My Dividend Growth Portfolio 2018 Review: 3 Sells, 6 Buys

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Includes: AAPL, ABT, AFL, AMP, BUD, CMI, CSCO, CVS, DIS, FB, GE, GLW, HD, IQ, ITW, JNJ, JPM, K, KWEB, LB, MA, MDT, MMM, MO, NKE, PRU, PSA, PYPL, SBUX, SCHB, SCHD, SKT, SQ, STAG, SWK, T, TROW, TRV, TWTR, UTX, V, VNQ, VTR, WPC, XLU
by: Dividend Derek
Summary

I collected $7,015 in dividends in 2018, a 20% increase over the $5,825 in 2017.

The $1,554 collected in the fourth quarter was 5% lower than the same quarter in 2017, I'll dive into that.

The $595 collected during December was lower than the $765 in December 2017.

I'll review my portfolio performance in 2018 and look back at some lessons learned.

Finally, I'll set my new goals for 2019 and provide updated portfolio visualizations.

Introduction

Welcome to my 2018 year in review. This will encapsulate an update for December, the fourth quarter and 2018 as a whole. This article series covers my investing journey as a father of two towards my eventual retirement. Any specific stocks or amounts are particular to my self-directed 401(k) plan.

The goal of my portfolio is to generate a growing income stream for me and my wife during our golden years. The aim is to live off dividends without touching the principal. Dividend growth stocks are the chosen vehicle to meet that goal. At 33, I have approximately 26 years before I can (safely) touch any of this money.

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."

What's New?

December was another wild roller-coaster ride. The Santa Clause rally failed to materialize with some of the lowest stock prices seen on Christmas Eve. The subsequent rally after Christmas was enough to make your head spin! In even preparing this piece, it initially seemed as though we were going to continue the broad market decline. Fed Chairman Powell then seemed to initiate another "Fed put" with his commentary regarding slowing rate hikes, watching the stock market and even possibly slowing the unwinding of the Fed balance sheet.

It's all another way of saying there are millions of market influences in the short term but in the long term, quality companies with growing earnings will drive stock returns.

After maxing my 2018 401(k) contributions in October, I am looking forward to having new funds hitting the account in January.

Performance

For the year, it looks like I was down just under 5%. My brokerage doesn't list their method of calculation but it seems that it does adjust for contributions from both myself and my employer.

I did a back of the envelope calculation by comparing the ending value to the starting value + all contributions. I got a figure of -4.83% which is close enough for me to go with the brokerage number. I'm also down 12% from the peak seen at the end of September.

I compared my results to the results of the Schwab U.S. Dividend Equity ETF (SCHD). That is my dividend ETF proxy and currently would be my "go to" if I ever wanted to get out of the individual dividend name game.

Based on the actual market data over time, I calculated a return of -5.87% for SCHD and -5.25% for the S&P in 2018.

There was technically a tiny bit of alpha generated but basically, I could have had the exact same returns if I was 100% in SCHD. That's an interesting revelation that this monkey with a dartboard isn't generating notable gains. The biggest advantage of course would be the regular payments spread out over the course of the year rather than the quarterly and erratic payments from an ETF.

Lessons Learned

The end of the year is a good time to analyze and pull the thread on a few topics that have been rattling around in my head.

Dividend reinvestment is not a black or white topic

Whether to reinvest dividends or not is a whole separate article upon itself so I won't attempt to do that here. Historically, I have reinvested dividends in all my holdings but I am pivoting away from that and looking to collect them on a holding by holding basis. Reinvesting is a passive decision to continue buying shares at whatever the market rate may be at the time of the dividend. This is a double-edged knife; it's advantageous when a company is trading below intrinsic value but can be destructive when shares are overpriced.

Additionally, in my own circumstances, I've had to pass on opportunities or sell other shares in order to fund an additional buy. This is an active retirement account with money coming in every paycheck but there are feast or famine times during the year. As we've seen during December especially, opportunities usually come from a broad market decline and not isolated to individual names. This will be highlighted by the transactions I made this month.

What I think I would prefer is having more cash accruing on an ongoing basis and then I can decide where to reinvest.

Be more data-dependent

The second idea of being data-dependent dovetails off the first point. There are periods when the market is overly bullish or bearish as we know. Anyone who uses Custom Stock Alerts probably noticed this during December. My phone was seemingly constantly buzzing with alerts that one company or another was having major price declines. During these times is when I want to have more cash already on hand to be able to buy cheaper shares in the dividend companies I love.

Conversely, when the market is overly bullish like in August/September it makes sense to take some money off the table. When Mr. Market offers you a price that you like, it's OK to take it! My lesson here is to keep closer tabs on where we are in the cycle and to move with conviction. As an example, 52-week lows may make sense to add some shares and a 52-week high may make sense to take some profits.

