 which does not offer DRIPs):

STOCK

SHARES

Alliance Resource Partners LP (NASDAQ: ARLP)

31.8577

Avista Corp. (NYSE: AVA)

3.3052

Chevron Corporation (NYSE: CVX)

0.2182

ONEOK Inc. (NYSE: OKE)

6.2016

PIMCO Corporate & Income Fund (NYSE: PTY)

16.3321

Following these transactions, this is the present composition of my portfolio (as of market close 12/29/17).

Shares

Price

Market Value

Div/Share

Yield

Exp. Income

Cash

2,832.12

2,832.12

Aflac Incorporated (AFL)

245

87.78

21,506.10

1.80

2.05%

$441.00

Air Products and Chemicals, Inc. (APD)

119

164.08

19,525.52

3.80

2.32%

$452.20

Ameriprise Financial, Inc. (AMP)

234

169.47

39,655.98

3.32

1.96%

$776.88

Amgen Inc. (AMGN)

149

173.9

25,911.10

5.28

3.04%

$786.72

Apple Inc. (AAPL)

170

169.23

28,769.10

2.52

1.49%

$428.40

Avista Corporation (AVA)

604.35

51.49

31,117.98

1.43

2.78%

$864.22

Becton, Dickinson and Company (BDX)

137

214.06

29,326.22

3.00

1.40%

$411.00

BlackRock, Inc. (BLK)

40

513.71

20,548.40

10.00

1.95%

$400.00

Boeing Company (BA)

199

294.91

58,687.09

6.84

2.32%

$1,361.16

CSX Corporation (CSX)

709

55.01

39,002.09

0.80

1.45%

$567.20

CVS Health Corporation (CVS)

294

72.5

21,315.00

2.00

2.76%

$588.00

Chevron Corporation (CVX)

172.45

125.19

21,589.02

4.32

3.45%

$744.98

Cincinnati Financial Corporation (CINF)

324

74.97

24,290.28

2.00

2.67%

$648.00

Cracker Barrel Old Country Store, Inc. (CBRL)

212

158.89

33,684.68

4.80

3.02%

$1,017.60

Cummins Inc. (CMI)

221

176.64

39,037.44

4.32

2.45%

$954.72

Darden Restaurants, Inc. (DRI)

365

96.02

35,047.30

2.52

2.62%

$919.80

Deere & Company (DE)

193

156.51

30,206.43

2.40

1.53%

$463.20

Digital Realty Trust, Inc. (DLR)

281

113.9

32,005.90

3.72

3.27%

$1,045.32

Dominion Energy, Inc. (D)

219

81.06

17,752.14

3.08

3.80%

$674.52

Emerson Electric Co. (EMR)

337

69.69

23,485.53

1.94

2.78%

$653.78

Four Corners Property Trust, Inc. (FCPT)

748.03

25.7

19,224.37

1.10

4.28%

$822.83

General Dynamics Corporation (GD)

198

203.45

40,283.10

3.36

1.65%

$665.28

Harris Corporation (HRS)

253

141.65

35,837.45

2.28

1.61%

$576.84

Hasbro, Inc. (HAS)

348

90.89

31,629.72

2.28

2.51%

$793.44

Illinois Tool Works Inc. (ITW)

168

166.85

28,030.80

3.12

1.87%

$524.16

International Business Machines Corporation (IBM)

110

153.42

16,876.20

6.00

3.91%

$660.00

Johnson & Johnson (JNJ)

159

139.72

22,215.48

3.36

2.40%

$534.24

L3 Technologies, Inc. (LLL)

146

197.85

28,886.10

3.00

1.52%

$438.00

Lockheed Martin Corporation (LMT)

144

321.05

46,231.20

8.00

2.49%

$1,152.00

Magna International Inc. (MGA)

290

56.67

16,434.30

1.10

1.94%

$319.00

McDonald's Corporation (MCD)

161

172.12

27,711.32

4.04

2.35%

$650.44

Microsoft Corporation (MSFT)

495

85.54

42,342.30

1.68

1.96%

$831.60

National Health Investors, Inc. (NHI)

