My 44 Holding Dividend Growth Portfolio Update

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Includes: AAPL, ABT, AFL, AMP, AMZN, ANTM, BRK.B, CMI, CSCO, CVS, DEO, DIS, DUK, FB, GLW, GOOG, HD, JNJ, JPM, KMB, LUV, MDT, MMM, MO, NKE, O, OHI, PEP, PRU, PSA, SBUX, SCHD, SKT, STAG, SWK, T, TROW, TRV, UA, UTX, VFC, VTR, VZ, WFC, WPC, WSM
by: Dividend Derek
Summary

I collected a personal record $865 of dividends in June and a total of $1933 in Q2.

I made no changes to the portfolio this month.

With half the year complete, I am on pace to complete my three primary goals.

What's New?

June was a particularly busy month for me; birthdays, graduations, Father's Day, vacations, the list is seemingly endless! This is all on top of the typical daily responsibilities of work, running a business, family life and running a household.

With all of these daily demands, I wanted a portfolio to be comprised of low stress, sleep well at night stocks. So it should come as no surprise when time to time, I'll make no portfolio changes during a given month. I prefer the Warren Buffett quote:

"Lethargy, bordering on sloth should remain the cornerstone of an investment style."

After having done both the hands-on management and authoring each month of the portfolio, I believe I've settled into that mentality quite nicely.

Don't mistake my idleness for being asleep at the wheel though. I'm just waiting. Every paycheck brings in new funds that I can use to fire at companies that look interesting to me.

Let's dive into a review of both my yearly goals, investing rules and dividend summary and then I'll circle back into what I'm looking at for July.

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."

2018 Goals

  1. I want my holdings to have a weighted 1-year dividend growth rate of at least 7%.
  2. By the end of 2018, I want to have a projected dividend income of at least $7,950.
  3. 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%). I want to make sure I focus on holdings that are able to deliver strong performance year after year given my long investing horizon.

I added the upcoming increase for Medtronic and back-added the 3M announcement which pushed the average increase to 9.0%

For my income goal, here's how I calculated it:

Starting Income $6,800
7% Organic Dividend Growth

$475

Maxing 401k @ 3%

$555

Employer Match

$120

End of 2017 Income $7,950

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 401(k) 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 it brings me to my goal of $7,950. I'm sitting at about $7,725 so this looks achievable.

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.

Portfolio Strategy

Buying Criteria

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 (T) is about 6% of my income, so I'm hesitant to add here, even though shares again look attractive.
  • Investment grade holdings >BBB+ should generate 95% of the portfolio's dividend income.
  • 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. Moats are funny, tech companies have been breaking into many of the spaces typically run by the "old guard".
  • 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.
  • I own non-dividend-paying stocks like Facebook (FB), Google (GOOG) 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.

Selling Criteria

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 may 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 had management issues or criminal/unethical business practices.
  • Based on known information, capital is better passively invested or focused into better ideas.

Timing

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 in amount gives a quick "at a glance" look into how management thinks the company is operating. This can be confirmation that the investment thesis is indeed working well. Sometimes the reverse 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 several times already with Altria Group, Inc. (MO), Starbucks (SBUX), Corning (GLW), Prudential Financial (PRU), Home Depot (HD), Johnson & Johnson (JNJ) and now PepsiCo (NYSE:PEP).

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.

Dividend Increases

  • None

Dividend Cuts

  • None!

The Portfolio

Name Ticker Percent of Portfolio CCC Status S&P Credit Rating Owned Since
Apple AAPL 3.94% Challenger AA+ 4/13/2015
Abbott Laboratories ABT 2.57% Challenger A+ 12/6/2016
Aflac AFL 2.12% Champion A- 10/30/2014
Ameriprise Financial AMP 2.03% Challenger A 9/29/2016
Amazon AMZN 2.50% AA- 4/28/2016
Anthem ANTM 2.59% Challenger A 7/22/2016
Berkshire Hathaway BRK.B 0.80% AA 9/22/2015
Cummins CMI 1.89% Contender A+ 10/30/2015
Cisco Systems CSCO 2.12% Challenger AA- 4/6/2016
CVS Health CVS 1.90% Contender BBB 10/7/2016
Diageo PLC DEO 1.14% Challenger A- 6/14/2016
Walt Disney DIS 2.88% Challenger A 12/28/2015
Duke Energy Corp. DUK 1.11% Contender A- 11/6/2015
Facebook FB 0.88% 4/8/2016
Corning GLW 2.98% Contender BBB+ 10/14/2015
Google (Alphabet) GOOG 2.55% AA+ 4/25/2016
Home Depot HD 2.55% Challenger A 5/3/2016
Johnson & Johnson JNJ 2.72% Champion AAA 12/9/2015
JPMorgan Chase JPM 1.29% Challenger A- 7/15/2016
Kimberly-Clark KMB 1.50% Champion A 5/24/2018
Medtronic MDT 2.23% Champion A 11/22/2016
3M MMM 1.52% Champion AA- 5/24/2018
Altria MO 2.98% Champion BBB+ 10/31/2013
Nike NKE 1.98% Contender AA- 5/3/2016
Realty Income O 2.35% Contender BBB+ 5/3/2016
Omega Healthcare Investors OHI 1.36% Contender BBB- 6/22/2016
PepsiCo PEP 1.53% Champion A+ 5/24/2018
Prudential Financial PRU 2.12% Challenger A 4/7/2016
Public Storage PSA 2.24% Challenger A 4/28/2017
Starbucks SBUX 2.99% Challenger A- 12/3/2015
Schwab US Dividend Equity SCHD 12.26% 9/24/2015
Tanger Factory Outlet SKT 1.68% Contender BBB+ 7/26/2017
STAG Industrial STAG 1.52% Challenger N/R 5/20/2016
Stanley Black & Decker SWK 1.75% Champion A 1/28/2016
AT&T T 2.73% Champion BBB+ 11/3/2015
T. Rowe Price TROW 1.93% Champion A+ 9/29/2016
Travelers Companies TRV 1.83% Contender A 4/28/2014
Under Armour UA 0.37% BB+ 6/1/2016
United Technologies Corporation UTX 2.17% Contender A- 1/28/2016
V.F. Corp. VFC 2.67% Champion A 12/22/2016
Ventas Inc. VTR 1.47% Challenger BBB+ 12/8/2015
Verizon VZ 2.11% Contender BBB+ 2/28/2017
W.P. Carey WPC 1.77% Contender BBB 5/15/2017
Williams-Sonoma WSM 2.37% Contender NR 10/27/2016

