The Next Generation Dividend Growth Portfolio Q1 Update - Bring On The Dividends

|
Includes: ABBV, ADP, AFL, AMGN, AVGO, BA, CL, CSCO, CVX, ENB, 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 Next Generation Dividend Growth Portfolio outperformed the Legacy Portfolio in capital appreciation and dividend growth during Q1. Surprisingly, the portfolio also outperformed the S&P 500.

The Legacy Portfolio is generating 1.18x the dividend income than the Next Generation Portfolio but its dividend growth is less than half.

It would take 2 years for the Next Generation Portfolio to collect more dividends in Q1 than the Legacy Portfolio.

The Next Generation, dividend growth portfolio, dividend growth investing, DGI Welcome to the first progress report on the progress of the Next Generation Dividend Growth Portfolio. I will also apologize for not getting this out sooner but as readers of my other model portfolio have learned, I have been working on a spreadsheet that would calculate the dividends and the progress of the portfolio as well as doing data entry. But now that I have something to work with, I will present the Q1 results.

For first time readers, you may want to click here to read my article on how I developed this portfolio. In a quick summary, most of my readers know that I focus on dividend growth. I also believe that the great dividend companies of yesterday are not necessarily the great dividend companies of today. What I mean by that is that each company generally has a season. Dividend growth is usually greatest when it is initiated or when earnings growth is high. Many of the best dividend growth stocks of yesterday are now raising their dividends between 5-8% which is nothing to be disappointed with but when they were raising their dividends by double digits in the past and have slowly lowered that growth, you get the sense that the best growth days are likely behind them. I believe that high growth in the beginning is important when investors are building a position in these companies because the income it generates in the first few years propels the growth of that portfolio particularly if the investor is reinvesting those dividends. Eventually, the growth will slow down but, the investor will have accumulated so many more shares due to the high growth compared to a typical payer, that it will surpass the dividend income of the typical payer and lead to a wealthier retirement. That is why I have developed the Next Generation Dividend Growth Portfolio and will compare its results against what I have called The Legacy Dividend Growth Portfolio which is a combination of your typical dividend growth stocks.

Volatility in the market

Since the end of January, volatility has been our constant companion it seems. The market, as defined as the S&P 500 (SPY), has declined about 8% from its high several months ago now. The stocks in both the Next Generation Dividend Growth Portfolio and the Legacy Portfolio have been affected but not in the same way. The following table shows the gains/loss of each stock as of April 23.

The Next Generation Dividend Growth Portfolio

The Legacy Dividend Growth Portfolio

Company

Ticker

Price (Jan 2)

Price (April 23)

Gains/

Loss

Company

Ticker

Price (Jan 2)

Price (April 23)

Gains/ Loss

Abbvie

(ABBV)

$98.41

$93.17

-5.32%

AFLAC

(AFL)

$43.99

$45.30

2.99%

Automatic Data Processing

(ADP)

$115.99

$117.10

0.96%

Colgate Palmolive

(CL)

$75.14

$66.37

-11.67%

Amgen

(AMGN)

$177.00

$174.66

-1.32%

Chevron

(CVX)

$127.58

$123.58

-3.14%

Broadcom

(AVGO)

$267.01

$233.45

-12.57%

General Mills

(GIS)

$59.04

$44.56

-24.53%

Boeing

(BA)

$296.84

$337.16

13.58%

Genuine Parts Company

(GPC)

$96.58

$88.79

-8.07%

Cisco

(CSCO)

$38.86

$44.25

13.87%

IBM

(IBM)

$154.25

$145.86

-5.44%

Enbridge

(ENB)

$40.14

$31.01

-22.75%

Johnson & Johnson

(JNJ)

$139.23

$126.83

-8.91%

Corning

(GLW)

$32.62

$27.50

-15.70%

Kimberly Clark

(KMB)

$119.07

$98.52

-17.26%

Hasbro

(HAS)

$92.08

$85.50

-7.15%

Coca-Cola

(KO)

$45.54

$43.98

-3.43%

Home Depot

(HD)

$188.03

$177.66

-5.52%

Lockheed Martin

(LMT)

$318.54

$358.60

12.58%

Honeywell

(HON)

$153.71

$148.62

-3.31%

McDonalds

(MCD)

$173.22

$158.99

-8.21%

Hormel Foods

(HRL)

$36.36

$35.77

-1.62%

3M

(MMM)

$235.64

$215.88

-8.39%

Hubbell

(HUBB)

$134.20

$118.86

-11.43%

Altria Group

(MO)

$70.74

$56.57

-20.03%

Inter Perfums

(IPAR)

$43.45

$46.55

7.13%

Microsoft

(MSFT)

$85.95

$95.35

10.94%

Illinois Tool Works

(ITW)

$165.27

$156.60

-5.25%

Realty Income

(O)

$56.62

$49.13

-13.23%

Lockheed Martin

(LMT)

$318.54

$358.60

12.58%

Pepsi

(PEP)

$118.06

$102.58

-13.11%

Magna International

(MGA)

$57.16

$59.50

4.09%

Proctor & Gamble

(PG)