256

75.38

19,297.28

3.80

5.04%

$972.80

Norfolk Southern Corporation (NSC)

174

144.9

25,212.60

2.44

1.68%

$424.56

Novartis AG (NVS)

240

83.96

20,150.40

2.72

3.24%

$652.80

Nu Skin Enterprises, Inc. (NUS)

394

68.23

26,882.62

1.44

2.11%

$567.36

ONEOK, Inc. (OKE)

511.67

53.45

27,348.76

2.98

5.58%

$1,524.78

Paychex, Inc. (PAYX)

438

68.08

29,819.04

2.00

2.94%

$876.00

Pepsico, Inc. (PEP)

177

119.92

21,225.84

3.22

2.69%

$569.94

Prudential Financial, Inc. (PRU)

125

114.98

14,372.50

3.00

2.61%

$375.00

QUALCOMM Incorporated (QCOM)

425

64.02

27,208.50

2.28

3.56%

$969.00

Raytheon Company (RTN)

198

187.85

37,194.30

3.19

1.70%

$631.62

Realty Income Corporation (O)

386

57.02

22,009.72

2.55

4.47%

$984.30

Royal Bank of Canada (RY)

225

81.65

18,371.25

3.64

4.46%

$819.00

Sysco Corporation (SYY)

372

60.73

22,591.56

1.44

2.37%

$535.68

T. Rowe Price Group, Inc. (TROW)

326

104.93

34,207.18

2.28

2.17%

$743.28

Tanger Factory Outlet Centers, Inc. (SKT)

847

26.51

22,453.97

1.37

5.17%

$1,160.39

Target Corporation (TGT)

384

65.25

25,056.00

2.48

3.80%

$952.32

First of Long Island Corporation (FLIC)

944

28.5

26,904.00

0.60

2.11%

$566.40

Procter & Gamble Company (PG)

166

91.88

15,252.08

2.76

3.00%

$457.89

Southern Company (SO)

341

48.09

16,398.69

2.32

4.82%

$791.12

Tupperware Brands Corporation (TUP)

205

62.7

12,853.50

2.72

4.34%

$557.60

UGI Corporation (UGI)

568

46.95

26,667.60

1.00

2.13%

$568.00

United Technologies Corporation (UTX)

108

127.57

13,777.56

2.80

2.19%

$302.40

W. P. Carey Inc. (WPC)

273.49

68.9

18,843.46

4.04

5.86%

$1,104.90

WEC Energy Group, Inc. (WEC)

336

66.43

22,320.48

2.21

3.33%

$742.56

Wal-Mart Stores, Inc. (WMT)

184

98.75

18,170.00

2.00

2.03%

$368.00

Walgreens Boots Alliance, Inc. (WBA)

250

72.62

18,155.00

1.60

2.20%

$400.00

Wells Fargo & Company (WFC)

384

60.67

23,297.28

1.56

2.57%

$599.04

High Yield Stocks

Alliance Resource Partners, L.P. (ARLP)

1,414.90

19.7

27,873.53

2.02

10.25%

$2,858.10

Annaly Capital Management, Inc. (NLY)

1657.779

11.89

19,710.99

1.20

10.09%

$1,989.33

Buckeye Partners, L.P. (BPL)

422

49.55

20,910.10

5.05

10.19%

$2,131.10

Omega Healthcare Investors, Inc. (OHI)

851

27.54

23,436.54

2.60

9.44%

$2,212.60

PIMCO Corporate & Income Opportunity Fund (PTY)

1,226.17

16.46

20,182.76

1.56

9.48%

$1,912.83

1,669,152.85

3.14%

52,487.24

Returns

My portfolio has increased in value this fourth quarter from $1,591,077.84 to $1,669,152.85. This is a return of 4.72%, if you do not include the pension contributions. In the same time period the "market", as represented by SPY, was up 5.11%. For the year my portfolio was up 21.13% while the return for SPY, with the same contributions as were invested in my account, invested on the same days, was 21.15%. (DAMN! I lost by 0.02%!)

