My K.I.S.S. Dividend Growth Portfolio: 4th Quarter 2018 Update

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Includes: AAPL, AFL, AMGN, AMP, APD, ARLP, AVA, BA, BDX, BLK, BPL, CBRL, CINF, CMI, CSX, CVS, CVX, D, DE, DLR, DRI, EMR, FCPT, FLIC, GD, HAS, HRS, IBM, ITW, IVZ, JNJ, JPM, 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.

There are many reasons why I believe a well constructed dividend growth portfolio will beat the market over time. One of the main ones is that many dividend growth stocks are often considered to be “defensive” stocks which have a low beta and will fall less than the market does during down turns. This has been demonstrated quite well with my portfolio over the last three months. October, November and December have been very difficult times for the market. And although my portfolio did fall, quite a bit, it held up better than the market did as a whole. In fact, where as I was trailing the market for YTD as of my last update, by the end of this quarter, and for the year as a whole, I was ahead. As my intention for posting my updates is to show that a dividend growth portfolio can have market beating performance, these results are quite satisfying.

I will go into the details of my returns later. First, I’ll present my portfolio update and my transactions.

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:

Oct: $1,964.37 ($1,336.14) (+47.01%)

Nov: $5,699.93 ($5,019.21) (+13.56%)

Dec: $6,170.21 ($4,535.23) (+36.05%)

Total dividends collected in the fourth quarter of 2018: $13,834.51, an increase of 27.11% over the $10,890.58 I collected during the fourth quarter of 2017. $2,459.81 of this was immediately reinvested through DRIP plans in my Charles Schwab accounts (See below for details).

In addition to this, $13,750 was added this quarter as my quarterly 401K contribution, and $950 was added as catch-up contributions.

The K.I.S.S. System

Over the past six 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”) list (as previously compiled by David Fish, but now compiled by Justin Law); (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- (Investment grade) 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 Chowder number is the 5 year dividend growth rate plus the present dividend yield. 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.) of at least 4.0%;
  • 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 2-3 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

In early November Buckeye Partners cut its dividend 40% from $1.2625 down to $0.75. As per my rules of selling a stock if it cuts its dividend, I immediately sold it.

I sold 640 shares of Buckeye Partners (BPL) @ $32.36, commission of $19.20 for a total of $20,690.99.

OK, here is a rare exception to my “sell only if the dividend is cut” rule. I have owned Wells Fargo for many years and have been happy with its performance and dividend payments. But then I had a personal experience with the bank in which I feel they stole thousands of dollars from me. Based on my experience with them I felt I could no longer keep the stock. So I sold it.

I sold 421 shares of Wells Fargo (WFC) @ $45.81, commission of $12.63, for a total of $19,273.16.

Purchases

After selling BPL I ran my screen to look for a replacement. I chose Invesco Limited (IVZ)

Invesco (IVZ):

  • Dividend Yield 7.17%
  • Payout Ratio 47.24%
  • Chowder Number 19.6%
  • S&P Credit Rating BBB+
  • Fast Graph

Macintosh HD:Users:sleeper1964:Desktop:Screen Shot 2019-01-07 at 7.36.09 PM.png

I purchased 1032 shares of Invesco Limited @ $20.10, commission of $30.96 for a total of $20,774.06.

To replace Wells Fargo I wanted to choose another bank stock with similar dividend metrics. I ran my screen and out of the banks that passed I chose JP Morgan (JPM).

JP Morgan (JPM)

  • Dividend Yield 3.28%
  • Payout Ratio 37.12%
  • Chowder Number 15.4%
  • S&P Credit Rating A-
  • Fast Graph

I purchased 200 shares of JP Morgan (JPM) @ $97.22, commission of $0.72 for a total of $19,449.98.

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 (in parentheses)

  • Invesco Limited (IVZ) 51.30%
  • Ameriprise (AMP) 40.98%
  • Illinois Tool Works (ITW) 38.75%
  • Blackrock (BLK) 34.90%
  • Lockheed Martin (LMT) 33.95%
  • First of Long island (FLIC) 33.06%
  • Harris Corp. (HRS) 32.57%
  • Boeing (BA) 32.03%
  • Raytheon (RTN) 31.97%
  • General Dynamics (GD) 30.67%

However, I already have a very large position in Boeing, so I decided to bypass that stock and move to the next one in line which was IBM.