Here are the values behind the "CCC Status" category:

  • King: 50+ years
  • Champion/Aristocrat: 25+ years
  • Contender: 10-24 years
  • Challenger: 5+ years

My Buys

None this month

Sales

None this month

Charts and Graphs

Dividends

That tallest green line is this past month! As I highlighted in the summary, the $865 received is my new all time high in a given month.

I have to give a couple special shoutouts for making this happen. First, SCHD had a monster distribution this quarter, $0.406 vs $0.262 in Q1. That alone contributed $100 more dividends. My new holding of Pepsico also provided $37 in new recurring money. Adding to JNJ provided an extra $18. Doubling my SWK holding added $13. Tripling my UTX also gave an extra $20.

These gains helped buoy the loss of J.M. Smucker and Wells Fargo from the first quarter.

Growth

With the second quarter in the books I now have an extra data point to compare. In Q2 I received $1,933 in dividends, a 45% boost over the $1,333 I received last year.

At a monthly level the $865 was a 13.8% boost over the $760 last year.

Finally my forward looking income has been adjusted to $7,725, just $225 short of my yearly goal of $7,950. Part of my updates this month was tweaking my API to more properly return the current dividend rate for each company. In some cases it was reporting the old rate.

What's interesting is that between the forces of compounding and dividend increases, I'm able to achieve about 1% earnings growth per month even if I take no specific action. It doesn't sound like much but I did a very crude example of the growth this can produce over time.

1/1/2018 100.00
1/1/2019 112.68
1/1/2020 126.97
1/1/2021 143.08
1/1/2022 161.22
1/1/2023 181.67
1/1/2024 204.71
1/1/2025 230.67
1/1/2026 259.93
1/1/2027 292.89
1/1/2028 330.04
1/1/2029 371.90
1/1/2030 419.06
1/1/2031 472.21
1/1/2032 532.10
1/1/2033 599.58
1/1/2034 675.62
1/1/2035 761.31
1/1/2036 857.86
1/1/2037 966.66
1/1/2038 1089.26

Starting today with $100 the amount eventually compounds to 10x the initial value after 20 years. This is also an approximation if no new funds could be added to this hypothetical account.

Visualizations

Income By Sector Minimal changes this month, just minor changes due to adjusting dividend rates.

Sector Allocations

No changes here as no money was added or removed from any holding.

Champion, Contender, Challenger View All my dividend-paying companies have at least a 5-year history of raising their dividends. No changes this month here either.

Things Coming Up

United Technologies did not announce a dividend increase as I was hoping they might. From last month I decided to pass on Southwest Airlines (LUV) and will see how the story plays out some more.

Bank stocks seem to have some legs to them after the largest banks announced (with approval) increased dividends and buybacks. I own JPM who announced a 40% dividend increase for the fall, I'll take another look at them.

On my spreadsheet I highlight companies near their yearly low so I have a few names to review for this month. Should the stories continue to look compelling it's a chance to add at the best pricing of the year and provides a larger margin of safety.

Those names include Cummins, 3M (recent position for me), Prudential, Starbucks, Stanley Black & Decker and AT&T.

At a glance, it still seems that industrials are in the dog house alongside a lot of financial firms.

I'm also waiting for a few dividend increases during the month. I'm expecting Cummins, Duke Energy, Stanley Black & Decker and Medtronic (already announced an 8.7% increase). Two of those happen to also be names on my short range radar for adding due to their proximity to the yearly low.

Conclusion

Though I made no transactions during the month of June, my account was far from inactive. I collected a record high $865 in dividends during the month and I am setting up for my next stock moves. I have a few names on my short list for research and hope to make some purchases during July.

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,KMB,MDT,MMM,MO,NKE,O,OHI,PEP,PRU,PSA,SBUX,SCHD,SKT,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.