I publish these updates to show how a simple DGI portfolio can be created and 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 who are 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 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 (NYSEARCA:SPY), the SPDR S&P Dividend ETF (NYSEARCA:SDY) and the Vanguard Dividend Growth Fund (MUTF: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 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 year the returns of my benchmarks were:

SPY - 21.15%

SDY - 12.21%

VDIGX - 18.84%

As a reminder my return was 21.13%

Over the life of the portfolio, which is now a full 5 years, my portfolio continues to beat the S&P and the other benchmarks by a significant amount.

Average Annual Return over the past 5 years (as calculated using the XIRR function on Excel).

KISS - 16.06%

SPY (S&P ETF) - 14.70%

SDY (dividend ETF) - 13.55%

VDIGX (Dividend Mutual Fund) - 12.77%

Dividends

During the fourth quarter I collected $10,890.58 in dividends. In all of 2017 I collected a total of $47,565.34, a 9.00% increase over the $43,635.36 in dividends I collected in 2016. This amount would have been higher, but I sold the PAA and GE positions before I collected their dividends, and did not buy the replacement stocks, OHI, SKT, and FCPT in time to collect theirs. This caused my dividend total to suffer this quarter.

With the declared dividends for each of my companies, the amount of dividends I expect to collect in the next 12 months is $52,487.24, a 10.34% increase over what I collected in 2017. But this 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 will 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 3.14%. This has dropped over the past two 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.

The drop in the fourth quarter of this year is due losing the income from GE and PAA, and not yet having it replaced by my purchases of OHI, SKT, and FCPT. But on a year to year basis my income has continued to go up.

Again, as a comparison, here are the dividend amounts collected for each of my benchmarks portfolios, showing that I am beating them on a total return basis, as well as dividends produced. (The VDIGX number is not all dividend income)

KISS - $47,565.34

SPY - $19,886.76

SDY - $22,863.57

VDIGX - $66,618.35 (Partially capital gains distribution, not all dividends)

As this is a dividend growth portfolio, I would like to show here the dividend growth from 2016 to 2017 for each stock presently in my portfolio. The average dividend growth for these stocks is 6.99%, which I would say is pretty typical of a dividend growth portfolio.

Conclusion

I started this portfolio on Dec 30, 2011, and one year later I started posting my method, thought process, and results on Seeking Alpha. So it has been 6 full years that I've been doing Dividend Growth Investing (D.G.I.) and 5 full years that I have been posting my results. In that time my portfolio has grown from $390,214.75 to $1,699,152.85. Yes, much of this is from continuing pension contributions (about $336,000), but the rest is from stock price appreciation, dividend income, dividend growth and dividend reinvestment. Obviously there has been a raging bull market during this time period, which explains part of the results, but I have still managed to beat the market during this time period, which to me shows the effectiveness of D.G.I.

I am a part-time investor. I do it as a hobby, and because I trust myself to look after my interests more than I trust anybody else. I am not a professional and have no formal training in finance, economics or investing. Most of what I know I have learned here on Seeking Alpha. If I can produce dividend income and total returns that beat the market, then anybody can. All you have to do is take the time to read about DGI from some of the best contributors here on SA (DVK, Chowder, 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, the mindset of a dividend growth investor (or at least me) is to grow the dividend income produced by his (or her) portfolio, and not necessarily to focus on growing the size of the portfolio. I know this is a controversial statement to some, but it is how I look at my investing, and how I analyze my results. (The reason I show the total return results is to demonstrate to others the effectiveness of D.G.I.). In the long run, by maintaining my discipline and carrying out my K.I.S.S. criteria, I believe I will continue to beat "the market", both on a dividend producing basis, and a total return basis.

DGI 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 as the dividends increase, if the prices stay low, it will just give me even more opportunities to buy more shares of undervalued stocks. 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.

And yes, some of my stocks have cut their dividends, but that is bound to happen from time to time. I just simply replace them with other, hopefully better quality stocks, and continue with my plan. And even with these dividend cuts, over all, my dividend income continues to grow year after year.

So going forward I will 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!), that someone (me!) 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 FCPT.

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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