My K.I.S.S. Dividend Growth Portfolio: 3rd Quarter 2018 Update

|
Includes: AAPL, AFL, AMGN, AMP, APD, ARLP, AVA, BA, BDX, BLK, BPL, CBRL, CCC-OLD, CINF, CMI, CSX, CVS, CVX, D, DE, DLR, DRI, EMR, FCPT, FLIC, GD, HAS, HRS, IBM, ITW, JNJ, LLL, LMT, MCD, MGA, MSFT, NHI, NLY, NSC, NUS, NVS, O, OHI, OKE, OMC, PAYX, PEP, PG, PRU, PTY, QCOM, RTN, RY, SKT, SO, SYY, TGT, TROW, TUP, UGI, UTX, WBA, WEC, WFC, WMT, WPC
by: The Part-time Investor

Summary

A successful DGI portfolio can be created using very simple criteria.

Just a couple of hours every quarter is all that is necessary to manage a well-designed DGI portfolio.

My K.I.S.S. portfolio continues to provide acceptable (to me) dividend growth.

Ummm, well, I guess don’t have much in the way of interesting or insightful introductory thoughts for this portfolio update. My portfolio just keeps chugging along producing more and more dividends. So let’s just proceed with the data.

First, if you wish to review my previous quarterly updates, you can find them here:

Review of Third-Quarter Dividends and Contributions

These are the total dividends I received over the past three months and the comparison (in parentheses) to the same months during 2017:

July: $1,714.67 ($2,773.46) (-38.18%)

Aug: $7,195.88 ($4,782.60) (+50.46%)

Sept: $6,772.89 ($5,488.11) (+23.41%)

Total dividends collected in the third quarter of 2018: $15,683.44, an increase of 20.23% over the $13,044.17 I collected during the third quarter of 2017. $2,949.44 of this was immediately reinvested through DRIP plans in my Charles Schwab accounts.

In addition to this, $27,500 was added this quarter as my usual 401K contribution (I received two contributions this quarter), and $1,950 was added as catch-up contributions.

The K.I.S.S. System

Over the past three years, I have been developing and refining my Keep It Simple, Stupid (K.I.S.S.) system for creating a dividend growth portfolio. The system I developed has been discussed in my previous updates, but as a quick summary, my criteria for buying stocks are as follows:

For Purchase of Regular Stocks

  • The stock is on the Dividend Champions, Contenders and Challengers (CCC-OLD) list (as compiled by David Fish); (Thank you, David. You will be missed. I couldn’t have done any of this without you)
  • The payout ratio < 60%;
  • For stocks with a yield between 2.0% and 2.5%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >16;
  • For stocks with a yield between 2.5% and 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >14;
  • For stocks with a yield greater than 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >12;
  • A credit rating of BBB- or better from S&P (found on F.A.S.T.Graphs); and
  • F.A.S.T. Graphs shows a 10-year uptrend in earnings, and shows that the stock is not overvalued.

The use of different Chowder Number requirements is a change I made to my criteria over the past few years. I prefer to have stocks with higher yields, but if the rest of the story is compelling enough, I am willing to buy stocks with yields in the 2.0% to 3.0% range if their DGRs and Chowder Numbers are higher, as shown in my criteria above. Please see the previous article I wrote about different yields, DGRs and Chowder Numbers to read about my thinking on this topic.

For Purchase of MLPs, REITs, Utilities and Telecoms (High Yielders)

  • The stock is on CCC list;
  • Yield > 4%;
  • Chowder Number > 8%;
  • DGR for all time periods (1-yr., 3-yr., 5-yr. and 10-yr.) at least 3.5%;
  • F.A.S.T. Graph shows a 10-year uptrend (or for the life of the company, if less than 10 years) in funds from operations ("FFO"); and
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.

The time it takes to run this screen is only about 1-2 hours per quarter since most of the work has already been done for us by way of the CCC list, F.A.S.T. Graphs and S&P.

