My Dividend Growth Portfolio - 38 Holdings, 1 Buy, 1 Sale

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Includes: AAPL, ABT, AFL, AMP, ANTM, CMI, CSCO, CVS, DEO, DIS, DUK, GLW, HD, ITW, JNJ, JPM, KMB, MA, MDT, MMM, MO, NKE, O, PEP, PRU, PSA, SBUX, SKT, STAG, SWK, T, TROW, TRV, UTX, V, VFC, VTR, WPC
by: Dividend Derek

Summary

I collected $536 in dividends during August, representing a 16% boost over August of 2017.

Williams-Sonoma was removed from the portfolio.

Investment gains were put into a new position in Illinois Tool Works.

What's New?

After having an incredibly busy investment month in July, August was a little tamer. If you didn't read it, I encourage you to check out my July article. In that article, I highlighted my rationale for pivoting more towards dividend growth. I removed some holdings that while would meet income needs in absolute terms are poised to be beaten by the market. Given my investment horizon, I decided to invest those monies into faster growing names. I want to highlight that those moves were done based on my own personal circumstances of having a long runway to retirement.

I also split off my "alpha" ideas into their own article. This article is going to focus on the dividend-paying companies that I own. The first edition of the alpha ideas can be found here.

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."

With that said, let's dive into the details.

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 (At $7,157, I'll explain this further).
  3. I want to suffer no dividend cuts (So far so good).

Notes About My Goals

Currently my dividend growth rate is 11.8% for the year. This was bolstered this month by Altria (NYSE:MO) increasing its dividend (again) and the upcoming one from Illinois Tool Works (ITW). In fact you can still get shares before the new higher rate takes effect.

I've noted that given my circumstances I want to see stronger growth. Absolute yield is not necessary as I would prefer to grow a larger pot that can be ultimately pivoted back into higher-yielding/slower-growing stocks.

With my pivot last month, I'm not going to hit my originally stated income goal. My current projected income is about $6,700, but here is the math as to how I had originally planned 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. I may break this rule and am currently in violating with my overweight holding in AT&T (T).
  • 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.
  • 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 may put in a limit order to sell should the gravity kick in.
  • 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 companies with 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., Starbucks (SBUX), Corning (GLW), Prudential Financial (PRU), Home Depot (HD), Johnson & Johnson (JNJ), PepsiCo (NYSE:PEP) and now Illinois Tool Works.

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

Dividend Cuts

  • None!

The Portfolio

Name Ticker Percent of Portfolio CCC Status S&P Credit Rating
Apple AAPL 4.17% Challenger AA+
Abbott Laboratories ABT 2.45% Challenger A+
Aflac AFL 1.97% Champion A-
Ameriprise Financial AMP 1.87% Challenger A
Anthem ANTM 2.85% Challenger A
Cummins CMI 1.68% Contender A+
Cisco Systems CSCO 2.08% Challenger AA-
CVS Health CVS 2.04% Contender BBB
Diageo PLC DEO 0.98% Challenger A-
Walt Disney DIS 2.89% Challenger A
Duke Energy Corp. DUK 1.11% Contender A-
Corning GLW 3.22% Contender BBB+
Home Depot HD 2.54% Challenger A
Illinois Tool Works ITW 2.40% Champion A+
Johnson & Johnson JNJ 2.77% Champion AAA
JPMorgan Chase JPM 1.99% Challenger A-
Kimberly-Clark KMB 1.56% Champion A
Mastercard MA 2.54% Challenger A
Medtronic MDT 2.22% Champion A
3M MMM 1.45% Champion AA-
Altria MO 2.94% Champion BBB+
Nike NKE 1.97% Contender AA-
Realty Income O 2.36% Contender BBB+
PepsiCo PEP 1.55% Champion A+
Prudential Financial PRU 1.91% Challenger A
Public Storage PSA 2.06% Challenger A
Starbucks SBUX 2.57% Challenger BBB+
Tanger Factory Outlets SKT 1.68% Contender BBB+
STAG Industrial STAG 1.48% Challenger N/R
Stanley Black & Decker SWK 1.56% Champion A
AT&T T 3.56% Champion BBB+
T. Rowe Price TROW 1.61% Champion A+
Travelers Companies TRV 1.70% Contender A
United Technologies Corporation UTX 2.08% Contender A-
Visa V 2.71% Contender A+
V.F. Corp VFC 2.70% Champion A
Ventas Inc. VTR 1.47% Challenger BBB+
W.P. Carey WPC 1.59% Contender BBB