You don't have to swing at every pitch

If you have an individual name in your portfolio, you should be really comfortable with the business and their prospects. When times sour, that'll help you keep your head on tight. Without naming the accused, I have names in my portfolio that I don't have a particular emotion one way or the other about but that coupled with seeing negative returns makes it much harder mentally sticking with it. Fortunately, the alternative is true, names that I intrinsically like more, it's easier to stick with through thick and thin.

I also have multiple ETF options that I am very comfortable with so there is never any need to "force" an investment. Some of the names I've owned for a few years so they are leftovers as I refine my investing style.

I highlighted that I maxed my 401k contributions for the year in October so the money I have is what I have until contributions begin again in January. If I don't add to any specific holding I will probably add to my Schwab US Dividend Equity ETF (SCHD).

Passive investing is OK

I had a similar scenario last year, but after running through the figures, there wasn't any meaningful alpha generated nor excess dividends received over the course of 2018.

My personal returns mimicked those of both SCHD and the S&P fairly closely. The payment schedule and distribution amounts may not fit for a retiree living off of dividends.

Now let's review and set new goals for 2019.

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.

For my first goal, I did accomplish this, by my math I saw an average of a 13% dividend increase across my holdings. This may be a fluke due to the tax plan but there were some massive dividend hikes in 2018.

Here's a quick table of my top dividend growers

JPMorgan Chase 42.0%
Mastercard 32.0%
Illinois Tool Works 28.0%
T. Rowe Price 22.8%
Prudential Financial 20.0%
Starbucks 20.0%

My income goal was not met this year, I finished with an estimated $6,459 of dividend income for 2019. That number is based on what I currently own today and doesn't account for increases or new investments. I missed on this goal because of adding some growth stocks during the summer months. Over a few months, I split approximately 20% of my portfolio to either low or no dividend paying names. Those names included Facebook (FB), Mastercard (MA), Visa (V), iQIYI (IQ), PayPal (PYPL), Twitter (TWTR), Square (SQ) and KraneShares CSI China Internet ETF (KWEB). That obviously has dividend repercussions as that money has to come from somewhere. In any event, that itch has been scratched and now it's back to business.

I did not suffer any dividend cuts during 2018. There were a few headline cuts including General Electric (GE), Anheuser-Busch InBev (BUD) and L Brands (LB).

2019 Goals

  1. I want my holdings to have a weighted 1-year dividend growth rate of at least 7%.
  2. By the end of 2019, I want to have a projected dividend income of at least $7,600.
  3. I want to suffer no dividend cuts.

I suspect that the dividend growth hype of 2018 will not completely carry over to 2019. Yes, profitability is still up from the tax plan but I expect increases to be a little more muted. I'm going to keep my goal at 7%.

I calculated my target income by assuming my existing projected income ($6,450) grows by 7% organically. That would take the income to $6,900. Additionally, I am assuming that all new contributions (mine and company match) buy an initial yield of 3%. Adding $720 to $6,900 gives me about $7,600.

Lastly, no dividend cuts!

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.
  • Dividend yield + 5 year dividend growth rate > 8% (Chowder rule). 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. The kicker may be better defined as a low-P/E stock that has not yet reverted to its mean.
  • 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 its 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 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 (13+ 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.

Selling Criteria

There are only a few reasons I'll sell a stock, though none of these events is a guarantee I'll do so.