My criteria for selling a stock are also very simple. I will only sell if the stock cuts its dividend. I do not look at anything else when deciding whether or not to sell. Therefore, the only other work that needs to be done during the quarter is to watch for the dividend announcement from each company and put in a sell order if there is a dividend cut. One caveat, as I mention below, I will sell spin-offs from my stocks if those new companies don't have dividend policies I'm comfortable or familiar with. Again, it comes down to the dividend.

Sales

No sales were made this quarter.

Purchases

After running my screen I found a few stocks that were of interest. But since I already have 64 stocks in my portfolio I didn’t want to add too many more or I fear it will just act more and more like an index and make it harder for me to outperform the S&P. So this quarter I only added one stock, and that is Omnicom (OMC).

Omnicom:

  • Dividend Yield 3.53%
  • Payout Ratio 44.28%
  • Chowder Number 17.38%
  • S&P Credit Rating BBB+
  • Fast Graph

I purchased 314 shares of Omnicom @ $70.10, commission of $9.42 for a total of $22,020.79.

PAAY and Reinvesting

When reinvesting I put my available cash not back into the stocks that paid the dividend but instead into more shares of my most undervalued positions. This is where my "Percent Above Average Yield" (PAAY) system comes in. I discussed how I use PAAY in a previous article, and I recently published an article showing the results of my PAAY reinvestments over the past 5 years. As I explain in the article, so far my PAAY investments have returned 15.47% as compared to the S&P which would have returned 14.27%. Please note that I use PAAY only to rank the companies already in my portfolio for purposes of reinvesting my dividends, not for new purchases. (It would be too difficult to calculate the PAAY for all stocks under consideration for purchase.)

This quarter the following ten stocks in my portfolio had the highest PAAY

  • Tupperware (NYSE:TUP) 38.76%
  • First of Long island (NASDAQ:FLIC) 37.18%
  • Illinois Tool Works (NYSE:ITW) 31.96%
  • Buckeye Partners (NYSE:BPL) 17.98%
  • Wells Fargo (WFC) 16.07%
  • Blackrock (BLK) 15.68%
  • Cummins (NYSE:CMI) 11.93%
  • McDonald’s (NYSE:MCD) 11.80%
  • Cracker Barrel (CBRL) 10.36%
  • T. Rowe Price (NASDAQ:TROW) 8.55%

TUP has not raised its dividend for many years (although it has not cut the dividend either). Therefore, I chose not to put any more money into that stock. Instead, I looked for the stock with the next highest PAAY to replace TUP. This turned out to be Ameriprise (AMP).

  • Ameriprise (NYSE:AMP) 6.50%

Therefore, after purchasing Omnicom I reinvested the remaining money I had available in the following 10 stocks:

Ameriprise Financial 14 shares @ 152.02, commission of $0.42 for a total of $2,128.70

Blackrock 4 shares @ 474.00, commission of $0.12 for a total of $1996.12

Buckeye Partners 54 shares @ 36.76, commission of $4.62 for a total of $1986.65

Cracker Barrel 13 shares @146.38, commission of $0.30 for a total of $1903.33

Cummins 13 shares @ 152.36, commission of $0.39 for total of $1981.07

First of Long Island 92 shares @ 21.57, commission of $2.76 for a total of $1987.19

Illinois Tool Works 14 shares @ 143.61, commission of $0.42 for a total of $2010.96

McDonald’s 12 shares @ 165.54, commission of $0.36 for a total of $1998.84

T. Rose Price 18 shares @110.88, commission of $0.54 for a total of $1996.38

Wells Fargo 37 shares @ 53.51, commission of $1.11 for total of $1980.98

As mentioned above some of my stocks are held in two Charles Schwab accounts. I received the following shares of these stocks due to DRIP plans I've set up in these accounts. (Most of my portfolio is held in a Univest account that does not offer DRIPs):

STOCK

SHARES

Alliance Resource Partners LP (ARLP)

34.4715

Avista Corp. (AVA)

3.5365

Chevron Corporation (CVX)

0.242

Annaly Capital Management, Inc. (NLY)

87.682

ONEOK Inc. (OKE)

