I collected a $663 of dividends during March and $2,027 during the first quarter of 2019 (up 13% YoY).
I added to two hated stocks (that's the idea right?).
My covered call strategy is underwater as popular stocks continue pushing new highs.
2 holdings were trimmed via limit sell orders and 1 was flat out sold with the market back near all-time highs. Cash sits near record highs.
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."
I introduced a change log as a quick reference to highlight relevant non-data changes. Things like dividends collected, dividend increases and charts will all change each month regardless.
- Moved "Target Portfolio" lower in the article
- Added a "Portfolio Yield" section
February saw the continued rally in equity markets with the S&P cresting over 2,800 by March 1. Several of my stocks continue to cruise to either all-time highs or back to their 52 week highs (CSCO, ABT, SBUX and NKE to name a few).
I'll start by quoting myself from my February article. I could easily copy, paste, and replace February with March because essentially that is what has continued this past month. While the overall S&P index bounced around over the past month, those same highlighted names continued to push new highs.
The S&P was up 14% in Q1 while my portfolio was up 15.4% after backing out contributions.
My current portfolio value also pushed well past the previous high water mark set late last summer. In my mind valuations continue to be stretched and it's been quite difficult finding great companies at good prices. With that in mind I have been content collecting my dividends as cash and waiting for my next move. My cash on hand sits around 9% which is the highest I've noted as long as I've been tracking it. That should give you an idea as to how bullish I am.
Now that the first quarter has wrapped up, earnings season will begin to kick off in a few weeks and that again will be our compass going forward. We'll get an updated view on both results and also what management of companies see going forward.
- I want my dividend growth holdings to have an average dividend growth rate of at least 7%. (Currently 11.2%)
- By the end of 2019, I want to have a projected dividend income of at least $9,000 (was $7,900). Changed in February.
- I want to suffer no dividend cuts.
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.
- Review my investing framework questions:
- 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?
- Can I sell a cash secured put to lock in a stock at a particular price I want?
- 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.
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, tailing a stock upwards until financial gravity kicks in.
- I may write an out-of-the-money covered call.
- 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.
One tactic I've used is buying shares prior to the ex-dividend date after the company has announced its yearly increase (this also works for ETFs). 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, 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.
Reinvestment is off for all of my holdings except for Visa, MasterCard, Schwab Dividend Equity ETF (SCHD) and recently CVS.
Other than that, I am of the mindset that I'll take the cash and figure out where to deploy it. This is especially useful if I go below my 5% cash target. The cash machine portion of my portfolio can throw off cash to restore my balances.
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.
At the end of 2018 when the market was rapidly unwinding I did not have enough deployable cash. Rather than ignoring what happened, I learned the lesson that I was quite unhappy not being able to take advantage as much as I would have wanted. My only option at the time was to sell existing holdings at non-optimal prices with most of my portfolio near 52 week lows. 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.
- None this month
|Name||Ticker||Percent of Portfolio||CCC Status||S&P Credit Rating|
|Global X MSCI SuperDividend||(EFAS)||1.04%||Challenger||A|
|Illinois Tool Works||(ITW)||3.01%||Champion||A+|
|Johnson & Johnson||(JNJ)||2.66%||Champion||AAA|
|Global X MLP ETF||(MLPA)||0.86%|
|Invesco CEF Income ETF||(PCEF)||0.71%|
|Schwab US Dividend ETF||(SCHD)||3.43%|
|Global X MSCI SuperDividend Emerging||(SDEM)||0.92%|
|Global X SuperDividend® ETF||(SDIV)||1.17%|
|Tanger Factory Outlets||(SKT)||2.00%||Contender||BBB|
|Stanley Black & Decker||(SWK)||2.61%||Champion||A|
|T. Rowe Price||(TROW)||1.40%||Champion||A+|
|United Technologies Corporation||(UTX)||1.92%||Contender||A-|
Here are the values behind the "CCC Status" category:
- King: 50+ years
- Champion/Aristocrat: 25+ years
- Contender: 10-24 years
- Challenger: 5+ years
|Ticker||Owned Since||Versus S&P||Benchmark||Versus Benchmark|
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.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.
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. I need to flesh out what high yield ETF I want to be the benchmark for my high yielding ETFs.
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. At the time of writing, my ABT holding is beating the S&P by 82%.
This is a new section for March that I'm trying out. I noticed through some of my previous analysis that my portfolio yield was not too much better than the S&P. This month I did some dedicated research into this topic and I calculated three different values.
|Portfolio Yield Divi Companies||3.22%|
|Portfolio Yield Ex-Cash||2.77%|
|Portfolio Yield w/Cash Drag||2.54%|
To explain each of these, the numerator in each calculation is my "forward looking income" of $7,982.
Portfolio Yield Divi Companies = "forward looking income" / ( "Portfolio Value" - (cash + value of all non dividend paying companies)). Said another way, this is the yield from all my dividend paying companies.
Portfolio Yield Ex-Cash = "forward looking income" / ( "Portfolio Value" - Cash). This is the yield based on all my invested money and their respective prices today.
Portfolio Yield w/Cash Drag = "forward looking income" / ( "Portfolio Value"). All in, this is the yield given my expected income divided by the full portfolio value.
Schwab US Broad Market ETF
First, this isn't a knock on the product. SCHB is a fantastic product that tracks the Dow Jones U.S. Broad Market Index. It's broader than the S&P 500 and in theory should outperform due to a higher tilt towards smaller cap companies with the increased broad nature. It also comes with a laughably low expense ratio of 0.03%, or $3 per $10,000 invested per year.
That said, my mistake was buying into the market hype during the last peak in September.