  • Dividend cut
  • Company degradation - This could be things like deteriorating balance sheets, loss of competitive advantage and 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 used is buying 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. With a fat increase, it could be a good time to jump in. 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 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 its 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, where 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 3.16% Challenger AA+
Abbott Laboratories ABT 2.94% Challenger A+
Aflac AFL 2.18% Champion A-
Ameriprise Financial AMP 2.53% Challenger A
Cummins CMI 1.87% Contender A+
Cisco Systems CSCO 2.19% Challenger AA-
CVS Health CVS 2.11% Contender BBB
Walt Disney DIS 3.30% Challenger A
Corning GLW 3.23% Contender BBB+
Home Depot HD 2.49% Challenger A
Illinois Tool Works ITW 3.08% Champion A+
Johnson & Johnson JNJ 2.96% Champion AAA
JPMorgan Chase JPM 3.20% Challenger A-
Mastercard MA 2.60% Challenger A
Medtronic MDT 2.17% Champion A
3M MMM 1.49% Champion AA-
Altria MO 3.67% Champion BBB+
Nike NKE 2.11% Contender AA-
Prudential Financial PRU 2.56% Challenger A
Starbucks SBUX 3.46% Challenger BBB+
Schwab US Broad Market ETF SCHB 2.39%
Schwab US Dividend ETF SCHD 3.72%
Tanger Factory Outlet SKT 1.74% Contender BBB+
STAG Industrial STAG 1.48% Challenger N/R
Stanley Black & Decker SWK 2.82% Champion A
AT&T T 3.96% Champion BBB+
T. Rowe Price TROW 1.50% Champion A+
Travelers Companies TRV 2.65% Contender A
United Technologies Corporation UTX 1.90% Contender A-
Visa V 2.92% Contender A+
W.P. Carey WPC 1.85% 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 -7.63% SPY -7.63%
ABT 12/6/2016 68.16% SPY 68.16%
AFL 10/30/2014 28.42% SPY 28.42%
AMP 9/29/2016 -2.49% SPY -2.49%
CMI 10/30/2015 16.29% SPY 16.29%
CSCO 4/6/2016 39.76% SPY 39.76%
CVS 10/7/2016 -39.24% SPY -39.24%
DIS 12/28/2015 -23.48% SPY -23.48%
GLW 10/14/2015 49.95% SPY 49.95%
HD 5/3/2016 9.56% SPY 9.56%
ITW 8/24/2018 6.37% SPY 6.37%
JNJ 12/9/2015 3.09% SPY 3.09%
JPM 7/15/2016 42.51% SPY 42.51%
MA 7/26/2018 1.66% SPY 1.66%
MDT 11/22/2016 4.54% SPY 4.54%
MMM 5/24/2018 2.46% SPY 2.46%
MO 10/31/2013 4.87% SPY 4.87%
NKE 5/3/2016 1.02% SPY 1.02%
PRU 4/7/2016 2.01% SPY 2.01%
SBUX 12/3/2015 -18.64% SPY -18.64%
SCHB 9/24/2018 -0.64% SPY -0.64%
SCHD 9/24/2018 2.08% SPY 2.08%
SKT 7/26/2017 -21.05% VNQ -10.72%
STAG 5/20/2016 8.85% VNQ 36.12%
SWK 1/28/2016 2.77% SPY 2.77%
T 11/3/2015 -20.76% SPY -20.76%
TROW 9/29/2016 25.93% SPY 25.93%
TRV 4/28/2014 -1.84% SPY -1.84%
UTX 1/28/2016 -10.25% SPY -10.25%
V 7/26/2018 4.91% SPY 4.91%
WPC 5/15/2017 11.94% VNQ 21.77%

This table is how shares have performed since I first purchased them. I am able to compare versus both the S&P and 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 define 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.

In past editions, I highlighted just how quick these results can change. My former position of Ventas went from a major laggard of both VNQ and the S&P to beating both of them within a few months. I managed to also sell my shares at the top.

My Buys

I went a little crazy with my buys on December 14th. I made 6 stock purchases that day on what was a good down day for the market as a whole.

JPMorgan

I picked up 30 more shares of JPM at a cost of $100 per share. The shares pay $3.20 after the mega 42% raise last fall. This'll add $96 annually to my dividend total. Shares look quite reasonable as financials are generally hated in this environment. These shares come with a 3.2% starting yield and trade at under 11x earnings.

Prudential

Continuing on with the financial theme, I added another 20 shares of Prudential at $82, providing an additional $72 of dividends ($3.60 x 20).

Shares are at a 52 week low, trade at a P/E of 7 and sport a 4.2% yield.

Travelers

Travelers has been on my want-to-add list for a while and the market had been stubborn for most of the past year. While the initial stats aren't as impressive as JPM or PRU, shares trade around 12x earnings and have a 2.6% starting yield. Travelers buys back a lot of stock which shows through long term stock return calculations. The 20 additional shares will add an extra $61.60 in annual dividends currently.

Ameriprise Financial

Ameriprise is another stock like Prudential that is struggling to garner much of a multiple. Shares did very briefly hit over $180 during the past year before their calamitous fall to the $110 level. With a starting yield at 3.25%, I added another $72 of dividend income annually.

Altria

MO has come under heavy pressure over the past year for a few reasons. There has been concern about additional regulation or bans on menthol cigarettes. As of late, the company jumped into the marijuana foray with an investment in Cronos. That investment is also coupled with a stake in Juul that valued the company at $38B. That may prove to be an overpayment but management is looking into new growth areas for the future of the company. I added an additional 50 shares, good for $160 in dividend income. I am also quite maxed out with Altria for a while so I have turned off the reinvestment plan.

Schwab U.S. Dividend Equity ETF

My favorite dividend ETF, SCHD, also got an additional 100 share boost this month. With its large price decline back under $50, I added at $48. The dividend payments will vary but based on the last published rate of $1.44, that would add $144 a year.

