My Dividend Growth Portfolio - 35 Holdings, 6 Sells, 2 Buys

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

Summary

I collected a sweet $718 in dividends in September and $1,733 for the quarter.

Five positions were exited, one more was trimmed.

Gains were rolled into two ETFs, one old, one new, were added.

What's New?

After a calm August, the investment pendulum swung back to an active September. At a high level I have continued to pivot my portfolio more towards growth. In the transaction section I will highlight what has changed and why it did. Some slower growing dividend names have been cut in favor of quicker earnings growth. That said, I am continually watching for great dividend investment ideas. In fact, I know opportunities will present themselves, it just may take some time.

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. I plan on writing another edition after completion of this.

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
  3. I want to suffer no dividend cuts.

Notes About My Goals

JPMorgan (JPM) and their monster 42% dividend hike increased my yearly average to 12.2% (from 11.8% last month).

My second goal will not be achievable at this point in time. Leading up to July it was, but as it is written will no longer be the case. By removing several dividend-paying stocks and either putting that money into lower yielding or companies with no dividend, my projected income has taken a hit. After peaking at $7,725 in July, it has declined to a current value of $6,280.

I've noted my rationale revolves around stronger earnings growth. I'm still working to strike the balance of current yield versus longer term earnings growth given my time horizon. Given the right circumstances, I will still invest in a higher yielding instrument.

Finally and most obviously, I don't want to see a dividend cut. So far so good for the year.

Portfolio Strategy

Buying Criteria

These are the general guidelines I will review to see if something is worthy of adding to my dividend 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. Investments in these areas I want to have an additional "kicker," stocks near a 52-week low or some other way they may generate alpha over a short to medium term horizon. I want to highlight this as part of my thesis.
  • 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. A company with a moat should be analyzed to see how easily their moat can be disrupted.
  • I like to see shareholder-friendly management. This manifests in a healthy and rising dividend and a willingness to buy back shares. Often times in reality buybacks aren't always done at opportune times. Additionally they are frequently established to just buy back stock options for employees. 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. (NYSE:MO), Starbucks (SBUX), Corning (GLW), Prudential Financial (PRU), Home Depot (HD), Johnson & Johnson (JNJ), PepsiCo (NYSE:PEP) and now Illinois Tool Works (ITW).

