- $574 in dividends were gained during the month, a 92% increase over last year.
- I've removed my Gilead, Amgen, Wells Fargo and J.M. Smucker holdings.
- I've reinvested that money across existing passive ideas and individual holdings.
February was another busy month both for the broad market and for me as well. I've continued to transition my portfolio to having lesser individual holdings and having more of my portfolio be dividend ETF concentrated. This was my stretch goal for this year, in fact I wasn't even sure I wanted to move in this direction. For me, I've come around to the idea that I want to be more passively invested.
The reasons are numerous but the recent bet by Warren Buffett and discussed at length in his annual letter solidified for me this concept. I still love having individual holdings, don't get me wrong, but I want to be able to focus more on fewer names and letting some of the existing ETF products help drive a larger share of the ship.
It's always worth remembering that there are opportunity costs associated with any investment. Any dollar invested in "Company A" takes away a potential dollar in everything else. I don't have time for average. I have two young boys and plenty going on in my life. I can easily buy the "average" with a variety of low cost and passive ETFs that also fit my investing profile.
I'll cover in more detail my moves later in the article.
For anyone interested in seeing changes in real time, I have my portfolio and dividends tracked on Dividend Derek. I also have a trimmed version that you can freely take for yourself if you wish, found here.
I've received some questions in the past so you can save off a copy by selecting "File" -> "Make A Copy".
Having had a chance to see and review my goals over the course of the year, I have a new set of goals for 2017.
- I want my holdings to have a weighted 1 year dividend growth rate of at least 7%.
- By the end of 2018, I want to have a projected dividend income of at least $7,725.
- I want to suffer no dividend cuts.
Notes About My Goals
This year I'm a little more aggressive with my desire for good increases. I'm targeting an overall average of 7% (up from 5%). After analyzing my performance I believe I need to demand more from my holdings. My portfolio should be able to deliver consistently strong performance with how long I have until retirement. Additionally as I previously mentioned, I believe the new tax plan will have the incentive of driving more money back to shareholders.
After February the average is over 9% thanks for solid raises from Cisco, Corning, T. Rowe Price and Prudential during the month. This still includes the 0% expected from CVS.
For my income goal, here's how I roughly calculated it
|7% Organic Dividend Growth|| |
|Maxing 401k @ 3%|| |
|Employer Match|| |
|End of 2017 Income||$7,725|
I started by rounding my starting income to $6,800. From there I added 7% average organic dividend growth.
Next is the money coming from maxing my 401k contributions. The cap was raised for 2018 so I can contribute a maximum of $18,500. I am also assuming that the money buys an average of a current 3% yield.
From there I add in dividends purchased with employer match money. Sum all that up and brings me to my goal of $7,725.
Lastly, I really don't want to see a dividend cut. The goal sounds rather obvious but there is a lot of legwork that goes into making that come true. As I've found out the past two years, it's not as simple as it may look.
These are the general guidelines I will review to see if something is worthy of adding to my portfolio or whether I will add to an existing position.
- Being a member of David Fish's Dividend Champion, Challenger and Contender list - obviously a longer streak is preferred.
- I prefer companies with a Chowder rule over 8%, obviously higher is better. Telecoms, REITs and utilities can get a pass due to their higher initial starting yield.
- No one individual holding should be weighted >7% of the portfolio's total cost or weighted >7% of the portfolio's total dividend income. ETFs are excluded from this. As an example, AT&T is over 6% of my income so I'm tapped out for a while here.
- Investment grade holdings >BBB+ should generate 95% of the portfolio's dividend income. This is currently at 87.25% due to the combined weight of REIT holdings that tend to lack the superior credit rating due to their nature.
- I want to see steady earnings growth over time; this will generally remove commodity-based companies.
- I like cash cows. Good profit margins (> 10%) are appreciated, though not required, if the company has a wide moat due to its business.