Sales

Realty Income

I opted to close out my position in Realty Income for now. REITs in general have had large run-ups recently due to the general market woes and concerns over interest rates. I like the company but couldn't pass up the opportunity Mr. Market was giving me.

I sold at $64.96 which was quite near the top of the range for the year. I managed to lock in a 43% total return, 16.59% annualized. I reset my alerts for when the stock crosses back over a 5% dividend yield or around the $50 level.

Ventas (VTR)

Ventas was another REIT that dramatically lagged in my portfolio before being one of the best gainers of late. What concerns me here is the expected drop in FFO/AFFO over the next two years. This coupled with the fact it had become an expensive stock trading nearly 18x AFFO. Declining FFO would only exacerbate the problem.

I didn't buy in at the best time but with the run up to $65 (sold at $64.56), I locked in a 24.2% total return, 8% annualized. It's still on my watch list, I'm looking for it back around $50 or about 6.3% yield. I think a lot of investors also felt snubbed by the dividend hike.

Public Storage (PSA)

Public Storage was another REIT that I got caught up in some of the hype around the name. I managed a 2% return in the 18 months I owned it. It historically carried a high P/FFO which gives it a low current yield. I believe the dividend is also frozen as they have paid the same amount for two full years. I'm interested in the name but it would have to be at a much bigger discount. I'd take a closer look if it drops below $180 and/or gives me at least a 4.5% yield.

Charts and Graphs

Dividends

The green bars are 2018 and you can see that my December did drop off compared to both 2016 and 2017.

Notes

  • The decline over September stems from losing: Anthem (NYSE:ANTM), Duke Energy (NYSE:DUK), PepsiCo (NYSE:PEP) and V.F. Corp. (NYSE:VFC).
  • I did get a boost from having added more shares of Stanley Black & Decker before the most recent ex-dividend day.
  • Also received a small dollar boost from the increases from Visa and United Technologies.

I pulled in a screenshot of the dividends received in December 2017 for reference. 9 of these names I no longer own.

Dividends By Position Size

Here's a new graph type I'm playing around with. This bubble graph maps dividends received by the percentage in my portfolio. The third data point, yield on cost, is represented by the size of the bubble.

There are a few things that stick out, firstly, I have both a large allocation in percentage and income to two names; MO and T. On the left-hand side are names like STAG, SKT, and WPC. These REITs have lower allocations than other names, but provide a better than average income and have higher yields on cost. It's not rocket science and should be fairly intuitive but it's another way of seeing a portfolio broken down.

Growth

Wrapping up December, the $595 received was 22% lower than the $765 in December 2017. Again, this was due to pivoting into faster-growing companies that may not pay dividends at all.

In the fourth quarter, I collected $1,554 in dividends which was 5% lower than 2017 Q4. For 2018, I received over $7,000 in dividend income which was a 20% boost over the amount collected in 2017.

Today I sit at $6,459 of expected income for 2019 but I wrote in detail earlier in the article that I hope to eclipse $7,600 by the end of 2019.

Visualizations

Income By Sector

November 2018

December 2018

My income chart shifted quite a bit with REIT income being halved and financials growing. There was actually a mistake with the November chart with Communications not actually showing up.

I'm still waiting to gain some utility exposure at the right price/yield combination.

Sector Allocations

November 2018

December 2018

I went from about 10% allocation to REITs down to 5% due to my perception of some high pricing in the sector. Of that 5%, 4% went to Financials with the other 1% to Consumer Staples (Altria).

Champion, Contender, Challenger View

I lost one contender and two challengers by closing out those REIT positions.

Things Coming Up

I like to run this screener to get some idea generation going again this month, in case it helps anyone out. Here are the filters I start with:

  • $10 billion+ in size
  • US companies
  • Positive dividend yield
  • Forward P/E under 20
  • Sorted by their 52-week lows

Sneak peek for the January article - I actually added some more Apple after a 2.5-year hiatus. You can see on that list MO and TRV which were two buys during December.

This is also the time of year when I will save off final versions of my tracking sheets and start new ones. I look forward to seeing the January dividend increases! ABT and T have already announced increases in December that go into effect in the January payment. CVS is still frozen (this is one holding I'm not very happy with currently). MMM is another that should announce their increase near the end of January.

Conclusion

I received $595 in dividends during December and over $7,000 for the year. Dividends don't lie - the checks rolled in regardless of the turbulence in the market. It's this steady eddy nature that makes dividend growth so very exciting. I'm looking to continue growing my income stream in 2019 and beyond.

I hope you all had a great New Year and wish you a happy and prosperous 2019.

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