  • IBM (IBM) 28.15%

Therefore, after purchasing full positions of Invesco and JP Morgan I reinvested the remaining money I had available in the following 10 stocks:

Ameriprise Financial 26 shares @ 103.73, commission of $0.78 for a total of $2,697.76

Blackrock 7 shares @ 390.14, commission of $0.21 for a total of $2,731.19.

First of Long Island 135 shares @ 19.89, commission of $4.05 for a total of $2,689.19

General Dynamics (GD) 17 shares @ 156.52, commission of $0.51 for a total of $2,661.35.

Harris Corp (HRS) 21 shares @ 133.07, commission of $0.63 for a total of $2,795.26.

IBM (IBM) 24 shares @ 113.43, commission of $0.72 for a total of $2,723.04.

Invesco (IVZ) 162 shares @ 16.66, commission of $4.86 for a total of $2,703.76.

Illinois Tool Works 22 shares @ 125.76, commission of $0.66 for a total of $2,737.38.

Lockheed Martin (LMT) 10 shares @ 261.16, commission of $030 for a total of $2,611.90.

Raytheon (RTN) 17 shares @ 152.34, commission of $0.51 for a total of $2,590.29

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)

36.2927

Avista Corp. (AVA)

4.0584

Chevron Corporation (CVX)

0.2432

Annaly Capital Management, Inc. (NLY)

14.6876

ONEOK Inc. (OKE)

6.2791

PIMCO Corporate & Income Opportunity Fund (PTY)

36.2828

W.P. Carey Inc. (WPC)

3.7625

Four Corners Property (FCPT)

3.3614

Following these transactions, this is the present composition of my portfolio (prices as of market close 1/4/19):

Company

Shares

Last Price

Market Value

Div/Share

Expected Income Over Next 12 Months (ED12)

Forward Annual Div Yield

Apple Inc. (AAPL)

170

148.26

$25,204.20

2.92

$496.40

1.97%

Aflac Incorporated (AFL)

490

44.92

$22,010.80

1.04

$509.60

2.32%

Amgen Inc. (AMGN)

162

195.44

$31,661.28

5.80

$939.60

2.97%

Ameriprise Financial, Inc. (AMP)

274

110.73

$30,340.02

3.60

$986.40

3.25%

Air Products and Chemicals, Inc. (APD)

119

161.61

$19,231.59

4.40

$523.60

2.72%

Avista Corporation (AVA)

618.88

42.15

$26,085.67

1.49

$922.13

3.53%

The Boeing Company (BA)

199

327.08

$65,088.92

8.22

$1,635.78

2.51%

Becton, Dickinson and Company (BDX)

137

216.99

$29,727.63

3.08

$421.96

1.42%

BlackRock, Inc. (BLK)

51

391.82

$19,982.82

12.52

$638.52

3.20%

Cracker Barrel Old Country Store, Inc. (CBRL)

225

162.84

$36,639.00

5.00

$1,125.00

3.07%

Cincinnati Financial Corporation (CINF)

396

75.89

$30,052.44

2.12

$839.52

2.79%

Cummins Inc. (CMI)

234

136.17

$31,863.78

4.56

$1,067.04

3.35%

CSX Corporation (CSX)

709

62.79

$44,518.11

0.88

$623.92

1.40%

CVS Health Corporation (CVS)

294

66.82

$19,645.08

2.00

$588.00

2.99%

Chevron Corporation (CVX)

173.38

110.82

$19,214.34

4.48

$776.74

4.04%

Dominion Energy, Inc. (D)

335

72.21

$24,190.35

3.34

$1,118.90

4.63%

Deere & Company (DE)

193

151.68

$29,274.24

3.04

$586.72

2.00%

Digital Realty Trust, Inc. (DLR)