$90.65

$73.00

-19.47%

Marathon Petroleum

(MPC)

$67.18

$79.85

18.86%

Philip Morris

(PM)

$104.39

$83.67

-19.85%

Penske Automotive Group

(PAG)

$47.84

$44.96

-6.02%

Southern Company

(SO)

$47.17

$45.24

-4.09%

Phillips 66

(PSX)

$101.75

$111.45

9.53%

AT&T

(T)

$38.54

$34.89

-9.47%

Starbucks

(SBUX)

$57.63

$57.86

0.40%

Target

(TGT)

$67.63

$70.95

4.91%

Store Capital

(STOR)

$25.84

$24.14

-6.58%

Visa

(V)

$114.51

$124.46

8.69%

Texas Instruments

(TXN)

$105.57

$97.50

-7.64%

Walgreen Boots Alliance

(WBA)

$74.95

$64.60

-13.81%

VF Corporation

(VFC)

$74.42

$78.10

4.94%

Wal-Mart

(WMT)

$98.59

$86.10

-12.67%

Valero Energy

(VLO)

$92.80

$109.26

17.74%

ExxonMobil

(XOM)

$85.03

$79.57

-6.42%

1.40%

-7.64%

Source: Seeking Alpha, table created by the author

What impressed me the most was the fact that the Next Generation Dividend Growth Portfolio gained (1.40%) over this period of time however there have been a number of companies that have taken it on the chin! Large declines since initiation were observed with GLW (-15.70%) and ENB (-22.75%) in particular. However, this was obviously balanced off by some notable gainers including MPC (18.86%) and VLO (17.74%). On the other hand, the Legacy Portfolio was down 7.64% led by sharp declines by GIS and MO among others. Overall, the Next Generation Dividend Growth Portfolio had 14 stocks in negative territory vs. 20 stocks in the Legacy Portfolio.

Lastly, here is a view of the performance of the portfolios compared to the SPY over the period.

Source: Stock Rover

For the moment, that is all I going to say because capital appreciation is not the primary objective but it is an objective and will be interesting to monitor over the long term.

Bring on the dividends!

Many of the company's in both portfolios have announced a dividend increase during Q1 and have made quarterly or other payments.

So that I set the record straight, I have made the decision to not reinvest the dividends in this model portfolio however I may undertake an analysis of such at a later time. There are multiple reasons. The first is that not all dividend growth investors choose to reinvest their dividends for many reasons but one of the primary ones is overvaluation of the stock that would be reinvested in. I follow this line of thinking and would rather reinvest in more attractively priced stocks in order to maximize my purchasing power than get less in return when the stock is overpriced. The other reason includes a lack of dividend income to actually purchase a whole share. Even in the model portfolio, the quarterly dividend received is generally insufficient to purchase a whole share. Lastly, not all brokerages or companies permit the purchase of partial shares (such is my personal case). At the end of the year or the start of the new year, I may consider purchasing shares using the dividend income but I will have to consider the impact on the objectives of the portfolios.

Now let's dig into the dividends of each portfolio. The following table shows which companies increased their dividends and by how much.

