The 1% Dividend Growth Model Portfolio Will Break The Mold And Transform Opinions

|
Includes: A, AAPL, ACN, AFL, ATRI, CE, CL, CMCSA, CNI, COST, CTAS, CVX, DIS, FDS, FDX, FLIR, GIL, GIS, GPC, IBM, JNJ, KMB, KO, LEA, LMT, LOW, MA, MCD, MMM, MO, MSFT, NKE, NOC, O, PEP, PG, PM, ROL, ROST, SHPG, SO, SYK, T, TGT, TJX, TSN, V, WBA, WMT, XOM
by: Accelerating Dividends
Summary

Many dividend growth investors ignore low yielding dividend growth stocks because of the lack of immediate income they provide.

Given enough time, low yielding stocks with high dividend growth can generate more dividend income than your typical dividend growth stocks.

I present a list of 25 companies whose dividend growth I believe will surpass the dividend income generated from a group of legacy dividend growth stocks.

I introduce the 1% Dividend Growth Portfolio.

Dividends, dividend growth investing, DGI, DG, portfolio management

When it comes to low yielding dividend growth stocks, many dividend growth investors tend to ignore them because their yield does not allow them to accumulate much in the way of dividends in the short term. But what about long term? For new or young investors with a long investment time horizon, are dividend growth stocks yielding 1% worth considering? It would depend on the dividend growth over the long term as well as several other considerations.

A company with a low yield is sometimes considered a growth stock and continues to retain more cash to reinvest into the business. A higher than average yield is sometimes considered the sign of a mature business that is generating lots of free cash but whose growth is lower and offers a higher yield to attract investors.

Low yielding stocks are often seen as less likely to their dividends because their payout ratios also tend to be lower but are also faster growing. This allows the company some flexibility with their future dividend payouts when the business environment sours. Higher yielding companies who experience difficulties may have to reduce their payout growth or cut their dividends.

It might interest you to know that there are 378 companies on David Fish's CCC list that have a dividend yield less than 2%. This represents about nearly half (46%) of the entire CCC universe. I like to call these the 1%ers. There are a number of 1%ers whose dividend growth is not attractive. But there are a handful of stocks whose low yield is coupled with high growth. So, let's take a look at an example of how a 1%er could be helpful to one's portfolio.

A Tale of Three Dividend Growth Stocks

Ross Stores Inc. (ROST) has paid a continuous dividend for 23 years. From 1999 to 2017, ROST's average dividend increase was 22.9% but it has a low yield of 0.77%.

AT&T (T) has paid a continuous dividend for 34 years. From 1999 to 2017, T's average dividend increase was 4.1% but it has a high yield of 5.42%.

Coca-Cola (KO) is a dividend champion having paid a continuous dividend for 55 years. From 1999 to 2017, KO's average dividend increase was 8.8% and yields 3.21%.

Let's assume that these companies continue to increase their dividends by their respective averages. Let's also assume we invest $1,000 into each company. Based on January 2, 2018 closing stock price, we would have 13 shares of ROST, 26 shares of T and 22 shares of KO. The chart below shows how much is collected in dividends from each company over time.

Source: SeekingAlpha, chart and calculations made by the author

It would take about 13 years for ROST to overtake both T and KO in terms of the amount in dividends collected. Now many are going to say that the dividend growth rates of both T and KO are not that high and ROST is not likely to continue growing its dividend at 20+%. Here is something interesting for you! I did the same calculations based on the 5-year dividend growth rate and the results are found in the chart below.

Source: SeekingAlpha, chart and calculations made by the author

Now, KO's 5-year DGR is 7.4% while T's is 2.2% and ROST is 18.0%. The results are still the same in that at some point ROST overtakes both T and KO in dividends collected. The difference is that now it took ROST 14 years to overtake T and 16 years to overtake KO.

What I essentially want to show and have readers take away from this is that a low yielding stock with high dividend growth can generate greater dividend income than some typical dividend growth stocks if given enough time.

What I am proposing

I have already released my first model portfolio this year which I called The Next Generation Dividend Growth Portfolio which focuses on dividend growth. I believe that dividend growth is an important catalyst in a portfolio in order to reap sufficient dividend income to sustain one's future income needs. You can read the article here.

In this article I am introducing the 1% Dividend Growth Model Portfolio.

No, this portfolio is not about the world's richest! This model portfolio will be comprised of dividend growth stocks, with a greater emphasis on growth but whose dividend yield is below 1.70%. 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
  4. Compare the results of this portfolio with those of The Next Generation Dividend Growth Model Portfolio and a legacy dividend portfolio
  5. Analyze the contribution a low yielding stock can have on a dividend growth portfolio

The "typical" or legacy DG portfolio was already created and is found in my article about The Next Generation Dividend Growth Portfolio. Here I used elements from Mike Nadel's creation of the Dividend Growth 50 to assemble the legacy portfolio.

