My Dividend Growth Portfolio Update: 32 Holdings, 3 Buys, 1 Sale

|
Includes: AAPL, ABBV, ABT, AMP, APLE, CMI, CSCO, CVS, DIS, GLW, HD, ITW, JNJ, JPM, K, KWEB, MA, MDT, MMM, MO, NKE, PRU, SBUX, SCHB, SCHD, SKT, STAG, SWK, T, TROW, TRV, UTX, V, VNQ, WPC
by: Dividend Derek
Summary

$797 in dividends were collected in January to start the year.

Three purchases were made, two were new additions to the portfolio and one was added to an existing holding.  One holding was sold.

Dividend reinvestment was turned off for some of my holdings. I'll explain further.

Introduction

Welcome to my monthly update for my dividend growth portfolio. 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?

No January assessment would be complete without mentioning both the massive equity rally and the commentary coming from the Fed.

Chairman Powell continued his dovish tone at the Fed meeting in January saying that the Fed will remain "patient" with regards to interest rate hikes. For all intents and purposes, it seems like rates are frozen for the time being with the possibility of rate cuts.

Additionally, the size and scope of the balance sheet normalization has also been called into question. In fact, it was even hinted that another round of QE was possible!

Long story short, it sure seems like we are off to the races at least in the short term. While I was getting excited about lower equity prices near the tail end of December, it seems a lot of those bargains have since vanished with the strongest January in decades.

I do wonder what the Fed is seeing "below the surface" that made them call into question their plans. Has it become their modus operandi to ensure equity markets maintain their value or are there troubling data?

In any event, I feel somewhat robbed of my zeal that was starting to take hold as I was preparing for what may be turbulent waters. Those waters have been calmed for the time being. That said, I'm about a 4 on 1-10 bullish scale. I have made some beginning moves in preparing for the next downturn.

My investing framework is always under constant improvement. One of my goals this year is to move beyond analysis of a company and into broader questions around how a company may fit into my portfolio.

At a high level, I am asking another layer of questions when reviewing an investment idea. Here are some samples:

  • What is the opportunity here?
  • Am I excited about the business?
  • What are expected returns?
  • What are the risks and downside?
  • How does this fit into my portfolio?
  • Does it offer something materially different than an equivalent ETF?
  • Would an options strategy work for it?

Target Portfolio

Dovetailing off the framework idea is figuring out what I want my target portfolio to look like. I never gave too much thought to it. I have my holdings broken down by their sector but not so much to what I really expect from them.

As a sample, I whipped up what a target may look like for me. I have decades to go so a portion allocated to growth also scratches my itch for having shares in Berkshire (NYSE:BRK.A) (NYSE:BRK.B) and the FANGs of the world. I'm also optimistic that at least some will be the dividend growers of the future (I'm looking at you Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)).

The flip side of that coin is a desire to have some holdings that just spit out dividends. These are the high yielders that will function as the income portion of my dividend machine. Dividends will not be reinvested but will be tactically allocated to the best investment idea at the time. Consider it active compounding. It also helps me shore up my "balance sheet" by having more cash being generated alongside my regular 401(k) contributions.

The bulk of the portfolio are for traditional dividend growth companies. The current yields may vary but this is what I expect to surpass the high yielders decades down the road. Generational ideas like Apple (NASDAQ:AAPL), Nike (NYSE:NKE) or Home Depot (NYSE:HD).

Actual Portfolio

I made the pie chart above before making the one below. Turns out I'm in the neighborhood of where I want to be. Growth currently sits at 18.5%. Core dividend growth is at 64.5%. Cash is high at over 6% as I have been preparing for "the real correction." High yield sits low at 9% and "former dividend growth" is 2%. That is my CVS (NYSE:CVS) holding, they don't have a good home right now and are on my shortlist for removal.

The classifications are completely subjective but here is how I lumped them. One example of the subjective nature is Altria (NYSE:MO) is pegged as a dividend growth stock but AT&T (NYSE:T) is high yield. Their current yields are about the same but the growth rate of T's dividend is barely beating the rate of inflation, if at all.