291

104.81

$30,499.71

4.04

$1,175.64

3.85%

Darden Restaurants, Inc. (DRI)

365

101.4

$37,011.00

3.00

$1,095.00

2.96%

Emerson Electric Co. (EMR)

337

59.72

$20,125.64

1.96

$660.52

3.28%

Four Corners Property Trust, Inc. (FCPT)

761.66

25.29

$19,262.35

1.15

$875.91

4.55%

The First of Long Island Corporation (FLIC)

1,364.00

21.28

$29,025.92

0.68

$927.52

3.20%

General Dynamics Corporation (GD)

215

157.77

$33,920.55

3.72

$799.80

2.36%

Hasbro, Inc. (HAS)

386

80.79

$31,184.94

2.52

$972.72

3.12%

Harris Corporation (HRS)

274

132.92

$36,420.08

2.74

$750.76

2.06%

International Business Machines Corporation (IBM)

134

117.32

$15,720.88

6.28

$841.52

5.35%

Illinois Tool Works Inc. (ITW)

204

127.18

$25,944.72

4.00

$816.00

3.15%

Invesco Ltd. (IVZ)

1,194.00

17.26

$20,608.44

1.19

$1,420.86

6.89%

Johnson & Johnson (JNJ)

198

127.83

$25,310.34

3.60

$712.80

2.82%

JPMorgan Chase & Co. (JPM)

200

100.69

$20,138.00

3.20

$640.00

3.18%

L3 Technologies, Inc. (LLL)

146

171

$24,966.00

3.20

$467.20

1.87%

Lockheed Martin Corporation (LMT)

154

265.04

$40,816.16

8.80

$1,355.20

3.32%

McDonald's Corporation (MCD)

173

178.28

$30,842.44

4.64

$802.72

2.60%

Magna International Inc. (MGA)

290

45.54

$13,206.60

1.32

$382.80

2.90%

Microsoft Corporation (MSFT)

495

101.93

$50,455.35

1.84

$910.80

1.81%

National Health Investors, Inc. (NHI)

271

76.25

$20,663.75

4.00

$1,084.00

5.25%

Norfolk Southern Corporation (NSC)

174

150.53

$26,192.22

3.20

$556.80

2.13%

Nu Skin Enterprises, Inc. (NUS)

394

61.48

$24,223.12

1.46

$575.24

2.37%

Novartis AG (NVS)

240

85.89

$20,613.60

2.94

$705.60

3.42%

Realty Income Corporation (O)

386

62.46

$24,109.56

2.65

$1,022.90

4.24%

Omnicom Group Inc. (OMC)

314

73.34

$23,028.76

2.40

$753.60

3.27%

Paychex, Inc. (PAYX)

438

66.2

$28,995.60

2.24

$981.12

3.38%

PepsiCo, Inc. (PEP)

186

110.48

$20,549.28

3.71

$690.06

3.36%

The Procter & Gamble Company (PG)

166

92.49

$15,353.34

2.87

$476.42

3.10%

Prudential Financial, Inc. (PRU)

125

85.04

$10,630.00

3.60

$450.00

4.23%

QUALCOMM Incorporated (QCOM)

425

56.6

$24,055.00

2.48

$1,054.00

4.38%

Raytheon Company (RTN)

215

153.74

$33,054.10

3.47

$746.05

2.26%

Royal Bank of Canada (RY)

225

70.32

$15,822.00

3.92

$882.00

5.57%

Tanger Factory Outlet Centers, Inc. (SKT)

891

20.95

$18,666.45

1.40

$1,247.40

6.68%

The Southern Company (SO)

341

44.71

$15,246.11

2.40

$818.40

5.37%

Sysco Corporation (SYY)

372

61.85

$23,008.20

1.56

$580.32

2.52%

Target Corporation (TGT)

384

66.43

$25,509.12

2.56

$983.04

3.85%

T. Rowe Price Group, Inc. (TROW)

344

91.98

$31,641.12

2.80

$963.20

3.04%

Tupperware Brands Corporation (TUP)