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 1% DIVIDEND GROWTH PORTFOLIO

THE LEGACY DIVIDEND GROWTH PORTFOLIO

Company

Ticker

Div. Yield

Div. Inc.

Company

Ticker

Div. Yield

Div. Inc.

Agilent Technologies Inc.

(A)

0.83%

12.90%

AFLAC

(AFL)

2.12%

4.70%

Accenture plc

(ACN)

1.66%

9.90%

Colgate Palmolive

(CL)

2.14%

2.60%

Apple

(AAPL)

1.42%

10.50%

Chevron

(CVX)

3.36%

0.90%

Celanese Corp.

(CE)

1.65%

27.80%

General Mills

(GIS)

3.34%

2.10%

Comcast Corp.

(CMCSA)

1.48%

14.50%

Genuine Parts Company

(GPC)

2.72%

2.60%

Canadian National Railway

(CNI)

1.58%

10.00%

IBM

(IBM)

3.68%

7.10%

Costco Wholesale

(COST)

1.04%

11.10%

Johnson & Johnson

(JNJ)

2.33%

5.00%

Cintas Corp.

(CTAS)

1.01%

21.80%

Kimberly Clark

(KMB)

3.38%

5.40%

Walt Disney Company

(DIS)

1.49%

7.70%

Coca-Cola

KO

3.21%

5.70%

Factset Research System

(FDS)

1.13%

12.00%

Lockheed Martin

(LMT)

2.42%

9.90%

FedEx Corp.

(FDX)

0.74%

25.00%

McDonalds

(MCD)

2.33%

7.40%

Flir Systems Inc.

(FLIR)

1.19%

25.00%

3M

(MMM)

1.95%

6.00%

Gildan Activewear Inc.

(GIL)

1.15%

16.90%

Altria Group

(MO)

3.76%

8.20%

Lear Corp.

(LEA)

1.06%

66.70%

Microsoft

(MSFT)

1.88%

7.60%

Lowe's Companies

(LOW)

1.63%

17.10%

Realty Income

(O)

4.81%

5.20%

MasterCard Inc.

(MA)

0.62%

13.60%

Pepsi

(PEP)

2.74%

7.00%

Nike Inc.

(NKE)

1.24%

11.10%

Proctor & Gamble

(PG)

3.05%

3.00%

Northrop Grumman

(NOC)

1.27%

11.10%

Philip Morris

(PM)

4.05%

2.90%

Rollins Inc.

(ROL)

0.97%

15.00%

Southern Company

(SO)

5.05%

3.60%

Ross Stores Inc.

ROST

0.77%

18.50%

AT&T

T

5.42%

2.00%

Shire plc

(SHPG)

0.62%

15.00%

Target

(TGT)

3.23%

3.30%

Stryker Corp.

(SYK)

1.19%

10.60%

Visa

V

0.65%

18.20%

TJX Companies Inc.

(TJX)

1.60%

20.20%

Walgreen Boots Alliance

(WBA)

2.10%

6.70%

Tyson Foods Inc.

(TSN)

1.13%

33.33%

Wal-Mart

(WMT)

2.02%

2.00%

Visa Inc.

(V)

0.65%

18.20%

ExxonMobil

(XOM)

3.52%

2.70%

AVERAGE

1.16%

18.22%

3.01%

5.27%

Source: SeekingAlpha

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

The Legacy Dividend Growth Portfolio (herein referred to as LDG) has a higher yield than 1% Dividend Growth Portfolio (herein referred to as the 1%er) as expected (3.01% vs. 1.16% respectively) however the 1%er's dividend growth is three times greater than the LDG (18.22% vs. 5.27% respectively).

Some may question whether DIS belongs in this portfolio because of its recent lower than normal dividend increase. I believe that his was a prudent move by the company as it picks up Twenty-First Century Fox (FOX, FOXA) media assets. After these assets are integrated into DIS, I see dividend growth returning to double digits again.

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 to .99 and round down when between .00 to .49. Here is the composition of the portfolios.

THE 1% DIVIDEND GROWTH PORTFOLIO

THE LEGACY DIVIDEND GROWTH PORTFOLIO

Company

Ticker

Price

Shares

Total

Company

Ticker

Price

Shares

Total

Agilent Technologies Inc.