Ticker Classification
AAPL Dividend Growth
ABBV Dividend Growth
ABT Dividend Growth
AMP Dividend Growth
AMZN Growth
APLE High Yield
BRK.B Growth
CMI Dividend Growth
CSCO Dividend Growth
CVS Former Dividend Growth
DIS Dividend Growth
FB Growth
GLW Dividend Growth
GOOG Growth
HD Dividend Growth
IQ Growth
ITW Dividend Growth
JNJ Dividend Growth
JPM Dividend Growth
KWEB Growth
MA Dividend Growth
MDT Dividend Growth
MMM Dividend Growth
MO Dividend Growth
NKE Dividend Growth
PRU Dividend Growth
SBUX Dividend Growth
SCHB Growth
SCHD Dividend Growth
SKT High Yield
SQ Growth
STAG High Yield
SWK Dividend Growth
T High Yield
TROW Dividend Growth
TRV Dividend Growth
UTX Dividend Growth
V Dividend Growth
WPC High Yield

Additionally, I've been researching higher yielding ETFs to expand my exposure into areas such as BDCs, mREITs and CEFs. I may eventually cherry-pick a few names to have as individual holdings. Right now, I'm not where I want to be with my knowledge.

2019 Goals

  1. I want my dividend growth holdings to have an average 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 want to clarify the growth rate target, which has to exclude what I'm classifying as "high yield." I'm not buying a REIT with any expectation that it will grow its dividend 7% per year.

Currently the growth rate is 7.9%, it includes the increases from Abbott (NYSE:ABT), AbbVie (NYSE:ABBV), CVS (yes a 0% still counts) and 3M.

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. This will be highlighted 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., Starbucks (SBUX), Corning (GLW), Prudential Financial (PRU), Home Depot, 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 Reinvestment

I opted to turn off the dividend reinvestment on a few of my existing holdings during the month. I notably turned them off for AT&T and Altria and that is largely due to how much of my income comes from those two names.

Generally for income investments, let me take the cash and I'll figure out where to reinvest it. I think a lot of people have a similar sort of plan where they'd collect dividends, possibly until $1,000 and then invest them to save on fees as a percentage of the investment amount.

A lot of this stems off the market happenings at the end of 2018 and not having deployable cash without selling a stock that potentially was also down in price. I don't have any peer reviewed study to suggest what I am doing is "better." I'm trying it out for me and I'll see how it goes.

Dividend Increases

Dividend Cuts

  • None!