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 4.31% Challenger AA+
Abbott Laboratories ABT 2.75% Challenger A+
Aflac AFL 1.99% Champion A-
Ameriprise Financial AMP 1.94% Challenger A
Anthem ANTM 2.93% Challenger A
Cummins CMI 1.79% Contender A+
Cisco Systems CSCO 2.17% Challenger AA-
CVS Health CVS 2.14% Contender BBB
Walt Disney DIS 3.09% Challenger A
Corning GLW 3.46% Contender BBB+
Home Depot HD 2.56% Challenger A
Illinois Tool Works ITW 2.48% Champion A+
Johnson & Johnson JNJ 2.88% Champion AAA
JPMorgan Chase JPM 2.00% Challenger A-
Mastercard MA 2.68% Challenger A
Medtronic MDT 2.28% Champion A
3M MMM 1.49% Champion AA-
Altria MO 2.97% Champion BBB+
Nike NKE 2.05% Contender AA-
Realty Income O 0.82% Contender A-
Prudential Financial PRU 2.00% Challenger A
Public Storage PSA 1.95% Challenger A
Starbucks SBUX 2.66% Challenger BBB+
Schwab US Broad Market ETF SCHB 2.43%
Schwab US Dividend ETF SCHD 1.84%
Tanger Factory Outlet SKT 1.58% Contender BBB+
STAG Industrial STAG 1.40% Challenger N/R
Stanley Black & Decker SWK 1.64% Champion A
AT&T T 3.76% Champion BBB+
T. Rowe Price TROW 1.59% Champion A+
Travelers Companies TRV 1.67% Contender A
United Technologies Corporation UTX 2.22% Contender A-
Visa V 2.83% Contender A+
Ventas Inc. VTR 1.32% Challenger BBB+
W.P. Carey WPC 1.53% 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 39.81% SPY 39.81%
ABT 12/6/2016 62.93% SPY 62.93%
AFL 10/30/2014 14.42% SPY 14.42%
AMP 9/29/2016 17.72% SPY 17.72%
ANTM 7/22/2016 59.66% SPY 59.66%
CMI 10/30/2015 9.35% SPY 9.35%
CSCO 4/6/2016 39.79% SPY 39.79%
CVS 10/7/2016 -42.91% SPY -42.91%
DIS 12/28/2015 -37.14% SPY -37.14%
GLW 10/14/2015 68.49% SPY 68.49%
HD 5/3/2016 15.19% SPY 15.19%
ITW 8/24/2018 4.43% SPY 4.43%
JNJ 12/9/2015 -2.45% SPY -2.45%
JPM 7/15/2016 43.47% SPY 43.47%
KWEB 9/6/2018 1.00% SPY 1.00%
MA 7/26/2018 4.10% SPY 4.10%
MDT 11/22/2016 2.75% SPY 2.75%
MMM 5/24/2018 -0.08% SPY -0.08%
MO 10/31/2013 18.07% SPY 18.07%
NKE 5/3/2016 -2.22% SPY -2.22%
O 5/3/2016 -44.06% VNQ -4.12%
PRU 4/7/2016 5.00% SPY 5.00%
PSA 4/28/2017 -25.40% VNQ -3.79%
SBUX 12/3/2015 -52.58% SPY -52.58%
SCHB 9/24/2018 0.10% SPY 0.10%
SCHD 9/24/2018 -0.14% SPY -0.14%
SKT 7/26/2017 -30.14% VNQ -11.05%
STAG 5/20/2016 4.52% VNQ 43.38%
SWK 1/28/2016 6.33% SPY 6.33%
T 11/3/2015 -31.07% SPY -31.07%
TROW 9/29/2016 35.85% SPY 35.85%
TRV 4/28/2014 -11.72% SPY -11.72%
UTX 1/28/2016 11.91% SPY 11.91%
V 7/26/2018 2.05% SPY 2.05%
VTR 12/8/2015 -32.98% VNQ -0.92%
WPC 5/15/2017 -10.74% VNQ 8.09%

This table is how shares have performed since I first purchased them. I am able to compare versus both the S&P or another benchmark for each holding. It's supported by the stock return calculator (there is also API access available) that I built.

Versus S&P: This is 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. A utility could be compared to XLU for example (the utility ETF).

As an example, VTR has lagged the S&P by 33% and VNQ by about 1% since 12/8/2015. Using some of these results, I can start determining whether I am making good stock picks or not.

As another example, SBUX has been a terrible pick since I first purchased it (trailing by 50%+) but GLW has been a fantastic pick (up 68%).

My Buys

Schwab US Broad Market ETF

Wait, what? A broad market index in a dividend growth portfolio? Yup and I'll even include a screenshot from the dividend section here on SA.

Using the broad market as a dividend growth engine has delivered over 7% annual dividend increases with massive diversification for virtually no cost. Sounds great, right? It also happens to exceed my own 7% desired benchmark. In fact, I expect the growth rate to continue as companies are awash in excess cash.

Schwab US Dividend Equity ETF

I'm back! I sold out of SCHD in July in order to fund other transactions. Even then I noted that I very much like the concept, have no issues with it, it was just going to be some time before I got back in. Well, I bought 100 shares along with the 100 shares of SCHB (I couldn't decide which to buy so I got some of both).

The SA growth page puts it currently at a negative 1-year growth rate but I'm still looking at the pace over a longer time frame. Remember, holdings here can change (essentially unlike SCHB) so there will be some bumping around. The ETF functions like an S&P clone but with a higher yield (and to an extent a lower return).

Sales

I want to preface this section by highlighting some of the overarching reasons for selling these names. First and most importantly, I don't see the sky falling with any of these names. They weren't a panic sell, it has to do more with portfolio management and how many places names I can keep track of.

Kimberly-Clark

I only bought into KMB back in May when the share price was teetering down around $100 per share. Shares aren't particularly cheap nor expensive currently. Fast Graphs pretty much tags the shares at fair value right now.