5.3587

PIMCO Corporate & Income Opportunity Fund (PTY)

24.4167

W.P. Carey Inc. (WPC)

3.5799

Four Corners Property (NYSE:FCPT)

3.369

Following these transactions, this is the present composition of my portfolio (prices as of market close 10/5/18):

Stock

Shares

Last Price

Market Value

Div/Share

Forward Annual Div Yield

Est. Income

Apple Inc. (AAPL)

170

224.29

$38,129.30

2.92

1.30%

$496.40

Aflac Incorporated (AFL)

490

46.5

$22,785.00

1.04

2.24%

$509.60

Amgen Inc. (AMGN)

162

204.02

$33,051.24

5.28

2.59%

$855.36

Ameriprise Financial, Inc. (AMP)

248

149.75

$37,138.00

3.60

2.40%

$892.80

Air Products and Chemicals, Inc. (APD)

119

168.88

$20,096.72

4.40

2.61%

$523.60

Alliance Resource Partners, L.P. (ARLP)

1,663.89

20.86

$34,708.76

2.08

9.97%

$3,460.89

Avista Corporation (AVA)

614.82

51.19

$31,472.61

1.49

2.91%

$917.31

The Boeing Company (BA)

199

386.47

$76,907.53

6.84

1.77%

$1,361.16

Becton, Dickinson and Company (BDX)

137

253.77

$34,766.49

3.00

1.18%

$411.00

BlackRock, Inc. (BLK)

44

470.86

$20,717.84

12.52

2.66%

$550.88

Buckeye Partners, L.P. (BPL)

640

36.21

$23,174.40

5.05

13.95%

$3,233.28

Cracker Barrel Old Country Store, Inc. (CBRL)

225

148.25

$33,356.25

5.00

3.37%

$1,125.00

Cincinnati Financial Corporation (CINF)

396

76.68

$30,365.28

2.12

2.76%

$839.52

Cummins Inc. (CMI)

234

151.28

$35,399.52

4.56

3.01%

$1,067.04

CSX Corporation (CSX)

709

74.55

$52,855.95

0.88

1.18%

$623.92

CVS Health Corporation (CVS)

294

78.67

$23,128.98

2.00

2.54%

$588.00

Chevron Corporation (CVX)

173.14

125.33

$21,700.24

4.48

3.57%

$775.67

Dominion Energy, Inc. (D)

335

71.85

$24,069.75

3.34

4.65%

$1,118.90

Deere & Company (DE)

193

156.4

$30,185.20

2.76

1.76%

$532.68

Digital Realty Trust, Inc. (DLR)

291

109.79

$31,948.89

4.04

3.68%

$1,175.64

Darden Restaurants, Inc. (DRI)

365

108.39

$39,562.35

2.52

2.32%

$919.80

Emerson Electric Co. (EMR)

337

78.06

$26,306.22

1.94

2.49%

$653.78

Four Corners Property Trust, Inc. (FCPT)

758.3

24.96

$18,927.20

1.10

4.41%

$834.13

The First of Long Island Corporation (FLIC)

1,229.00

21.62

$26,570.98

0.68

3.15%

$835.72

General Dynamics Corporation (GD)

198

206.32

$40,851.36

3.72

1.80%

$736.56

Hasbro, Inc. (HAS)

386

101.64

$39,233.04

2.52

2.48%

$972.72

Harris Corporation (HRS)

253

167.56

$42,392.68

2.74

1.64%

$693.22

International Business Machines Corporation (IBM)

110

149.03

$16,393.30

6.28

4.21%

$690.80

Illinois Tool Works Inc. (ITW)

182

141.01

$25,663.82

4.00

2.84%

$728.00

Johnson & Johnson (JNJ)

198

139.1

$27,541.80

3.60

2.59%

$712.80

L3 Technologies, Inc. (LLL)

146

210.28

$30,700.88

3.20

1.52%

$467.20

Lockheed Martin Corporation (LMT)

144

347.21

$49,998.24

8.80

2.53%

$1,267.20

McDonald's Corporation (MCD)

