It's Time For The Next Generation Dividend Growth Model Portfolio

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Includes: ABBV, ADP, AFL, AMGN, AVGO, BA, CL, CSCO, CVX, ENB, FDX, GIS, GLW, GPC, HAS, HD, HON, HRL, HUBB, IBM, IPAR, ITW, JNJ, KMB, KO, LMT, MCD, MGA, MMM, MO, MPC, MSFT, O, PAG, PEP, PG, PM, PSX, SBUX, SO, STOR, T, TGT, TXN, V, VFC, VLO, WBA, WMT, XOM
by: Accelerating Dividends

Summary

The typical dividend growth company has had slowing dividend growth which for new investors will hinder their future passive income accumulation.

I believe that other dividend growth companies with greater dividend growth are needed for to replace many of the typical dividend growth stocks.

I present a list of 25 companies whose dividend growth I believe will help investors exceed the typical dividend growth company and contribute to greater dividend income accumulation.

I introduce The Next Generation Dividend Growth Portfolio.

Dividends, DGI, dividend growth investing, the next generation People who read my articles know that I am looking for growth in both the company's cash flows (as well as sales and earnings) and the dividend. I feel that any company needs cash flow growth in order to grow its dividend organically rather than through debt or other financing. Debt has to be paid at some time while interest on that debt accumulates and is paid constantly. I also want the company to be responsible and not over-extend its ability to pay its dividend.

Not all dividend growth companies are the same. I also feel that the great companies of yesterday are no longer the great dividend companies of today. There are many great authors here on SA that continue to support, promote, and, most importantly, invest in. I feel that there is a discount between investors of today and those authors. While some of those authors had the advantage of investing in great companies while their dividend yields were higher and whose growth was still strong back during the great recession, today's investors do not find the same advantages, apart from those same great companies still typically paying their dividends! I feel as though there is a new generation of dividend growth investors looking for the same great companies of yesterday today.

Perhaps an example is warranted to better explain myself. Many authors here on SA love companies like Coca-Cola (KO), Procter & Gamble (PG), and Johnson & Johnson (JNJ). These are great companies whose products are spread across the globe, and I could not foresee the likelihood of a world where these companies do not exist. But PG's dividend growth has been about 3% or less now for three years running. The dividend growth of both KO and JNJ has been slowly declining. Those long-time investors in these companies have reaped great dividend growth in the past and continue to DRIP today where the power of compounding grows their wealth. I tip my hat off to you! But I am coming at a time when those companies' best dividend growth is likely behind them. If you were not invested in either of these companies, would you really be satisfied with 5% growth or less?

I believe that dividend growth is important. To illustrate, I presented to readers back in this article a comparison of four companies with varying dividend yields and growth. These companies were FedEx (FDX), JNJ, AT&T (T), and V.F. Corporation (VFC). The table below presents their dividend-related stats.

Symbol

Yield

Dividend

Payout Ratio

1 YR DGR

3 YR DGR

5 YR DGR

10 YR DGR

FDX

0.86%

$1.60

20.39%

44.44%

30.87%

20.58%

14.02%

JNJ

2.55%

$3.20

53.12%

6.78%

6.74%

6.96%

8.03%

T

4.86%

$1.96

91.90%

2.13%

2.17%

2.22%

3.74%

VFC

3.05%

$1.68

55.04%

15.04%

18.69%

18.58%

12.17%

Source: Old School Value, David Fish

I figuratively invested $10,000 into each and grew their dividends annually by their 5-year dividend growth rate. The following chart shows the total value of dividends collected over 25 years.

No one knows what the future will hold, and perhaps VFC and FDX will not be able to maintain their dividend growth, but JNJ and T may not be able to either. But what I find impressive is that after 9 years, VFC paid out more dividends than T (showing the impact that a higher yield has on dividends collected) and never trailed JNJ. Even if VFC's dividend growth dwindles later down the road and grows no more than JNJ's or T's, if you are DRIPing those shares, your shares are compounding faster than either of those companies because of the initial growth. That is why I advocate for responsible dividend growth (as well as yield but it is hard to have both particularly now).

What I'm Proposing

To start off the new year, I am presenting The Next Generation Dividend Growth Model Portfolio.

This model portfolio will be comprised of dividend growth stocks, with a greater emphasis on growth. These companies still need to appear on David Fish's CCC List.

