Each year, I try to look back on the year that was to see how my dividend growth portfolio performed. Not from a return perspective; rather from a purely dividend growth perspective. Since my goal is to build up a portfolio of excellent companies that pay me cold, hard cash to support our lifestyle, it's the dividends that are the most important part of the portfolio with capital appreciation taking the back seat.
The thing is dividends are much more steady and predictable than capital appreciation for any given year. For instance, I think we all could have made a pretty good guess that McDonald's (MCD) would have paid at least $3.76 per share in dividends during 2017, yet who really saw the share price climbing from around $120 to over $176 as of today.
That's why I want to focus on the dividends that my investments pay me each year and how much they grow.
Forward Dividends by Sector
As of the last week of December, the forward dividends for the companies owned in my FI Portfolio sit at $5,833.07. The following chart shows a breakdown of the forward dividends by the economic sector that they fall into.
|Forward Dividends by Sector|
The two largest contributors, by sector, to my forward dividends are Consumer Discretionary and Consumer Staples with 20% and 19% weights, respectively. Frankly, that's exactly how I want it to be although I wouldn't mind increasing the weights of the Consumer Staples, because there are still some great companies such as Hormel Foods (HRL) and J.M. Smucker (SJM) that I don't yet own.
Energy is the next largest sector at 13% of my forward dividends. That's within the range of where I want my energy exposure to be although it's on the high side, so I don't plan on increasing my exposure there. Ideally, I think the 8-10% range would be a good spot to be in.
The Financials, Health Care, Industrials and Real Estate sectors are all very close with 9%, 8%, 11%, and 10% weightings, respectively. Health Care is the only sector out of those four that I feel is a bit on the low side. Honestly, if I could swap the weightings of Energy and Health Care, I'd be a bit happier with my exposure.
Both the Technology and Telecommunication sectors have the lowest exposure at 4% and 6%, respectively. The telco sector is quite mature, so it's typically reserved for the high current yield-low dividend growth stalwarts like AT&T (T) and Verizon (VZ). Although I do own Harris (HRS) which has been a great investment for me thus far, there are a few Technology names that I'd like to add such as Cisco Systems (CSCO) and Qualcomm (QCOM), but overall, I think the weightings for each of these sectors is about where I'd like them to be.
Back in mid-2015, I wrote about the Dividend Clubs where each club was a different level of forward dividends. In order to join one of the dividend clubs, a holding has to meet the minimum amount of forward dividends for that specific club. So, in order to join the $50 club, a holding has to pay $50 or more in dividends.
Think of it as one of those big, multi-room nightclubs where there's a hip hop room, an 80s room, a dance/techno room, a country room. Except instead of being able to go to each room the $50 Club members can only stay in the $50 Club, whereas the $100 Club members get to experience the $50 Club and the $100 Club and so on.
The $50 Club has 35 members; that means 35 of my holdings provide at least $50 in annual dividends. Sadly, 12 of those 35 don't get to venture into any of the other clubs... at least not yet.
The $100 Club has 23 members meaning half of my holdings produce at least $100 of dividends each year, whereas the $200 Club has 10 members with 8 of them on the outside looking in at the $300 Club.
The two $300 Club members are in a party all to themselves and consist of McDonald's and Target (TGT). Honestly, I think that's a bit of an odd pairing to be my two largest contributors to my dividends, but we can thank my former self for taking advantage of adding shares at what I felt were good long-term value levels.
Dividend Growth: The Good, The Bad, And The Ugly
First off, as of this week, I own 46 different companies within my FI Portfolio. Of those 46 companies, 40 of them gave me pay raises throughout the year by either increasing or initiating dividend payments. Unfortunately, that means six of my holdings decided to not join in on the fun.
|FI Portfolio Dividend Changes - 2017|
There were four companies that did not increase their dividend payment during 2017. Those four are: EOG Resources (EOG), BP plc (BP), Chevron Corporation (CVX), and Deere & Company (DE). While these four companies did not raise their dividend payment, they did maintain their dividends throughout the year.
It's not too surprising to see three companies in the oil/energy sector not increasing their dividend payments considering the persistently low price of oil over the last few years. For those three, I'm not all that concerned about the long-term trajectory of their dividends because cash in the company's bank is much more important for the health of each of those enterprises right now.
However, Deere & Company is another story. If my memory serves me right, back in 2015, management at Deere & Company decided to keep the dividend the same as there were very serious concerns about the health of the business, namely the business out of China and the effects of a slowdown there. The reasoning made sense, so I was content to just hold and wait for better days and a return to dividend growth; however, that growth is still yet to come. I can't complain too much since Deere has been compounding my investment capital at over a 20% internal rate of return, but the lack of dividend growth is concerning and something I'll have to examine closer in early 2018.
