The Passive DGI Core Portfolio: Income, Safety, And Growth

by: Financially Free Investor

A DGI strategy provides everything that a retiree needs: decent income, relative safety, and reasonable growth.

We provide the review of our Passive DGI portfolio for the first quarter of 2018.

Updates on changes and additional investments made since January 2018.

Updates on dividends collected and overall YTD performance.

The concept of Dividend Growth Investing (or DGI) is simple and rational. DGI generally means that you invest in a set of dividend-paying stocks that grow their dividend payout year after year. If you are still in the accumulation phase, reinvest (drip) the dividends, which results in more shares and higher future income. With each passing year, this growth of dividend-income becomes bigger and bigger. If implemented with some prudent planning and over an extended period of time, the DGI strategy can provide everything that a retiree needs, decent income, relative safety and reasonable growth. The only drawback of this strategy that we can think of is that one would need a sizable amount of savings to generate the required amount of dividend income that one could live off comfortably.

In the last decade, DGI has been very popular. One of the primary reasons has been the low-interest rate regime of the last several years, which forced investors to chase income securities of all stripes, including DGI stocks. This has resulted in steep valuations for many of the dividend-paying companies. That’s why we need to be mindful of the quality and valuations of the companies that we choose. One very effective way to deal with valuations is not to invest in one lump sum but over a long period of time, like 5-10 years. This is one of the tenets of our Passive DGI portfolio.

At the same time, we may also point out that the importance of the ability to pick exceptional stocks is generally overstated. As long as you are able to pick a solid and diversified group of dividend paying stocks with a 10-year or more history of growing dividends and buy them at fair prices, you should do just fine. To ensure a fair price, one could buy using dollar-cost-averaging. We should mix high-yielding, slower growth companies with low-yielding fast growing ones. We should also diversify among various sectors and industries.

We also explained why DGI is a superior income strategy in one of our previous articles:

We also believe that a well-thought-out DGI strategy would outperform the broader market over the long-term. It will also offer less volatility and smaller drawdowns during recessions and bear markets. In the bear market of 2008-2009, while the S&P500 had more than 50% drawdown from peak to bottom, most well-diversified DGI portfolios saw only between 30-35% drawdowns. You may like to check some back-testing results in one of our previous articles. Though 30-35% drawdown is not easy to stomach for most people; but a significant dividend-income would make it little easier to wait out the downturn. When you start a new DGI portfolio, you would normally begin with a low current yield of something like under 3%, but if you were to reinvest the dividends, the yield on cost could grow very quickly. The best part is that it is a far superior strategy to draw 4% inflation-adjusted income (on the invested capital) compared to index investing since it lets you do this without ever selling the shares.

The Passive DGI Core Portfolio

We launched this DGI portfolio some three and a half years ago in August 2014. We like to call it a “Passive” portfolio because it requires minimal management. Many times there is no action in this portfolio for months. Our basic intent was to create a well-diversified portfolio with mostly blue-chip companies which had a history of raising dividends year after year and hold them for years. We also wanted to invest over an extended period of time so as to take advantage of Dollar-Cost Averaging and create a decent enough income stream without the need to ever withdraw the capital by selling shares.

A Recap Of The Basic Portfolio Structure:

The underlying principles of the portfolio were:

  1. Select 30 solid dividend-paying, dividend-growing companies and invest the initial capital divided equally.
  2. Invest additional money on fixed intervals according to a pre-determined schedule. Use dollar cost averaging and buy in a spread-out manner on a set timetable.
  3. Stay consistent, and rarely sell or replace a company.
  4. Reinvest the dividends for the first 5-10 years or more (depends on personal situation), to grow the yield on cost (YOC). Thereafter, reap the benefits!

This is what we have done so far:

  • $1,000 invested on August 1, 2014, in each of 30 original stocks.
  • $1,000 invested on November 3, 2014, the first trading day of November 2014, in each of 30 stocks.
  • Starting February 2015, every year on the first day of trading in February, we invested $1,000 in each of 30 stocks. This was completed for the years 2015, 2016, 2017 and 2018. The same routine will continue until the year 2024.