- I like to see shareholder-friendly management, a healthy and rising dividend and willingness to buy back shares, though in practice, the buybacks aren't always done at opportune times. A good metric to look into is the "total shareholder yield". This aggregates net dividends, buybacks and debt reduction.
- Though a small part of my portfolio, I do have some non-dividend-paying stocks like Facebook (FB), Google (GOOG) (GOOGL) and Amazon (AMZN). These are the long tail ideas that may continue to generate significant alpha over time. I want to focus on some of these ideas more so than I am right now, these may become the great dividend ideas of the future.
- Perhaps most importantly, the valuation needs to be right per F.A.S.T. Graphs. The stock should be trading at fair value or better for an appropriate timeline (12+ years if possible). With a longer time frame I can see how shares fared during the Great Recession, and this also removes some of the recency bias that can come from only analyzing valuation during this extended bull market.
- I will also use Simply Safe Dividends and the information provided by Brian on his site. Among a plethora of information available, he has a dividend scorecard where companies are ranked in terms of dividend safety, growth and yield. I aim to pick companies that are in the 80+ safety range, though not always.
There are only a few reasons I'll sell a stock, though any of these events is not a guarantee I'll do so.
- Dividend cut.
- Company degradation - This could be things like deteriorating balance sheets, loss of competitive advantage, loss of credit ratings. These factors would come to light before a dividend cut manifests. This may also appear in a streak of less than expected dividend increases. The dividend increase is the more visible outward sign of a company's success. A paltry increase or two may underscore problems below the surface.
- Wild overvaluation - This becomes a bigger factor if there is something at a fair valuation that I wish to purchase with the proceeds. I will admit that several things I have sold have continued to defy financial gravity so I am more becoming of the mind of just ignoring overvaluation if the underlying business continues to operate well.
- I just don't want to own it. When I pull this card I will more fully explain my reasoning. Part of the beauty of owning individual companies is choosing where I put my money. I can opt to not support companies, products, management, etc. that I do not agree with. An example of this could be Wells Fargo (WFC) that has management issues and illegal/unethical business practices.
- Based on expectations the money is better passively invested or focused into better ideas.
One tactic I've been using lately when adding to an existing holding is buying additional shares prior to the ex-dividend date after the company has announced its yearly increase. The increase amount gives a quick "at a glance" look into how management things the company is operating. This can be confirmation that the investment thesis is indeed working well. Sometimes the converse can be true too, being snubbed with a "bad raise" can be a red flag that things are not as they seem and it's time to research what's up. I've done this a few times already with MO, SBUX, GLW, PRU and very soon to be HD.
Most importantly, this was not done to chase dividends but to strategically add to a position that was worthy of being added to. Trees don't grow to the sky and neither do dividend yields. A quality company that has a nice dividend increase should see their stock price rise by a similar amount over the course of the year, readjusting to the new and higher dividend amount. By jumping the gun, you can speed up the compounding process.
If this sounds interesting to you, you should check out my weekly article as I give the full list of these companies. I also have upcoming ex-dividend functionality on my site Custom Stock Alerts to help me keep tabs on these increases.
- Corning (NYSE:GLW) declares $0.18/share quarterly dividend, 16.1% increase from prior dividend of $0.155.
- Prudential Financial (NYSE:PRU) had declared $0.90/share quarterly dividend, 20% increase from prior dividend of $0.75.
- Omega Healthcare Investors (NYSE:OHI) declares $0.66/share quarterly dividend, 1.5% increase from prior dividend of $0.65.
- Cisco Systems (CSCO) declares $0.33/share quarterly dividend, 13.7% increase from prior dividend of $0.29.
- T. Rowe Price (NASDAQ:TROW) declares $0.70/share quarterly dividend, 22.8% increase from prior dividend of $0.57.