173

166.57

$28,816.61

4.64

2.79%

$802.72

Magna International Inc. (MGA)

290

50.77

$14,723.30

1.32

2.60%

$382.80

Microsoft Corporation (MSFT)

495

112.13

$55,504.35

1.84

1.64%

$910.80

National Health Investors, Inc. (NHI)

271

72.39

$19,617.69

4.00

5.53%

$1,084.00

Annaly Capital Management, Inc. (NLY)

1,937.16

10.11

$19,584.68

1.20

11.87%

$2,324.59

Norfolk Southern Corporation (NSC)

174

183.02

$31,845.48

3.20

1.75%

$556.80

Nu Skin Enterprises, Inc. (NUS)

394

76.85

$30,278.90

1.46

1.90%

$575.24

Novartis AG (NVS)

240

85.51

$20,522.40

7.64

8.93%

$1,832.64

Realty Income Corporation (O)

386

57.06

$22,025.16

2.65

4.65%

$1,023.67

Omega Healthcare Investors, Inc. (OHI)

851

32.4

$27,572.40

2.64

8.15%

$2,246.64

ONEOK, Inc. (OKE)

570.9

68.61

$39,169.11

3.30

4.81%

$1,883.97

Omnicom Group Inc. (OMC)

314

70.21

$22,045.94

2.40

3.42%

$753.60

Paychex, Inc. (PAYX)

438

72.94

$31,947.72

2.24

3.07%

$981.12

PepsiCo, Inc. (PEP)

186

106.49

$19,807.14

3.71

3.48%

$690.06

The Procter & Gamble Company (PG)

166

82.15

$13,636.90

2.87

3.49%

$476.09

Prudential Financial, Inc. (PRU)

125

104.46

$13,057.50

3.60

3.45%

$450.00

PIMCO Corporate & Income Opportunity Fund (PTY)

1,308.09

17.41

$22,773.77

1.56

8.96%

$2,040.62

QUALCOMM Incorporated (QCOM)

425

71.21

$30,264.25

2.48

3.48%

$1,054.00

Raytheon Company (RTN)

198

206.75

$40,936.50

3.47

1.68%

$687.46

Royal Bank of Canada (RY)

225

79.48

$17,883.00

3.04

3.82%

$683.10

Tanger Factory Outlet Centers, Inc. (SKT)

891

21.58

$19,227.78

1.40

6.49%

$1,247.40

The Southern Company (SO)

341

43.71

$14,905.11

2.40

5.49%

$818.40

Sysco Corporation (SYY)

372

72.03

$26,795.16

1.44

2.00%

$535.68

Target Corporation (TGT)

384

84.52

$32,455.68

2.56

3.03%

$983.04

T. Rowe Price Group, Inc. (TROW)

344

109.32

$37,606.08

2.80

2.56%

$963.20

Tupperware Brands Corporation (TUP)

205

32.24

$6,609.20

2.72

8.44%

$557.60

UGI Corporation (UGI)

618

55.33

$34,193.94

1.04

1.88%

$642.72

United Technologies Corporation (UTX)

108

139.06

$15,018.48

2.80

2.01%

$302.40

Walgreens Boots Alliance, Inc. (WBA)

379

72.51

$27,481.29

1.76

2.43%

$667.04

WEC Energy Group, Inc. (WEC)

336

68.28

$22,942.08

2.21

3.24%

$743.23

Wells Fargo & Company (WFC)

421

53.19

$22,392.99

1.72

3.23%

$724.12

Walmart Inc. (WMT)

184

93.31

$17,169.04

2.08

2.23%

$382.72

W. P. Carey Inc. (WPC)

284.24

62.94

$17,889.89

4.10

6.51%

$1,165.38

Cash

$1,762.22

$1,858,561.56

3.32%

$61,743.43

Returns

My portfolio has increased in value this quarter from $1,738,949.93 to $1,858,561.56. Not including the 401K contribution of $15,450, this is a return of 5.18%. In the same time period, the "market," as represented by SPY, was up 5.22%. YTD, I am up 8.00% while the S&P is up 11.22%.