The original article that launched the portfolio can be accessed here and here.

Below is the current list of 36 stocks (30 original + 6 added subsequently), with the industry/sector information for easy reference.


Company Name

Aerospace & Defense

Lockheed Martin Corp. (NYSE: LMT)

United Technologies Corp. (NYSE: UTX)


Monsanto Co. (NYSE: MON)

Beverages - Non-Alcoholic

PepsiCo Inc. (NYSE: PEP)

Business Services

Automatic Data Processing (NASDAQ: ADP)

Consumer Goods (Packaged, Food, and Cleaning products)

Colgate-Palmolive Co. (NYSE: CL)


Procter & Gamble Co. (NYSE: PG)

Clorox Co. (NYSE: CLX)

Drug Manufacturers

Johnson & Johnson (NYSE: JNJ)

Teva Pharmaceutical ADR (NYSE: TEVA)

Pfizer Inc. (NYSE: PFE)

ETF - International Dividend (Foreign Large Value)

SPDR S&P International Dividend (NYSEARCA: DWX)

Industrial Products and Chemicals

Emerson Electric Co. (NYSE: EMR)

Air Products and Chemicals (NYSE: APD)

Insurance - Life

Aflac Inc. (NYSE: AFL)

Medical Devices

Abbott Laboratories (NYSE: ABT)

Medtronic Inc. (NYSE: MDT)

Oil & Gas

Chevron Corp. (NYSE: CVX)

Exxon Mobil Corp (NYSE: XOM)

Valero Energy Corporation (VLO)


Realty Income Corp. (NYSE: O)


Omega Healthcare Investors, Inc. (NYSE: OHI)

Ventas, Inc. (NYSE: VTR)


McDonald's Corp. (NYSE: MCD)

Retail - Defensive, Drugstores

Walmart Inc. (NYSE: WMT)

Walgreens Boots Alliance (NASDAQ: WBA)

CVS Health Corp. (CVS)


Microsoft Corp. (NASDAQ: MSFT)

Qualcomm Inc. (NASDAQ: QCOM)

Intel Corp. (NASDAQ: INTC)

Cisco Systems, Inc. (NASDAQ: CSCO)

Tobacco Products

Altria Group Inc. (NYSE: MO)

Telecommunications Services

AT&T Inc. ( T)

Waste Management

Waste Management, Inc. (NYSE: WM)

Brief Highlights From Annual Investments (February 2018)

As per our annual schedule of contribution in the first week of February, we added $30,000 of new money to this portfolio. We invested $1,000 into 29 out of 36 securities. We did not add new money to DWX, HCP, QCOM, T, TEVA, WMT, and XOM.

Additional Buy/Sell After February 2018



Starting April 2017, we made a temporary change with regards to the dividend reinvestment policy: We stopped reinvesting the dividends automatically. This was to allow us to build some cash position and make some opportunistic buys from time to time.

Dividends in 2014


Dividends in 2015


Dividends in 2016


Dividends in 2017


Dividends in 2018 (until 04/14/2018)


Total dividends since inception


Forward Current Yield: (6,486/225,035)


Forward Yield (on cost) (6,486/180,000)


Dividend Cuts or Freezes in 2016/2017/2018

  • In 2017, CVS (CVS Health) announced that it was freezing its dividend to current levels of $0.50 per share due to its pending acquisition of Aetna Inc. (NYSE:AET). At this point, we have invested $1,875 only, just 0.69% of the total portfolio.
  • MON (Monsanto) increased its dividend last time in October 2015 to $0.54 per share. Since then it has not increased the dividend rate and has paid the same dividend in the last 11 quarters.
  • HCP did not increase its dividend in 2017 after it cut its dividend by 35% in 2016, following ManorCare assets spin-off. It has been paying $0.37 per share since 2016 for the last 6 quarters.
  • TEVA cut its dividend by 75% in August 2017. Subsequently, it suspended or eliminated the dividends entirely in fourth quarter 2017.