When I started researching how I would tilt my portfolio towards growth I had to figure out which names I would be OK parting with. Kimberly Clark came up, I don't have any particular affinity for paper products or diapers but it's just a steady Eddy business. Also, earnings growth is expected to be mid-single digits for the foreseeable future and I'm looking to at least have the market growth rate of earnings. After shares bounced off their low I set a limit sell order which triggered in the beginning of the month.

Using the stock return calculator I linked above, I ran a test going back eight years to this time in 2010.

Overall shares lagged the market though there was a period of out-performance of consumer companies during 2015-2016. I didn't have shares going back that long but during that time it was apparent consumer companies were valued a little too highly.

All of that said, I'm perfectly content having shares of KMB via both SCHB and SCHD (yes it's a member).

V.F. Corporation

V.F. Corp. (NYSE:VFC) is one of those companies that I have found that many DGI own. I wrote an article here (I made it an Author's pick to get by the paywall) on their upcoming split of the company.

My interpretation of the split is that the new "spinco" may be a better place for investors who need current income (jeans and outlet stores). The "remainco" that will keep the V.F. name is for the brands with growth.

What I also learned from many of the comments of the article is that many investors got in right around the same time that I did. VFC had a major dip down to about $50/sh in early 2017. Shares have since rocketed upwards and my own personal feeling is that the multiple expansion is not fully justified and shares are running hot.

The highlighted time range pretty closely mimics my (and others) investment results during this time frame. Similar to KMB, I set a limit sell order which triggered during the month. My problem stems that I don't see a huge catalyst pushing shares higher any time soon. Earnings have grown, sure, but most of the money has been made via P/E expansion. Holding the initial P/E of 17.5, full-year results put the stock trading more appropriately in the mid $60s and not into the $90s.

I'm content with taking the money and running for now and watching the story develop from the sidelines. I think there are still a few question marks about the split and just how earnings and guidance will look post-split.

Diageo

Diageo (NYSE:DEO) will always hold a special place in my heart. I bought shares on the day of Brexit as global markets seemed to be figuring out exactly how they should behave. Shares quickly recovered but have been stuck in gear for over a year now. Following the financials and dividends is a little bit harder as a company domiciled in the UK and having different accounting standards.

There's also a lot of excitement around cannabis (in the form of CBD) infused drinks. That is still in the very nascent stages and it seems like there are solutions in search of a problem.

The company issued a trading statement about two weeks ago, giving some early guidance for next year. Essentially, they are expecting another year of mid-single-digit growth. Slow growth coupled with different account and dividend policies and it's easier to step out of this name for now and put my money elsewhere.

Realty Income

There are plenty of things to like about Realty Income. It has been a great income generator over time and they carry the moniker of "The Monthly Dividend Company." What hasn't worked out for yours truly is the investment thus far.

I got caught up with first getting into REIT investing and the eye-popping yields. It should have been more obvious at the time but I ignored the financial gravity of valuation. Chuck Carnevale is a huge proponent of it, but valuation always matters.

The graph charts the first tranche of shares I purchased. Shares had been on their way up and I caught them before the blow-off top near $70. I initially paid about 21x P/AFFO which was quite expensive but it was "OK" because it's a quality company. Lesson learned, you can do pretty poorly in the best of companies by buying at the wrong time. FFO is growing but with a single digit grower, the initial valuation at the time of purchase is paramount. Growth can fix a lot of sins of initially overpaying, but in these slow growers it can really hamper returns.

I made several purchases over time, several above the current share price. I finally got to the point where I got my stock alert that shares were near their yearly time and it was time to trim my holdings to reset my cost basis. The returns are highlighted above but not only did O trail the S&P by a monster 44%, but it's even behind the REIT benchmark VNQ by 4%.

Duke Energy

Duke (NYSE:DUK) was another byproduct of looking to trim average holdings. Sure, it was paying me a nice dividend but I needed some additional firepower for my buys this month.

I bought back in November 2015 and for a long while it was beating the market. Looking at the graph it nearly matches the results of XLU perfectly, which seems like an easier way to get utility exposure when valuations are right. What is great though is that even with slow-growing companies, you can beat the market, at least for a time.

This is another case where when valuations call for it, I have to be willing to part with shares. Earnings are going to grow slow which can be okay when bought at a nice valuation which I believe I did. Shares weren't at a fire-sale price like during the recession but there were some clear times where they represented a nice opportunity.