I run three paper portfolios to compare to my returns, SPY, SDY and VDIGX. For each of these portfolios whenever I have cash contributions put into my real-life account I also put the same amount into the paper portfolios and "buy" more shares of the individual indices. And when SPY, SDY or VDIGX pays a dividend, it gets reinvested into more paper shares, just like I reinvest my real-life dividends in my portfolio. As far as I can tell, this is the most accurate way I have to compare their performances.

The year to date returns of my benchmarks (assuming they received the same amount of reinvestments as my portfolio did, and at the same time) were:

SPY 11.22%

SDY 6.50%

VDIGX 8.80%

Dividends

During the third quarter of 2018, I collected $15,683.44 in dividends. This is an increase of 20.23% over the $13,044.17 collected in the third quarter of 2017. With the dividends that have already been declared for each of my companies, the amount of dividends I expect to collect in the next 12 months (ED12) is $61,743.43. For the first time in the life of my portfolio my expected dividends over the next year has exceeded $60,000. At this time last year my ED12 was barely over $50,000! So it has increased by over $10,000 (20%!) in only 12 months. As of the end of last quarter, my ED12 was $58,311.65, so in the past 3 months alone my ED12 has increased by 5.88%. But this does not include the dividend income I will receive when I invest the 401K contributions I'll receive over the next year. And as many of my stocks continue to increase their dividends over the coming year, I expect that the dividend growth will be even higher. (It is important to note that the growth in my ED12 is due both to the dividends expected from new contributions, as well as the actual organic dividend growth of the stocks in my portfolio.)

The present yield of my portfolio is 3.32%. This has dropped over the past year or two due to the increase in the portfolio value, not due to a drop in dividends.

As shown in the following graph, my dividend income continues to grow year by year.

Conclusion

Not much has changed with my portfolio and certainly not with my plan, so I’ll just reiterate what I’ve said in previous updates. I am a part-time investor. I do it as a hobby, and because I trust myself to look after my interests more than I trust anybody else to do so. I am not a professional and have no formal training in finance, economics or investing. Most of what I know I have learned here on Seeking Alpha. If I can produce dividend income and total returns that match, or even beat the market, then anybody can. All you have to do is take the time to read about DGI from some of the best contributors here on SA (DVK, Chowder, Mike Nadel, Bob Wells, etc.), set up a system that you are comfortable with and stick to that system. And try to keep it as simple as possible. The more complicated it is, the harder it is to follow, and in my opinion, the worse your results will be in the end.

As I've already said, but must reiterate, my mindset is to grow the dividend income produced by my portfolio, and not necessarily to focus on growing the size of my portfolio. I know this is a controversial statement to some (dividend growth vs. total return), but it is how I look at my investing, and how I analyze my results. In the long run, by maintaining my discipline and carrying out my K.I.S.S. criteria, I believe in the end I will beat "the market."

DGI has taught me to have a long-term focus, and for that focus to be on the dividends, not on price movement. The prices of some of my stocks may fall from time to time, but as long as the dividends continue to rise, I know the stock prices will eventually recover. More importantly, while waiting for that to happen, I will continue to collect dividends from those stocks. And as the dividends increase, if the prices stay low, it will just give me even more opportunities to buy more shares of undervalued stocks, as I did with my PAAY stocks this quarter. I'm already enjoying some of the benefits of my patience, as I was able to buy more shares at depressed prices, which means I will collect even more dividends in the coming years.

So my plan going forward is to continue to focus on the dividends and to follow my simple K.I.S.S. rules. They have been working very well so far. I believe my results continue to support my hypothesis: that by using simple, straightforward, easy-to-understand criteria for buying and selling, and by using the hard work of other people (thank you David Fish, Chuck Carnevale, S&P and all the wonderful SA contributors I have learned from!), someone can achieve excellent investment results without having to put an inordinate amount of time into the process.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am/we are long OMC, MSFT, AAPL, BA, WFC, CVX, O, ITW, PG, JNJ, MCD.

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.