Dividend Increase Restored

CVX (Chevron) had paid the same $1.08 quarterly dividend for five quarters, until February 2018. It has finally raised the dividend to $1.12 per share, an increase of 3.70%.

Dividend Increases Declared In 2018

2017 summary: Out of 35 individual stocks, dividends were increased by 30 companies, kept the same by 4 companies, and cut by one.

2018 (until 04/14/2018) summary: One company (TEVA) pays no dividend currently. There is one ETF (DWX) in the portfolio that pays the variable amount of dividend. Three companies (CVS, MON, HCP) have their dividends frozen currently.

Out of remaining 31 companies, 19 have announced dividend increases. The average increase has been 7.91%

In the above table, the greyed-out rows show the companies that have frozen the dividend. The rows highlighted in “red,” have yet to announce a dividend hike in 2018.

Total Return and Relative Performance

Here is a snapshot of relative performance as of April 17, 2018, created using the Morningstar Portfolio Tool. The DGI portfolio and Morningstar Market-Index are represented by green and blue lines, respectively:

Portfolio positions as of 04/17/2018:

In case, the above image (Google-sheet) is too difficult to read, here is the image of the portfolio from excel:

The good, the bad and the ugly

As of 04/17/2018, the portfolio has 36 positions, and when we include all dividends (the amounts that were not dripped), this is how they performed:

  • 2 positions with over 70% gains:

MSFT (+94.7%), LMT (+74.29%)

  • 6 positions with over 50-70% gains:


  • 2 positions between 40% and 50% gains:


  • 9 positions between 20% and 40% gains:


  • 4 positions between 10% to 20% gains:


  • 6 positions between 0% to 10% gains:


  • 3 position with < 10% loss:


  • 2 positions with a loss from -10% to -20%:


  • The worst performers

HCP (-28%), TEVA (-66%)

Stocks that are in negative territory or have struggled recently:

CVS and WBA:

CVS and WBA are the two largest pharmaceutical retail companies in the US. CVS is currently in the process of acquiring Aetna and expand in the health-insurance business, which is expected to be approved. However, this will add to CVS’s debt load substantially even though the acquisition is expected to be accretive. The share price of CVS is down 20% from its 52-week high of $84 a share. WBA shares are down more than 26% from their 52-week high of $89.67 a share.

There are concerns in the market about the margin contractions in the retail pharmaceutical business due to competition from e-commerce. However, we feel this fear is unfounded to a large degree, and these companies will find a way to stay competitive and profitable, especially because of their vast footprint and expertise in this business. Their shares have been beaten down, and their forward P/Es are very attractive at 10.3 and 10.9, respectively.


As it is widely known that Broadcom’s (AVGO) hostile takeover bid of QCOM was blocked by President Trump on national security concerns, since then the share price of QCOM has retracted to its pre-bid levels. There are additional concerns and risks related to the possible fallout from the FTC complaint filed early this year.

We had stopped adding fresh money to QCOM after Feb. 2015, but we held on to our existing position, which is less than 1.2% of the portfolio. We will continue to hold our small positions even though the risks remain and growth is uncertain, but the yield is attractive at 4.14%.


Even though our position in OHI has been in the negative (about -10%), we consider the company safe in terms of its dividends. The share price has been impacted due to the headwinds to the REIT sector in general and the SNF (skilled nursing facility) sector in particular.

On the positive side, OHI is one of the most diversified and largest SNF REIT with a presence in 42 states, and its properties are leased to some 77 SNF operators. The largest tenant contributes only about 10% of the company’s revenue. We believe, in the long term, the demographic trends will continue to provide strong demand for OHI’s assets. Our position is about 2.2% of the portfolio.


HCP has been underperforming since its trouble with one of its large tenants HCR ManorCare and subsequent spin-off of all skilled-nursing business to Quality Care Properties (QCP). This led to a dividend cut that was the first in its history of raising dividends for 40+ years. After the spin-off and dividend cut, we sold out of QCP shares and stopped adding new money to HCP. But we have kept our existing position intact, since this is a buy and hold kind of portfolio. Recently, most of the REIT sector companies have struggled. A healthy dividend of $1.48 per share, well-covered by its FFO, will keep the income coming, while the company improves its business over time. After including all dividends and the sale proceeds from QCP, our position is down about -28% and not -40% as shown in the table above.