A

$67.60

59

$3,988.40

AFLAC

AFL

$87.97

45

$3,958.65

Accenture plc

ACN

$153.84

26

$3,999.84

Colgate Palmolive

CL

$75.14

53

$3,982.42

Apple

AAPL

$172.26

23

$3,961.98

Chevron

CVX

$127.58

31

$3,954.98

Celanese Corp.

CE

$106.76

37

$3,950.12

General Mills

GIS

$59.04

68

$4,014.72

Comcast Corp.

CMCSA

$41.07

97

$3,983.79

Genuine Parts Company

GPC

$96.58

41

$3,959.78

Canadian National Railway

CNI

$83.28

48

$3,997.44

IBM

IBM

$154.25

26

$4,010.50

Costco Wholesale

COST

$188.32

21

$3,954.72

Johnson & Johnson

JNJ

$139.23

29

$4,037.67

Cintas Corp.

CTAS

$156.85

26

$4,078.10

Kimberly Clark

KMB

$119.07

34

$4,048.38

Walt Disney Company

DIS

$111.80

36

$4,024.80

Coca-Cola

KO

$45.54

88

$4,007.52

Factset Research System Inc.

FDS

$191.63

21

$4,024.23

Lockheed Martin

LMT

$318.54

13

$4,141.02

FedEx Corp.

FDX

$257.60

16

$4,121.60

McDonalds

MCD

$173.22

23

$3,984.06

Flir Systems Inc.

FLIR

$47.11

85

$4,004.35

3M

MMM

$235.64

17

$4,005.88

Gildan Activewear Inc.

GIL

$32.29

125

$4,036.25

Altria Group

MO

$70.74

56

$3,961.44

Lear Corp.

LEA

$178.80

22

$3,933.60

Microsoft

MSFT

$85.95

46

$3,953.70

Lowe's Companies

LOW

$91.62

44

$4,031.28

Realty Income

O

$56.62

71

$4,020.02

MasterCard Inc.

MA

$151.91

26

$3,949.66

Pepsi

PEP

$118.06

34

$4,014.04

Nike Inc.

NKE

$63.49

63

$3,999.87

Proctor & Gamble

PG

$90.65

44

$3,988.60

Northrop Grumman

NOC

$305.24

13

$3,968.12

Philip Morris

PM

$104.39

38

$3,966.82

Rollins Inc.

ROL

$46.65

86

$4,011.90

Southern Company

SO

$47.17

85

$4,009.45

Ross Stores Inc.

ROST

$80.50

50

$4,025.00

AT&T

T

$38.54

103

$3,969.62

Shire plc

SHPG

$159.21

25

$3,980.25

Target

TGT

$67.63

59

$3,990.17

Stryker Corp.

SYK

$157.90

25

$3,947.50

Visa

V

$114.51

35

$4,007.85

TJX Companies Inc.

TJX

$76.69

52

$3,987.88

Walgreen Boots Alliance

WBA

$74.95

53

$3,972.35

Tyson Foods Inc.

TSN

$80.62

50

$4,031.00

Wal-Mart

WMT

$98.59

41

$4,042.19

Visa Inc.

V

$114.51

35

$4,007.85

ExxonMobil

XOM

$85.03

47

$3,996.41

TOTAL

$99,999.53

$99,998.24

CASH

$0.47

$1.76

Source: NASDAQ.com, calculations completed by the author

For transparency, the 1%er had $33 remaining based on my method so to get it as close as possible to being fully invested without going over and close to the LDG portfolios remaining cash, I added one share of GIL.

One of the questions that remains is how long will it take for the 1%er to generate more dividend income than the LDG. 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 1%er would collect $1,125.16 in dividends while the LDG would collect $3,025.87. That's quite de deficit! Assuming that the dividend growth rate remains the same (obviously not likely but this will be something to evaluate over time), then the 1%er would likely surpass the LDG in dividend income by year 11 (see the chart below).

Source: SeekingAlpha, chart and calculations made 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.

As for me, the data collected from these model portfolios will help my personal Accelerating Dividends portfolio which will likely contain stocks from both. Low yielding stocks were not on my radar until I began to perform a deeper analysis of their potential, particularly after the article I wrote about high yield low growth and low yield and high growth.

I hope to have a lively comment stream as we are having in The Next Generation article. Come join us if you haven't already.

What are your thoughts? Building off of the comments stream from my previous article, are there any inclusions you believe should be considered for the 1%er? One stock that I have on the watchlist at the moment is Altrion Corporation (ATRI). My primary reason for withholding it at the moment is that I need to do a much deeper analysis of the company since it is relatively unknown to me but had impressive dividend growth.

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.

You can also follow me on FACEBOOK and TWITTER!

Disclosure: I am/we are long T. 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.