- Home Depot (NYSE:HD) declares $1.03/share quarterly dividend, 15.7% increase from prior dividend of $0.89.
|Name||Ticker||DRIP Basis||Sector||CCC Status||S&P Credit Rating|
|Diageo PLC||DEO||$97.87||Consumer Discretionary||Challenger||A-|
|Walt Disney||DIS||$96.44||Consumer Discretionary||Challenger||A|
|Duke Energy Corp||DUK||$63.09||Utilities||Contender||A-|
|Home Depot||HD||$131.10||Consumer Discretionary||Challenger||A|
|Johnson & Johnson||JNJ||$116.29||Healthcare||Champion||AAA|
|Omega Healthcare Investors||OHI||$28.17||REIT||Contender||BBB-|
|Schwab US Dividend Equity||SCHD||$37.04||ETF|
|Tanger Factory Outlets||SKT||$26.43||REIT||Contender||BBB+|
|S&P 500 High Div Low Volatility||SPHD||$39.65||ETF|
|Stanley Black & Decker||SWK||$89.15||Industrials||Champion||A|
|T. Rowe Price||TROW||$64.63||Financials||Champion||A+|
|Under Armour||UA||$32.82||Consumer Discretionary||BB+|
|United Technologies Corporation||UTX||$84.72||Industrials||Contender||A-|
|V.F. Corp||VFC||$50.94||Consumer Staples||Champion||A|
I simplified the reporting reporting this month so it's easier to digest the moving pieces.
Here are the column definitions for the ones that may not be evident:
- DRIP Basis: "Cost" / Shares Total
- CCC Status: The classification from From David Fish's "CCC" list
I'm down to 42 positions with closing out four positions during February.
I wrote about Corning in a recent article so it should come as no surprise that I added to my position. I love science companies, I love companies that have a healthy mix of growing the business and rewarding shareholders.
At a glance, the company scores great across the different metrics from Simply Safe Dividends. Safe dividend, rapidly growing dividend (thanks Corning for the 16% increase) with an above average yield.
On top of that, the company has a large capital return program in place. From the linked article:
As we shared, the strategy and capital allocation framework outlines our leadership priorities. We continue to focus our portfolio and utilize our financial strength to extend our leadership, drive our growth and reward our shareholders. Under the Framework, we target generating $26 billion to $30 billion in cash through 2019. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends, and we invest $10 billion to extend our leadership and deliver growth across all of our market access platforms. We made great progress towards those goals since we announce the Framework in October of 2015.
Our cash generation is on target, and through the end of 2017, we return $9 billion through share repurchases and dividends. We've invested $4.5 billion under the Framework in RD&E capital expenditures and acquisitions. We're starting to see the returns already. As you can see in our most recent results 4-year sales increased 8%, EPS increased 11% and we expect these returns to accelerate. We believe that these results illustrate to benefits of our framework. We are best in the world in three, core technologies, four manufacturing and engineering platforms, and five market access platforms.
The emphasis is mine but the company is getting the job done, returning capital while still heavily investing in the business. Most importantly, both the top and bottom line are expected to grow at a high single / low double digit clip.
Schwab US Dividend Equity ETF (SCHD)
The SCHD ETF has been my favorite dividend ETF for a few years now as a combination of its low cost and use of fundamental metrics as a filtering process to build the index. I'm planning a follow-up article covering SCHD but at a high level these companies in the index have a 10+ years of dividend increases and meet certain yield and quality metrics. Adding here also gets me closer to a more streamlined portfolio.
S&P 500 High Dividend Low Volatility ETF (SPHD)
This is the yin to my SCHD yang. SPHD takes a different approach by (true to its name) takes the highest yield stocks in the S&P that have the lowest volatility to create a portfolio. By its selection nature this will tilt more to the utilities and real estate sectors which are underweight and absent from SCHD respectively.
This fund may lag in a rising interest rate environment but that has not been demonstrably proven yet. In any event, right now my SPHD:SCHD ratio is approximately 1:3.