The ugly: TEVA

TEVA is our worst performer, down by nearly 65%. In 2017, the company announced a 75% cut in its dividend and then subsequently suspended the dividends entirely. Even before the dividend cut, there were signs of trouble, and that’s why, back in Feb. 2017, we stopped adding fresh money to this position. TEVA does carry a lot of debt but still has a sizable cash flow, and a dividend suspension is expected to save more than a billion dollars a year, which can be used to reduce debt. The company is also undergoing a painful restructuring to save additional dollars.

Since Oct. 2017, from the depressed levels of $11 a share, the share price has come back quite a bit to the current levels of $18 a share. Our position is only about 0.60% of the portfolio, and the risk-to-reward ratio is very low, that’s why we are holding our small position. Also, it does not hurt when you hear the news that the "Oracle of Omaha" Warren Buffett has recently invested $357 million in the company,

TEVA’s dividend elimination resulted in a reduction of only about $100, which is marginal considering the total expected dividend of $6,486 in 2018.

Concluding Remarks

We follow and recommend many different strategies and portfolios, not just DGI. But DGI portfolio stands out on one quality that is its simplicity. This portfolio is simple, easy to implement and hassle-free. We believe the DGI portfolio strategy described above is the simplest way to accumulate wealth over a long period of time.

In our own allocation model, we invest only about 40% of our investment assets into DGI. This is because we believe in strategic diversification and we have other compelling strategies that we are invested in. But certainly, that requires more effort and is not for everyone. For more passive type investors, a DGI strategy is ideally suited as it requires very little effort, mostly just a few times a year.

We feel in the long term this portfolio will offer better performance, lower volatility, and much higher dividend yields than the broader market. In addition, it requires minimal management. The current yield based on 2018 projected dividend income is roughly 2.88%. However, the yield-on-cost is very decent at 3.60%, compared to less than 1.9% yield from S&P 500.

It is well-accepted notion that over a long period of time, the dividend-paying companies provide a higher total-return compared to non-dividend-paying companies or the overall index. In addition, there is no on-going expense or annual fees for holding the shares unlike most ETFs or mutual funds. If your investment time horizon is long enough, say more than 20 years, just a few percentage points of difference in performance can make a big difference. However, timing can matter, and that’s why we do not recommend investing the entire capital in one lump-sum, but over a period of time using dollar-cost-averaging.

Our regular readers know that in addition to a DGI Core portfolio, we invest in alternate portfolio strategies, mainly to enhance the current income and to hedge the risks by using Rotation strategies. Below is our investment allocation model, and as you can see the DGI portfolio forms the foundation of the overall strategy. These allocations are just for broad guidance; everyone should decide what is right for them based on his/her goals and risk tolerance. The other two portfolios are focused on high income and risk management and are suited for active investors.

Author’s Note: The Passive DGI Core portfolio is published as free-content. Other portfolios such as ‘8% Income CEF portfolio,’ ‘6% Income Risk-Adjusted portfolio,’ ‘401K-IRA-Conservative portfolio,’ ‘Sector-Rotation ETF portfolio’ and ‘High-Growth BTF portfolio’ are part of our SA Marketplace service ‘High Income DIY Portfolios.’ For more details, please see at the top of the article just below our logo.

Full Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolio presented here is a model portfolio for demonstration purposes; however, the author holds many of the same stocks in his personal portfolio.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, MON, ADM, MO, PM, KO, DEO, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VTR, CVX, XOM, VLO, HCP, O, OHI, NNN, STAG, WPC, MAIN, NLY, PCI, PDI, PFF, RFI, RNP, UTF, EVT, FFC, KYN, NMZ, NBB, HQH, JPC, JRI, TLT, DAE , ARCC, JPS, TLT. 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.

Additional disclosure: Please see our 'SA Profile' for our long positions.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.