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

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

Performance

Ticker Owned Since Versus S&P Benchmark Versus Benchmark
AAPL 4/13/2015 42.14% SPY 42.14%
ABT 12/6/2016 43.43% SPY 43.43%
AFL 10/30/2014 16.44% SPY 16.44%
AMP 9/29/2016 15.16% SPY 15.16%
ANTM 7/22/2016 54.86% SPY 54.86%
CMI 10/30/2015 4.07% SPY 4.07%
CSCO 4/6/2016 35.85% SPY 35.85%
CVS 10/7/2016 -47.73% SPY -47.73%
DEO 6/14/2016 0.13% SPY 0.13%
DIS 12/28/2015 -41.47% SPY -41.47%
DUK 11/6/2015 -6.97% XLU -2.90%
GLW 10/14/2015 56.22% SPY 56.22%
HD 5/3/2016 13.79% SPY 13.79%
ITW 8/24/2018 4.23% SPY 4.23%
JNJ 12/9/2015 -5.51% SPY -5.51%
JPM 7/15/2016 47.62% SPY 47.62%
KMB 5/24/2018 6.50% SPY 6.50%
MA 7/26/2018 -0.18% SPY -0.18%
MDT 11/22/2016 0.25% SPY 0.25%
MMM 5/24/2018 0.51% SPY 0.51%
MO 10/31/2013 17.32% SPY 17.32%
NKE 5/3/2016 -8.00% SPY -8.00%
O 5/3/2016 -39.45% VNQ -3.64%
PEP 5/24/2018 7.52% SPY 7.52%
PRU 4/7/2016 4.76% SPY 4.76%
PSA 4/28/2017 -16.19% VNQ 1.60%
SBUX 12/3/2015 -54.13% SPY -54.13%
SKT 7/26/2017 -26.83% VNQ -11.44%
STAG 5/20/2016 11.88% VNQ 46.55%
SWK 1/28/2016 1.76% SPY 1.76%
T 11/3/2015 -35.06% SPY -35.06%
TROW 9/29/2016 43.82% SPY 43.82%
TRV 4/28/2014 -5.38% SPY -5.38%
UTX 1/28/2016 2.70% SPY 2.70%
V 7/26/2018 -1.89% SPY -1.89%
VFC 12/22/2016 45.33% SPY 45.33%
VTR 12/8/2015 -20.19% VNQ 7.50%
WPC 5/15/2017 -6.44% VNQ 8.54%

Last month I introduced this new table of my stock picks. I am tracking from the first time I bought shares, not necessarily future purchases. I built a stock return calculator (there is also API access available), and plugging in figures I can calculate my performance from the time I bought shares versus a benchmark.

Versus S&P: This a measure of the alpha generated (or not) versus the S&P 500 as a benchmark. This is calculated using the stock return calculator here and it uses the "owned since" column as the starting date. This may not reflect actual results as multiple purchases would change the figure. I can also set the benchmark at the individual ticker level.

The next column allows flexibility to defining what my benchmark can be. For example, look at the REITs, I've set their benchmark to be VNQ for an apples-to-apples comparison. My one utility I've set it to XLU which is the utility ETF.

Lastly, adjusting the data call, I can compare the performance against the proper benchmark. To continue to REIT example, on an absolute level, VTR has lagged the S&P by 20% since 12/8/2015, but it has beaten the VNQ index as a whole by 7.5%.

My Buys

Illinois Tool Works

I'll start by quoting myself from last month in regards to what I was looking forward to:

Additionally, Illinois Tool Works looks interesting year and has recently announced a 28% dividend hike and a new buyback program. I have some research to do here but check out this article by my friend, Dividend Sleuth.

There are a few other recent bullish articles on the company here and here (paywall). There's a lot to like here for a dividend aristocrat that hasn't been on sale in several years.

While earnings have been steadily climbing the past few years, the share price (and subsequent multiple expansion) has not been consistent. The market valued shares much higher the past few years with the share price hitting $173 earlier this year (and a P/E of 26). After falling over 20% from their highs, shares have moved back in line with a semblance of normal valuation. A multiple of 19 seems appropriate given the large earnings boost expected this year followed by high-single-digit growth expected in 2019 and 2020.

Using the score system from SimplySafeDividends, Illinois Tool Works ranks highly across safety and growth coupled with a better-than-average yield. With an initial purchase price of $135, the forward yield works out to just a hair under 3% (2.96%).