My objectives for the portfolio are the following:

  1. Measure the impact of dividend growth on dividends received particularly over long term
  2. Measure the dividend growth over time and look for cyclicality or other patterns for better stock selection
  3. Measure price appreciation (as well as depreciation) and overall wealth

I believe that this portfolio contains a number of solid companies whose dividend growth remains robust and will provide new or young investors with excellent dividend growth in the future. In order to truly measure the performance of this portfolio, I will need to compare it to a "typical" DG portfolio. I returned several years back to Mike Nadel's creation of the Dividend Growth 50. During its creation, he polled 10 panelists who are well known and respected here on SA for their dividend writing, focus, and knowledge. These panelists selected 160 companies and yet could only agree upon five. Using the list of companies named by the panelists with a particular focus on those that were named by most of the panelists, I put together a typical dividend growth portfolio [herein referred to as DGP] to use as a comparison to The Next Generation Portfolio [herein referred to as TNG].

The companies that comprise each portfolio are found in the table below along with their current dividend yield and the latest dividend increase at the time of writing.

THE NEXT GENERATION PORTFOLIO

THE TYPICAL DG PORTFOLIO

Company

Ticker

Div. Yield

Div. Inc.

Company

Ticker

Div. Yield

Div. Inc.

AbbVie

(ABBV)

2.85%

10.90%

Aflac

(AFL)

2.12%

4.70%

Automatic Data Processing

(ADP)

2.14%

10.50%

Colgate-Palmolive

(CL)

2.14%

2.60%

Amgen

(AMGN)

2.52%

14.80%

Chevron

(CVX)

3.36%

0.90%

Broadcom

(AVGO)

2.66%

71.60%

General Mills

(GIS)

3.34%

2.10%

Boeing

(BA)

1.77%

20.40%

Genuine Parts Company

(GPC)

2.72%

2.60%

Cisco

(CSCO)

2.91%

11.50%

IBM

(IBM)

3.68%

7.10%

Enbridge

(ENB)

4.89%

10.00%

Johnson & Johnson

JNJ

2.33%

5.00%

Corning

(GLW)

1.86%

14.80%

Kimberly Clark

(KMB)

3.38%

5.40%

Hasbro

(HAS)

2.47%

11.80%

Coca-Cola

KO

3.21%

5.70%

Home Depot

(HD)

1.86%

29.00%

Lockheed Martin

(LMT)

2.42%

9.90%

Honeywell

(HON)

1.90%

12.00%

McDonald's

(MCD)

2.33%

7.40%

Hormel Foods

(HRL)

2.12%

10.30%

3M

(MMM)

1.95%

6.00%

Hubbell

(HUBB)

2.30%

10.00%

Altria Group

(MO)

3.76%

8.20%

Inter Parfums

(IPAR)

1.91%

23.50%

Microsoft

(MSFT)

1.88%

7.60%

Illinois Tool Works

(ITW)

1.86%

20.00%

Realty Income

(O)

4.81%

5.20%

Lockheed Martin

(LMT)

2.42%

9.90%

Pepsi

(PEP)

2.74%

7.00%

Magna International

(MGA)

1.93%

10.00%

Procter & Gamble

PG

3.05%

3.00%

Marathon Petroleum

(MPC)

2.30%

11.10%

Philip Morris

(PM)

4.05%

2.90%

Penske Automotive Group

(PAG)

2.60%

14.50%

Southern Company

(SO)

5.05%

3.60%

Phillips 66

(PSX)

2.74%

11.10%

AT&T

T

5.42%

2.00%

Starbucks

(SBUX)

2.01%

20.00%

Target

(TGT)

3.23%

3.30%

Store Capital

(STOR)

5.02%

6.90%

Visa

(NYSE:V)

0.65%

18.20%

Texas Instruments

(TXN)

2.26%

24.00%

Walgreens Boots Alliance

(WBA)

2.10%

6.70%

VF Corporation

VFC

2.42%

9.50%

Wal-Mart

(WMT)

2.02%

2.00%

Valero Energy

(VLO)

2.97%

16.70%

Exxon Mobil

(XOM)

3.52%

2.70%

AVERAGE

2.51%

16.59%

3.01%

5.27%

Source: Seeking Alpha

The only company that is the same among the two portfolios is LMT.

The DGP has a higher yield than TNG (3.01% vs. 2.51%, respectively). However, the TNG dividend growth is three times greater than the DG (16.59% vs. 5.27%, respectively).

Each portfolio contains 25 stocks. I will figuratively invest a total of $100,000 and purchase shares on an equal weight basis for each company, based on the closing price on January 2nd. I divided the stock price from $4,000 in order to determine how many shares could be purchased. I rounded the number of shares up when the decimals were between .50 and .99 and round down when between .00 and .49. Here is the composition of the portfolios.