The Next Generation Dividend Growth Portfolio

The Legacy Dividend Growth Portfolio

Company

Ticker

Old Quarterly Rate

New Quarterly Rate

Increase %

Div. Inc. Ann. Month

Company

Ticker

Old Quarterly Rate

New Quarterly Rate

Increase %

Div. Inc. Ann. Month

Abbvie

ABBV

$0.71

$0.96

35.21%

FEB

AFLAC

AFL

$0.26

Automatic Data Processing

ADP

$0.63

Colgate Palmolive

CL

$0.40

$0.42

5.00%

MAR

Amgen

AMGN

$1.32

Chevron

CVX

$1.08

$1.12

3.70%

JAN

Broadcom

AVGO

$1.75

General Mills

GIS

$0.49

Boeing

BA

$1.71

Genuine Parts Company

GPC

$0.68

$0.72

6.67%

FEB

Cisco

CSCO

$0.29

IBM

IBM

$1.50

Enbridge

ENB

$0.52

Johnson & Johnson

JNJ

$0.84

Corning

GLW

$0.16

$0.18

16.13%

FEB

Kimberly Clark

KMB

$0.97

$1.00

3.09%

JAN

Hasbro

HAS

$0.57

$0.63

10.53%

FEB

Coca-Cola

KO

$0.37

$0.39

5.41%

FEB

Home Depot

HD

$0.89

$1.03

15.73%

FEB

Lockheed Martin

LMT

$2.00

Honeywell

HON

$0.75

McDonalds

MCD

$1.01

Hormel Foods

HRL

$0.19

3M

MMM

$1.17

$1.36

16.24%

JAN

Hubbell

HUBB

$0.77

Altria Group

MO

$0.66

$0.70

6.06%

MAR

Inter Perfums

IPAR

$0.21

Microsoft

MSFT

$0.42

Illinois Tool Works

ITW

$0.78

Realty Income

O

$0.21

$0.22

3.54%

JAN, MAR

Lockheed Martin

LMT

$2.00

Pepsi

PEP

$0.81

Magna International

MGA

$0.28

$0.33

20.00%

FEB

Proctor & Gamble

PG

$0.69

Marathon Petroleum

MPC

$0.40

$0.46

15.00%

JAN

Philip Morris

PM

$1.07

Penske Automotive Group

PAG

$0.33

$0.35

6.06%

MAR

Southern Company

SO

$0.58

Phillips 66

PSX

$0.70

AT&T

T

$0.50

Starbucks

SBUX

$0.30

Target

TGT

$0.62

Store Capital

STOR

$0.31

Visa

V

$0.20

$0.21

7.69%

FEB

Texas Instruments

TXN

$0.62

Walgreen Boots Alliance

WBA

$0.40

VF Corporation

VFC

$0.46

Wal-Mart

WMT

$0.51

$0.52

1.96%

FEB

Valero Energy

VLO

$0.70

$0.80

14.29%

JAN

ExxonMobil

XOM

$0.77

16.62%

5.94%

Source: Seeking Alpha, table created by the author

Taking a look at the Next Generation Portfolio, there were eight companies, representing 36% of the portfolio, who raised their dividends in Q1 with an average of 16.62%. The only disappointment would appear to be PAG but you would be mistaken. PAG has an interesting way of raising their dividend. They raise it every quarter since October 2014! Now the increase has been $0.01 per quarter thus far since that time and as a result the increases are getting smaller in percentage each time. But, PAG is expected to increase its dividend by 12.12% this year at this rate.

Turning my attention to the Legacy Portfolio, it had a total of 10 companies raise their dividends in Q1 with an average raise of 5.94%. Not overly impressive and in reality, buoyed up in large part by the 16.24% increase from MMM. I suspect that many of the Legacy companies will reward shareholders with above average dividend growth this year, not due to organic growth or innovation, but because of the Tax Act which is a good thing for those shareholders. It may have been a while since they saw double digit dividend growth! I should further note that O raised its dividend twice in Q1 with an overall increase of 3.54%. AFL also announced a special dividend in the form of a 2:1 stock split in January.

I expect more companies over the coming months will utilize their repatriated cash and announce dividend increases in the coming months. It's a great time to be a dividend growth investor!

Special dividends announcements

The Next Generation portfolio had three companies use their repatriated cash already to reward shareholders.

ABBVIE

The company has generally raised its dividend in October and this past October was no exception. ABBV increased the dividend by 10.9% in October and then surprised investors with a 35.2% increase in February this year. Despite all the talk about drug pricing by the current administration, ABBV rewarded shareholders handsomely.

AUTOMATIC DATA PROCESSING

The company announced in November 2017 an increase of 10.5% which was followed by an announcement in April this year of an additional 9.5% raise. Overall, this represents an increase of 21.1% since the November announcement.

MARATHON PETROLEUM

Investors may be anxious for the next dividend announcement expected in July but they were also given a gift in a special increase announced in January of this year. The company raised the dividend another 15% from the already 11.1% increase announced last July.

What about the cash dividends? Well, the following chart shows the amount of dividends collected in Q1 by month.

Source: Seeking Alpha, chart created by the author

Not too shabby! The Legacy Portfolio is generating 1.18x more income than the Next Generation Portfolio. In comparison, the Next Generation Portfolio has a yield on cost of 2.7% while the Legacy Portfolio has a 3.1%. As a whole, the Next Generation Portfolio generates $1.94 per share while the Legacy Portfolio generates $2.57 per share.

Although not all companies have announced increases, and more importantly allowed the portfolio to collect those freshly increased dividends, the Next Generation Portfolio is projected to collect $2,747 while the Legacy Portfolio is projected to collected $3,149 this year. It will be interesting to monitor how much this gap closes over the course of the year.

If I project the Q1 dividend growth out over the next several years (no changes but there will inevitably be changes), then the Next Generation Dividend Growth Portfolio will overtake the Legacy Portfolio in 2 year's time in the amount of dividends collected assuming that each company raises its dividend an average of 16.62% which happens to be below the previous 1-year DGR of 18.8% for the portfolio as a whole.

Source: Seeking Alpha, chart created by the author

Final Thoughts

As of this moment I am pleased with the progress of the portfolio and the dividend growth is above my expected average of 15%. Although more companies will announce their latest dividend policy in the coming months, I do not foresee any real negative surprises coming.

One of the things that has surprised me is the underperformance of the Legacy Portfolio particularly when compared to SPY. Since its initiation, the portfolio has underperformed while the Next Generation Portfolio has for the most part outperformed the SPY. One of the biggest debates when creating the portfolio was timing the purchases due to valuations. The quick results obtained thus far sends a mixed message unless as a class, the Legacy type dividend growth stock was merely overly overvalued or something else is in the mix. I would like to hear your thoughts on this!

I look forward to seeing how the portfolio progresses throughout the year, and how management from each of the companies use their repatriated cash. Let's hope it's to our benefit!

I hope you enjoyed this article. 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 if you want to be notified when my future articles are published. Thanks for reading.

Disclosure: I am/we are long ABBV, AMGN, AVGO, CSCO, GLW, HAS, STOR, TXN, T, PEP.

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.