If I had to highlight a few bullet points about ITW, it would be:

  • Top-line growth coupled with faster bottom-line growth (reduced share count)
  • Conservative payout ratio with a yield not seen this high in many years
  • Healthy margins for sustained advantage
  • 44 years of dividend increases

Sales

Williams-Sonoma

This one I need to wipe some egg of my face surrounding limit orders. From the earnings preview here on SA, there was a particular highlight that caught my eye:

The report could lead to some trading fireworks after the numbers spill, with short interest on WSM at 25% of float. Options volatility is implying a move up or down in share price of at least 9%

What I ended up doing was setting a stop limit order on my shares. As it had been noted also, shares were up 18% since Q1, and there was the potential for some major downside. Given the overall froth of some areas of the market, I had set myself some downside protection. I was up already on the stock and had some areas of interest to look into if it triggered. Specialty retail has had its troubles lately, and I was taking a deliberate action to ensure I would "lock in gains".

Well, it triggered - the day before earnings there was a big downward move right at the market open, something like 3-4%. That ended up being the trigger point for my shares. Needless to say, the company reported great earnings and shares took off from there. Here's the one-month chart:

I highlighted the blip on the 21st at the open when shares were down. In any event, I closed the position up 33%, which actually slightly underperformed the market during that time. I'll note that I did it in two separate purchases, so the results are not exact but highlight the first time I made a buy decision on the company. This screenshot is from my stock return calculator I linked above:

Had my limit not triggered, here's what I would be looking at (blue line):

In a perfect world, my intention was earnings would drive the stock up (which it did), and then given the new bullishness and the 52-week high, I could have then set a limit sell order a little below the current price.

Charts and Graphs

Dividends

The green bars are for 2018, and the higher bars continue to represent my progress as time progresses. The absolute number was a little bit lower than in past quarters due once again to my tilt towards growth rather than the current income side of things. I still find it incredibly cool that I received over $500 in dividends this month and I have 30-ish years until retirement.

Growth

From the changes I made last month, I shaved $1,000 in dividend income off my yearly projections. I still saw 16% year-over-year growth and am on pace for another fantastic quarter. Comparing my yearly income projection to last year, I am nearly neck and neck with no or minimal growth expected. Like I've said in the past, I have a very long investing horizon, 27 years in fact until I can tap into this money tax free.

For a current retiree, this makes no sense if you are in need of income today. I did not want an anchor holding back future gains for the sake of a higher income today (which I can't even tap into without penalty).

Visualizations

Income By Sector

No real changes here this month; my industrial income was boosted at the expense of all others due to my addition of ITW. Consumer discretionary also dropped from 12% to 9% with the removal of WSM.

Sector Allocations

Again, as expected, the figures here shuffled around in conjunction with the two portfolio moves that I made in August. There are also upcoming sector adjustments with the "Communications" sector being added which will shuffle around this chart also.

Champion, Contender, Challenger View

All my dividend-paying companies have at least a 5-year history of raising their dividends. I lost one contender and gained a champion this month.

Things Coming Up

I don't really have many stocks on my radar currently, so I am open to ideas. With my portfolio once again at an all-time high, it generally seems to be a sellers' market. I was watching a few names on my list like Cummins, Ameriprise Financial, 3M, Prudential, Starbucks, and Stanley Black & Decker, but most of them have bounced up.

I do play with a few different stock screeners for idea generation, here is one I use on Finviz. Here are the filters I started with:

  • $10B+ in size
  • USA companies
  • Positive dividend yield
  • Forward P/E under 20
  • Sorted by their 52-week low

Nothing on the early list really jumps out to me, but like I said, I am open to ideas.

As we also head into the back stretch of the year, I am waiting for a few more dividend increase announcements. I'm looking for these:

  • Disney
  • JPMorgan Chase (formal announcement will be coming, should be 42%)
  • Nike
  • Public Storage (is this frozen?)
  • Starbucks (it just announced back in July, but it was early for the year) unless it plan another one
  • United Technologies (it seems to be on a raise every five quarter cycle)
  • Visa (it did have a February increase, smaller than the fall increases)
  • V.F. Corp (not sure how the split will play into this)
  • Ventas

Conclusion

August was back to my normal pace of investing after a busy July. Though I closed out a position earlier than anticipated, those gains were rolled into a new position in Illinois Tool Works. I got in nearly at the low of the year ($135.xx versus $134.xx) so I am happy about that.

Dividends received continue to grow year over year which should ultimately lead to a happy and successful retirement.

Anyway, let me know what you think, and happy investing. Also, let me know some other ideas to look into!

Disclosure: I am/we are long AAPL, ABT, AFL, AMP, AMZN, ANTM, BRK.B, CMI, CSCO, CVS, DEO, DIS, DUK, FB, GLW, GOOG, HD, IQ, ITW, JNJ, JPM, KMB, KWEB, MA, MDT, MMM, MO, NKE, O, PEP, PRU, PSA, PYPL, SBUX, SKT, STAG, SWK, T, TROW, TRV, TWTR, UA, UTX, V, VFC, VTR, WPC.

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.