The Portfolio

Name Ticker Percent of Portfolio CCC Status S&P Credit Rating
Apple AAPL 3.96% Challenger AA+
AbbVie ABBV 1.39% Challenger A-
Abbott Laboratories ABT 2.79% Challenger A+
Ameriprise Financial AMP 2.59% Challenger A
Apple Hospitality APLE 0.56% None
Cummins CMI 1.83% Contender A+
Cisco Systems CSCO 2.17% Challenger AA-
CVS Health CVS 1.81% Contender BBB
Walt Disney DIS 3.04% Challenger A
Corning GLW 3.34% Contender BBB+
Home Depot HD 2.36% Challenger A
Illinois Tool Works ITW 3.01% Champion A+
Johnson & Johnson JNJ 2.80% Champion AAA
JPMorgan Chase JPM 2.98% Challenger A-
Mastercard MA 2.64% Challenger A
Medtronic MDT 2.09% Champion A
3M MMM 1.42% Champion AA-
Altria MO 3.31% Champion BBB
Nike NKE 2.08% Contender AA-
Prudential Financial PRU 2.53% Challenger A
Starbucks SBUX 3.38% Challenger BBB+
Schwab US Broad Market ETF SCHB 2.33%
Schwab US Dividend ETF SCHD 3.54%
Tanger Factory Outlet SKT 1.65% Contender BBB+
STAG Industrial STAG 1.48% Challenger N/R
Stanley Black & Decker SWK 2.60% Champion A
AT&T T 3.41% Champion BBB+
T. Rowe Price TROW 1.40% Champion A+
Travelers Companies TRV 2.55% Contender A
United Technologies Corporation UTX 1.92% Contender A-
Visa V 2.75% Contender A+
W.P. Carey WPC 1.86% 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 5.86% SPY 5.86%
ABBV 1/28/2019 -0.12% SPY -0.12%
ABT 12/6/2016 70.80% SPY 70.80%
AMP 9/29/2016 3.72% SPY 3.72%
APLE 1/28/2019 0.33% VNQ 1.45%
CMI 10/30/2015 18.43% SPY 18.43%
CSCO 4/6/2016 45.44% SPY 45.44%
CVS 10/7/2016 -51.28% SPY -51.28%
DIS 12/28/2015 -31.90% SPY -31.90%
GLW 10/14/2015 66.45% SPY 66.45%
HD 5/3/2016 7.15% SPY 7.15%
ITW 8/24/2018 7.07% SPY 7.07%
JNJ 12/9/2015 -0.60% SPY -0.60%
JPM 7/15/2016 39.04% SPY 39.04%
MA 7/26/2018 7.23% SPY 7.23%
MDT 11/22/2016 -3.28% SPY -3.28%
MMM 5/24/2018 0.60% SPY 0.60%
MO 10/31/2013 -8.07% SPY -8.07%
NKE 5/3/2016 4.05% SPY 4.05%
PRU 4/7/2016 2.94% SPY 2.94%
SBUX 12/3/2015 -19.00% SPY -19.00%
SCHB 9/24/2018 -0.44% SPY -0.44%
SCHD 9/24/2018 0.81% SPY 0.81%
SKT 7/26/2017 -21.35% VNQ -13.68%
STAG 5/20/2016 17.56% VNQ 43.05%
SWK 1/28/2016 -5.64% SPY -5.64%
T 11/3/2015 -33.59% SPY -33.59%
TROW 9/29/2016 19.98% SPY 19.98%
TRV 4/28/2014 -4.13% SPY -4.13%
UTX 1/28/2016 -4.00% SPY -4.00%
V 7/26/2018 2.99% SPY 2.99%
WPC 5/15/2017 17.98% VNQ 24.96%

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 holding 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

Apple

I picked up another block of shares of Apple on January 3rd which was the day the stock fell about 10% to its new 52 week low of about $143. I had been sitting patiently on my Apple shares for some time waiting to add. Revenue did ultimately drop year over year but it seems as though the move was vastly overblown. Shares have rocketed back over $30/share since that point.

Apple Hospitality

This one has been on my radar for a little bit of time. I needed more REIT exposure and it seems like a stable business model. This was also the first new holding I ran through the framework.

Apple Hospitality is a hotel REIT with lots of popular brands like Hilton and Marriott operating in their facilities. At the time of purchase shares were sporting over a 7.6% yield.

Since the IPO, FFO has not grown in any material way. It should be no surprise that shares are not firing on all cylinders and have steadily dropped from their $18 IPO price. This is an example of where I want the dividends in hand and I'll choose when to buy more shares. Yes, I missed the bottom in December but the company seems stable and any mean reversion could offer a nice capital gain bump. I want to highlight this was not bought as a dividend growth investment but as a high yielder, the dividend has been frozen since the IPO.

What made Apple Hospitality a little different than just being a REIT or high yielding ETF was the low correlation it had to a passive investment vehicle. SRET is probably the closest comp, it's a high yield REIT ETF that also sports a very similar yield. I'll probably pick up some shares of that one down the road.

I only picked up 100 shares to start and will let it run for some time before adding considering adding more.

AbbVie

AbbVie is the drug manufacturer that was spun off from Abbott Labs back in 2013. As an Abbott shareholder, I've always been interested in getting the band back together.