Unfortunately, two of the companies that I own announced dividend cuts compared to their last payment in 2016. The first one I'm not too concerned about because it came from Yum Brands (YUM) which spun off its Chinese business via Yum China (YUMC). However, the combined dividend payment between the two companies is still a decrease from YUM's payment last year. So, it gets thrown into the dividend cut tally albeit with an asterisk.
Admittedly, the other dividend cut hurt. This one came from General Electric (GE). In December, management announced a not-too-surprising 50% dividend cut to its dividend payment. Ouch! General Electric's share price had front run the dividend cut amid widespread concerns of an impending cash crunch for the company and likely dividend cut. General Electric was a fairly large holding of mine providing over $160 of dividends per year before the cut, and now, that's down to just over $80 per year.
I couldn't help but laugh when the dividend was officially cut, and I started seeing articles mentioning that General Electric had only cut the dividend twice since the Great Depression. While that is in fact true, that seems like a bit of a cherry-picked point of reference, considering they've now cut their dividend twice in the last decade.
Despite the very real concerns about General Electric I'm going to stick this one out as I believe the core of the business is still very much intact. Companies go through rough patches all the time, and I'll side with the business that's been around for over a century and still provides very much needed industrial goods to right the ship over time. After all, companies like McDonald's and Johnson & Johnson (JNJ) were two Dividend Champions that fell out of favor with market participants and have since righted the ship.
Dividend Increases by Month
The 40 companies that announced raises this year combined to dish out 47 total increases with several holdings giving multiple raises throughout the year.
|2017 Dividend Increases by Month|
February led the way with seven increases being announced while April, July, and September each had six each. May was rather disappointing with just one increase being announced.
Portfolio Wide Weighted Dividend Growth
Since each company carries a different weight in terms of dividends, you can't just take the average of each company's dividend growth to come up with a dividend growth rate for the portfolio as a whole. Rather you have to assign a dividend weighting to each position's dividend growth and sum it up. The formula would look like this Dividend Growth for Position 1 * (Dividends for Position 1/Total Dividends for Portfolio. Do that for each position and add it all up and you get the weighted dividend growth for your portfolio.
|Weighted Dividend Growth by Position|
Overall, it was a solid year in terms of dividend growth. The largest contributor in terms of the weighted dividend growth came from Bank of America (BAC) with a weighted contribution of +0.83%. That was due largely in part by the monster 60% dividend increase they announced. McDonald's was the second largest contributor at +0.46%, thanks to solid dividend growth and its large weighting in my portfolio.
Unfortunately, there are those two red bars associated with the two dividend cuts from General Electric and Yum Brands. General Electric in particular was a big drag on the weighted dividend growth for the portfolio with a weighted contribution of -0.74%. Yikes!
The weighted dividend growth rate for my portfolio worked out to 4.65%. Not all that great, if you ask me. Although the two dividend cuts played a big role in that. Those two alone dropped the weighted average growth rate from 5.89%. The four companies that kept their dividends flat, namely BP, Chevron, and Deere were big drags as well. Among just the companies that announced increases year over year, the weighted growth rate came in at 6.68%. For comparison's sake, the average dividend growth rate among my holdings accounting for all positions came in at 8.91%.
Unfortunately, many of my high dividend growers are also low dividend yielders, which means they carry relatively low weight in the portfolio-wide dividend growth rate. For example, Visa (V) had a very strong 18.18% increase in its dividend payment, but it only contributed 0.10% to my weighted dividend growth because the yield is typically around 1%.
Overall, I'm fairly happy with how things stand as of the end of 2017. December brought in over $900 for the second time ever and also set a personal best for dividends received during a month. I'll also be surpassing 2016's total dividends received, which I'm glad to see after 2016's decline. Even better news is that regular monthly investment of savings is on the horizon, which will really help to juice the dividends received.
Looking forward to 2018, I'd love to add more to the Consumer Staples and Health Care sectors; however, that will only happen if the valuations make sense. In the end, it's valuation first and foremost to determine which companies get my investment capital.
As far as forecasts for 2018 dividend growth, I fully expect it to come in higher than 2017's weighted growth rate of 4.65% for several reasons. One, corporate tax reform should provide a boost to dividend growth going forward although I expect most of the tax savings to be spent on share buybacks *sigh*. Also, if I can avoid dividend cuts among my holdings, then that alone will boost my weighted dividend growth rate higher, and if the no-raisers from 2017 return to at least minor bumps higher, that will help as well.
Disclosure: I am/we are long MCD, T, VZ, HRS, TGT, EOG, BP, CVX, DE, YUM, YUMC, GE, BAC, JNJ.
Additional disclosure: Investing involves risks. Any mention of a company in this article is not a recommendation to buy or sell. Please consult a financial professional prior to investing and do your own due diligence. I have no positions in CSCO, QCOM, HRL, or SJM, but may initiate a long position in the next 72 hours.