THE NEXT GENERATION PORTFOLIO

THE TYPICAL DG PORTFOLIO

Company

Ticker

Price

Shares

Total

Company

Ticker

Price

Shares

Total

AbbVie

(ABBV)

$98.41

41

$4,034.81

Aflac

(AFL)

$87.97

45

$3,958.65

Automatic Data Processing

(ADP)

$115.99

34

$3,943.66

Colgate-Palmolive

(CL)

$75.14

53

$3,982.42

Amgen

(AMGN)

$177.00

23

$4,071.00

Chevron

(CVX)

$127.58

31

$3,954.98

Broadcom

(AVGO)

$267.01

15

$4,005.15

General Mills

(GIS)

$59.04

68

$4,014.72

Boeing

(BA)

$296.84

13

$3,858.92

Genuine Parts Company

(GPC)

$96.58

41

$3,959.78

Cisco

(CSCO)

$38.86

103

$4,002.58

IBM

(IBM)

$154.25

26

$4,010.50

Enbridge

(ENB)

$40.14

100

$4,014.00

Johnson & Johnson

(JNJ)

$139.23

29

$4,037.67

Corning

(GLW)

$32.62

123

$4,012.26

Kimberly Clark

(KMB)

$119.07

34

$4,048.38

Hasbro

(HAS)

$92.08

43

$3,959.44

Coca-Cola

(NYSE:KO)

$45.54

88

$4,007.52

Home Depot

(HD)

$188.03

21

$3,948.63

Lockheed Martin

(LMT)

$318.54

13

$4,141.02

Honeywell

(HON)

$153.71

26

$3,996.46

McDonald's

(MCD)

$173.22

23

$3,984.06

Hormel Foods

(HRL)

$36.36

110

$3,999.60

3M

(MMM)

$235.64

17

$4,005.88

Hubbell

(HUBB)

$134.20

30

$4,026.00

Altria Group

(MO)

$70.74

56

$3,961.44

Inter Parfums

(IPAR)

$43.45

92

$3,997.40

Microsoft

(MSFT)

$85.95

46

$3,953.70

Illinois Tool Works

(ITW)

$165.27

24

$3,966.48

Realty Income

(O)

$56.62

71

$4,020.02

Lockheed Martin

(LMT)

$318.54

13

$4,141.02

Pepsi

(PEP)

$118.06

34

$4,014.04

Magna International

(MGA)

$57.16

70

$4,001.20

Procter & Gamble

(PG)

$90.65

44

$3,988.60

Marathon Petroleum

(MPC)

$67.18

60

$4,030.80

Philip Morris

(PM)

$104.39

38

$3,966.82

Penske Automotive Group

(PAG)

$47.84

84

$4,018.56

Southern Company

(SO)

$47.17

85

$4,009.45

Phillips 66

(PSX)

$101.75

39

$3,968.25

AT&T

(T)

$38.54

103

$3,969.62

Starbucks

(SBUX)

$57.63

69

$3,976.47

Target

(TGT)

$67.63

59

$3,990.17

Store Capital

(STOR)

$25.84

155

$4,005.20

Visa

(V)

$114.51

35

$4,007.85

Texas Instruments

(TXN)

$105.57

38

$4,011.66

Walgreens Boots Alliance

(WBA)

$74.95

53

$3,972.35

VF Corporation

(VFC)

$74.42

54

$4,018.68

Wal-Mart

(WMT)

$98.59

41

$4,042.19

Valero Energy

(VLO)

$92.80

43

$3,990.40

Exxon Mobil

(XOM)

$85.03

47

$3,996.41

TOTAL

$99,998.63

$99,998.24

CASH

$1.37

$1.76

Source: NASDAQ.com, calculations compiled by the author

For transparency, the DGP was over by $37 based on my method. So, to get it as close as possible to being fully invested without going over and close to the TNG portfolios cash remaining, I added subtracted one share of T.

One of the questions that remains is how long will it take for TNG to generate more dividend income than the DGP. Assuming that we start by collecting the TTM dividends paid for each stock (this does not include increases as of yet, this is for projection purposes only), then the TNG would collect $2,537.92 in dividends, and the DGP would collect $3,025.87. Assuming that the dividend growth rate remains the same (obviously not likely, but this will be something to evaluate over time), then the TNG would likely surpass the DGP in dividend income by year 3 (see the chart below) and would be approaching a doubling of DGP dividend income by year 10.

Source: Seeking Alpha, calculations and chart created by the author

Conclusion

My intention is to monitor the dividend income for each stock on a quarterly basis and update the projections over time. I hope that the data accumulated from this model portfolio will provide some useful information for dividend growth investors and uncover some patterns or tendencies for good portfolio management or investment wisdom.

What are your thoughts? I welcome your comments below.

I hope you enjoyed this article. If you want to be notified when my future articles are published, please consider following me as a Seeking Alpha author by clicking the "Follow" button at the top of the article beside my name Accelerating Dividends. Thanks for reading.

Disclosure: I am/we are long T, AMGN.

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.