I won't pretend to be a master at the pharmaceutical game but they have been nailed lately due to concerns about Humira's patent expiry across Europe and how that will quickly decelerate sales. In any event, they have a strong drug pipeline and I got shares at an eye-popping 5.5% yield. The valuation numbers seem quite compelling on the Fast Graph but again, this is a forward-looking story where there are some unknowns.

In the past, I got hamstrung by similar pharmaceutical stories but the difference with this one is having a much stronger yield while waiting for things to sort themselves out.

This company has been a fan favorite due to its legacy of being part of Abbott for so many decades that it only seemed right to finally dip a toe and buy some shares of this one.

Sells

Aflac

I'll preface by saying there's nothing wrong with Aflac. I mentioned wanting to have some dry powder and that made me review several holdings in my portfolio. Aflac came up for a few reasons.

  • Low dividend yield
  • Low earnings growth expected
  • Shares appeared to be fully valued if not moderately overvalued

You may say - how can they be overvalued at 12x earnings? Well because the market has given them a very long leash for deserving more and they haven't been delivering consistent strong returns.

I set a limit sell order at $47 which ultimately triggered, locking in a 63% total return (14.9% annualized).

I will add that my sell decision was confirmed after seeing the paltry dividend increase just announced (3.8%). Low yield with low growth is not what I'd be looking for. If this jumped back over 3% yield I'd take a second look, or around $40 sometime in 2019.

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

  • January started with a bang and a lot of that is due to the distributions from the KraneShares China Internet ETF (KWEB). Technically, $251 was a long-term capital gain distribution and the other $3 was the actual "dividend." This is why I included the asterisk in the headline. That amount though is about a 2.6% yield which seems quite reasonable and repeatable each year.
  • Dividends from Altria were over $154 which included my most recent purchase.

Here's the table of who paid me during the month.

Dividends By Position Size

The bubble graph maps expected dividends by the percentage in my portfolio. The third data point, yield on cost, is represented by the size of the bubble.

MO and T are still massive outliers with just how much of my income they provide. The large bubble size also indicates they have a high "yield on cost." New holding Apple Hospitality appears on the left hand side. It's a small allocation and doesn't provide a lot of income yet, but the yield is high. This is the section I'm looking to bulk up.

Growth

There's not much to show yet with only one month in other than the 79% income growth over January 2018!

This is my forward-looking 12-month dividend view (take all known dividends for all shares and sum them up). I'm a hair behind where I was at the beginning of last year but I added 4% in the past month.

My goal is to grow that $6,717 figure over $7,600 by the end of this year.

Visualizations

Income By Sector

At the moment, the pie chart looks extremely balanced across almost all sectors. As a teaser for my February update, Energy will finally gain a piece of the pie. I'm struggling to gain utility exposure at what I feel is the right price and yield combination.

Sector Allocations

When looking at how I actually put my money into each sector, it shouldn't be too much of a surprise that tech is leading. From my own comfort and career path, tech is my natural go to. Additionally, this includes all of my growth stocks (think the FANGs).

Champion, Contender, Challenger View

I added a challenger with AbbVie, a "none" with Apple Hospitality and lost a champion by selling Aflac. Fun fact - AbbVie is still a Dividend Aristocrat due to grandfathering rules from when it spun off from Abbott.

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

Here are the upcoming dividend increase announcements I'm waiting for in February.

  • CSCO
  • GLW
  • HD
  • PRU
  • TROW

As I finished writing this, Corning announced a sweet 11.8% increase!

Conclusion

I received nearly $800 in dividends to start off 2019! That number was also nearly 80% higher than last January. I've begun adding a few higher-yielding names to my portfolio to boost myself closer to a targeted allocation. After the head fake in December was quickly countered with a rally in January, I'm still not completely sold that this is going to be a runaway year for equities.

I opted to turn off my dividend reinvestment for some of my holdings, especially in the higher yield area to give myself a better constant cash flow for when opportunities present themselves.

Let me know what your thoughts are! How bullish are you feeling?

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