The last time shares touched $90 I should have been willing to part and looked to re-enter at a later time.

Pepsi

Finally, Pepsi was sold during the month. Like KMB, this was picked up first during May and prior to their 14% dividend hike which was very generous. Purchased just under $100 a share, shares quickly rebounded back to the $115 range.

Part of my thesis revolved around now former CEO Indra Nooyi. I had listened to some of her interviews and she always came off as an intelligent, level-headed business leader. In August she announced her retirement which dinged my perception about where the company is headed. The soda industry still faces secular headwinds that need to be sorted out though their snack division has done well. Sometimes raw numbers can't always capture an investment thesis and there are intangibles like who is at the helm.

I had set a limit sell at $112 which ultimately triggered. Ironically, while writing this article their earnings came out which seemed to disappoint the Street. Again, with their core guidance of $5.65 per share, shares aren't necessarily cheap today. I decided to not hold shares individually at this time, but don't fret as Pepsi is a big holding in both SCHD and SCHB.

So again to recap, none of these sells were because I see major deterioration in a company or anything of that nature. This is me simplifying my portfolio, in some cases taking large market-beating gains and rolling that into "the average."

Charts and Graphs

Dividends

The green bars are 2018 and in September I did receive $718 in dividends. This is also the end of the 3rd quarter of 2018 and the last months of a given quarter are usually the biggest for dividends received.

The absolute number was lower than last year's $793 received, but that was to be expected by my tilt towards growth. I still love what I've built thus far with how much time I have until I can actually tap this month (26.5 years).

Growth

At the end of a quarter, this chart may be the most important to smooth out monthly variations. So on the top, there is the quarterly sums of dividends compared to the prior year. With the $1,733 I received in Q3, which was 10% better than what I received in 2017. Awesome!

Now on a monthly basis, yes, this September was 7% lower than last year. Again, it was fully expected and if I ever get to the point where I say the hell with growth stocks, I can bump this up considerably.

Finally, my forward-looking income took another 6% hit this month by selling many dividend-paying names. This was rolled into what should be higher earnings growth providing a larger nest egg at the end of all of this. With these changes, this put me under where I was at this same point last year. Never fret though, the account balance is up 18% YTD and 26% TTM.

Visualizations

Income By Sector

August 2018

September 2018

Consumer staples took an obvious hit this month by removing KMB and PEP. I also lost my only utility exposure. I have stock alerts setup when either XLU or VPU is near their 52-week low to take another look.

Sector Allocations

August 2018

September 2018

This chart just got awkward. After GICS created the new "Communications" sector, everything has been a little more blurred. Companies like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Disney (NYSE:DIS), Netflix (NASDAQ:NFLX) have been thrown into the Communications bin alongside legacy names like AT&T.

This chart is my overall allocation by sector - including importantly my non-dividend paying companies. So this encapsulates the names I expect to generate significant alpha over time. Be aware there are also several companies where the lines are blurred. Think of Visa, Mastercard, PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). They all play in the financial pool but also leverage technology to a great extent.

Champion, Contender, Challenger View

August 2018

September 2018

The pie looks about the same though five holdings were removed including three champions (KMB, PEP, VFC).

Things Coming Up

I don't have any stocks on my radar currently, so I am open to ideas. I had a very tentative eye on General Electric (NYSE:GE) until Flannery was thrown out. Perhaps at some price I would speculate with some shares but right now I have no intention to.

I'll share my screener again this month in case it helps anyone out. Here is one screen 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 Q4, I am waiting for a few more dividend increase announcements. I'm looking for these:

  • Disney
  • Nike
  • Public Storage (is this frozen?)
  • Starbucks (they just announced back in July, but it was early for the year) unless they 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)
  • Ventas

Conclusion

Again please remember, this is for my life situation. Don't take anything I say as gospel! I have well over two decades before the IRS definition of retirement. If you are living off your dividends today, you probably shouldn't sell these names.

September was a strong month for dividends with over $700 received. Q3 in absolute terms saw fewer dividends than Q1 or Q2. I sold several dividend-paying names this month and bought two ETF placements.

Anyway, let me know what you think, and happy investing.

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