205

33.81

$6,931.05

2.72

$557.60

8.04%

UGI Corporation (UGI)

618

54.06

$33,409.08

1.04

$642.72

1.92%

United Technologies Corporation (UTX)

108

107.02

$11,558.16

2.94

$317.52

2.75%

Walgreens Boots Alliance, Inc. (WBA)

379

69.57

$26,367.03

1.76

$667.04

2.53%

WEC Energy Group, Inc. (WEC)

336

68.26

$22,935.36

2.36

$792.96

3.46%

Walmart Inc. (WMT)

184

93.44

$17,192.96

2.08

$382.72

2.23%

W. P. Carey Inc. (WPC)

287.99

65.96

$18,995.99

4.12

$1,186.52

6.25%

HIGH YIELD STOCKS

Alliance Resource Partners, L.P. (ARLP)

1,700.19

18.66

$31,725.48

2.10

$3,570.40

11.25%

Annaly Capital Management, Inc. (NLY)

1,951.85

10.02

$19,557.53

1.20

$2,342.22

11.98%

Omega Healthcare Investors, Inc. (OHI)

851

35.02

$29,802.02

2.64

$2,246.64

7.54%

ONEOK, Inc. (OKE)

577.18

56.65

$32,697.18

3.42

$1,973.96

6.04%

PIMCO Corporate & Income Opp. Fund (PTY)

1,336.17

15.79

$21,098.05

1.56

$2,084.43

9.88%

Cash,

$1,244.08

TOTALS

$1,685,064.69

$60,742.47

3.60%

Returns

My portfolio has decreased in value this quarter from $1,858,561.56 to $1,685,064.69. Not including the 401K contribution of $14,700, this is a return of -10.13%. In the same time period, the "market," as represented by SPY, was down -11.78%. For 2018 (through 1/4/19) I am down -2.51% while the S&P is down -2.89%. Please note, the returns for SPY are made assuming I made pension contributions to buy more SPY during the year, just as pension contributions went into my actual portfolio. This is why the SPY returns I report are different that what you would see if you simply looked up online the annual return for SPY (which would be -4.45%). This will hold true for the other benchmarks I report below.

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 -2.89%

SDY -1.53%

VDIGX 0.23%

As a reminder my KISS portfolio returned -2.51%

On an annual basis since 2013 the returns for me benchmarks are as follows:

SPY 11.07%

SDY 10.46%

VDIGX 10.22%

The annual return for my KISS portfolio during this time is 12.23%

Dividends

During the third quarter of 2018, I collected $13,834.51 in dividends. This is an increase of 27.11% over the $10,890.58 collected in the fourth 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 $60,742.47. This is a drop from the $61,743.43 that I reported for my ED12 in my third quarter update. This is due to the sale of BPL and its replacement with IVZ, and the sale of WFC to be replaced by JPM. The removal of BPL from my portfolio caused a significant decline in my dividend income that was not completely compensated by the purchase of IVZ. However, I’m sure that difference will be made up with my usual dividend growth over the next year, as well as more dividends created by the purchase of stocks with my upcoming pension contributions. 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 3.60%. This is a fairly large increase in my yield, over the past 3 months, even with the loss of income from the sale of BPL and WFC. This increase is due to the over 10% drop in the portfolio value over the past quarter.

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

Macintosh HD:Users:sleeper1964:Desktop:Screen Shot 2019-01-07 at 7.40.29 PM.png

Conclusion

It was a tough quarter, but it’s periods like this that reinforce in my own mind my reasons for being a dividend growth investor. Tough times in the market are when dividend portfolios should perform the best (as compared to the market as a whole). After trailing the market by about 3 percentage points throughout the first 9 months of the year, I ended up ahead of the market by 0.38%. Not a huge amount, but a nice comeback. Remember, my reason for posting my portfolio is to show that a well designed and managed DGI portfolio can beat the market over the long term. This quarter helped to show how that is possible.

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. 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, and not so much 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 JPM, IVZ, MSFT, BA, AAPL, QCOM, TGT, JNJ, PG. 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.