In my opinion Starbucks is another long tail dividend idea similar to Apple. Dividend initiators have a history of outperformance and I believe a strong consumer brand like Starbucks will continue to be a perennial market beater. While the latest quarter may have disappointed some investors, China remains a large growth opportunity for the company and management continues to reward shareholders with large dividend increases and buybacks.
Another point to make is that companies like Apple and Starbucks won't make SCHD until they have 10 years of dividend growth under the belts and with their low yields probably won't ever make SPHD.
Prudential has been an under the radar type of stock. I first purchased it when it carried a PE of 7 and a yield over 4%. It's been one of my best performing stocks and management recently have rewarded shareholders with another 20% dividend increase. I decided to use the upcoming opportunity to add prior to the ex-dividend date to capture that.
I'm going to cover selling these two as one item. After reading over the latest earnings transcripts, slides and article commentary here on SA I've come around to the fact that I don't truly understand the biotech companies. As I mentioned with Corning, I love science, I love life bettering or saving drugs but I don't feel that I have any kind of advantage as an individual investor with regards to the biotech industry.
In fact, both companies just had nice dividend increases but neither is expecting much growth this year. It would be more prudent in my mind to take the average provided by a diverse and quality filled dividend ETF. I don't have the ability to "read the tea leaves" on where a particular biotech company is heading.
Wells Fargo (WFC)
Well, this one was bound to happen, I actually use it as an example as one of my sell criteria. So after all the various account scandals, the last shoe to drop was the "mic drop" by Janet Yellen. Wells Fargo's asset base will be capped until a slew of changes are made. While those changes should ultimately help, I see below average returns for the forseeable future. I'll hold it vicariously through Uncle Warren.
J.M. Smucker (SJM)
Lastly, I sold my shares of J.M. Smucker. I waited until earnings and the clarification that would bring. Unfortunately, I didn't like said clarity. Results continue to be weak, top line growth is virtually non-existent. The company is in desperate need of a hit. They upped their expected EPS for the full year due to the tax plan, but so has everyone else.
I don't see the catalyst here to drive the stock higher. With full hindsight bias, the mistake I made was buying at about $120 and not $100. I think it the roughly $120 I paid was a fair price though not a great price.
Charts and Graphs
DividendsThe $574 was 92% improvement over February 2017. Not shown here but it was an 11% improvement in quarter over quarter performance vs November 2017.
With my forward looking projected dividend income, the $6913 currently expected is 32% higher year over year. With all the moves I made during the month I still increased the expected amount by about 1%.
With about $9,500 in cash currently and most of a full year of 401k contributions yet to come, I've got a lot of firepower at my disposal.
Income by SectorI receive 1/4 of my income from REITs with the rest of the sectors having a fair allocation. I myself am a little confused as to which way REITs will go, I've now seen stories and market moves both for and against REITs based on rising rates.
Sector AllocationsI'm still targeting some more industrial exposure, I'd like to add to my UTX and SWK positions. Perhaps the market will temper tantrum some over the new tariffs being imposed and give me an opportunity at a reasonable valuation.
I had another strong performing month with another record setting amount of dividends collected. The proof is in the pudding as they say and I have a stable of companies that wishes to pay me more and more every year.
Last month I concluded that the market had just recently been falling and lo and behold, history repeating itself. I built and run Custom Stock Alerts and hope to have some of my stock alerts triggered. Stop by and get email or text alerts on your stocks.
Let me know what you think, do you agree or disagree with adding more ETF exposure to focus on fewer names? I know ETF can be a 4-letter word so let me know your thoughts!
This article was written by
Analyst’s Disclosure: I am/we are long AAPL, ABT, AFL, AMP, AMZN, ANTM, BRK.B, CMI, CSCO, CVS, DEO, DIS, DUK, FB, GLW, GOOG, HD, JNJ, JPM, MDT, MO, NKE, O, OHI, PRU, PSA, SBUX, SCHD, SKT, SPHD, STAG, SWK, T, TROW, TRV, UA, UTX, VFC, VTR, VZ, WPC, WSM. 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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