Using the SA chart, I literally bought at the highest point. As the market has been rallying recently, I decided to tail the price of SCHB with a limit sell order should the market falter. It managed to trigger earlier in March and I took a small loss. My feeling is to come back to this one when we are truly in a correction and that fulfills one of my goals of being more data driven.
Abbott Labs (trim)
Abbott is a fantastic company with a storied history and is a fabled Dividend Aristocrat. However, I think shares are rather richly valued. Starbucks is another fantastic company with a long runway ahead of it. I just personally think this is another stock that has been on an incredible run coupled with a pricey market.
I highlighted my investment results thus far. I picked up shares at the end of 2016 and with the recent tick up have more than doubled. I had an interesting scenario where I could halve my holding and have a negative cost basis. Similar to SCHB, I used a limit sell order as I trailed the stock price upwards.
I get a fair amount of alerts from Custom Stock Alerts so I had been tracking ABT as the price kept increasing. In a similar vein I used this for Nike.
Earnings have grown the past two years at a mid-teen clip and I could have just let things run but I do think the stock is richly valued as well as the broader market. Most of the investment results were from multiple expansion (17 to 27 approximately) which is then multiplied by actual earnings growth which leads to outsized returns, at least in the short term.
So again, this sell triggered and I now am riding 50 shares with a negative cost basis (permanent gain) but I do plan on jumping back in when things are rational again.
Nike shares a similar story to Abbott with a few nuances. I made multiple small purchases of shares throughout 2016 in the low to mid $50 range. After selling half of my stake I am left with an ultra low cost basis of $15/sh for my remaining shares.
This does funny things to the math, like having close to a 6% yield on cost even with the ultra low dividend Nike currently pays. I'll be back in with both feet once prices return to a reasonable level.
Somewhere in the ballpark of 20x earnings is a fair price I'll pay so at 33x, there needs to be quite the decline before I jump back in. Before you say that it's crazy or wishful thinking, the blue line on the chart is the average P/E over the whole timeframe. Its set at 21x earnings and the stock spent a good chunk of that time underneath that line. Again, it's that recency bias that makes a P/E of 30+ seem reasonable. That puts shares about 35% above where I would be willing to add.
Both of my purchases this month are in companies that are pretty well hated by the market. Both stocks are at multi year lows and sport historically high yields.
I'll show a screenshot of another alert I had previously set for myself. I was interested in adding shares once Tanger crossed above a 7% dividend yield. It happened back on March 15th.
I picked up another 100 shares adding $142 to my yearly income. Tanger is still a favorite of Brad Thomas here and his many bullish articles on the company. With a P/AFFO under 10, shares seem like a steal. We'll see in due time but I'm comfortable with this continuing to throw off money for my dividend machine.
CVS has been an utter dog since I've owned it. At the time of purchase, I thought, well at least I didn't buy it when it was over $100. Clearly, it's been a disaster over the past few years. Between the acquisition of Aetna and plenty of political eyes watching over the whole healthcare industry, shares have dramatically underperformed the market.
I've even taken my fair share of shots at the company in my commentary over the past years. I opted to pivot this past month because frankly I think shares are just too stupid cheap. Earnings have actually grown nicely since 2016 though much of that was the benefit of the tax reform.
Shares now sport a 3.8% dividend yield on a payout ratio of 28% and a P/E of 7.4. I think the market is overly bearish on this company in the short term and this is poised to be a coiled spring someday. Yes the dividend is currently frozen as they pay off the debt from the acquisition. Yes there are a lot of questions around the future of the PBM market in general but I'm willing to go against the consensus and add here.
Additionally, I opted to turn on dividend reinvestment for CVS since I believe shares are too cheap to ignore here. The 30 shares I added will add $60 in dividend income and I was able to lower my cost basis to $71.
I'm going to start by saying I'm getting my butt kicked with the two covered call contracts I wrote. The exciting conclusion will be written this month as they will both expire by the 18th, whether exercised or not. I'll be able to opine more once the final chapter is written but so far I've been humbled with how quickly these stocks can rise.
The $50 strike Cisco option is well under water with shares north of $55 as I write this. At the time I wrote it, shares were up 20% from their December lows. I for sure didn't foresee another 12% rise from that point.
The $72.50 Starbucks call is also underwater with shares at approximately $74.50.
So the premiums have been collected, the only thing left is whether those shares lock in a strong return (albeit not at the absolute peaks) being called away or I'll get to keep them and rinse and repeat.
Charts and Graphs
The purple bars represent 2019 and you can see that after a monster January, I'm happy with March's performance of $663 though that number actually lagged both 2017 and 2018. That said, taking a step back and looking at quarterly numbers this has been the strongest turnout yet.
- Right off the bat, I got $93 from my ETF suite (EFAS, SDEM, PCEF, SDEM, SDIV, SRET) that I added last month which is repeatable and will reoccur every.month.forever. Sure the amounts may bounce around but this is an automatic boost to every month from here on out.
- Home Depot's fat dividend increase took effect with this payment.
- TRV and PRU were boosted from my adds to those stocks back in December.
Here's the table of who paid me during the month.
Dividends By Position Size
The bubble graph maps expected yearly dividends (y axis) by the percentage in my portfolio (x axis). The third data point, yield on cost, is represented by the size of the bubble.
SKT jumped up and to the right with the add this month.
The bottom left hand corner has been bolstered since I bought higher yielding dividend focused ETFs.
From there, are circles of various sizes plotted across the board. WPC sports the highest yield on cost. T and MO continue to sit out in right field as both a large portion of my portfolio and the income they provide.
On a monthly basis the $663 was lower than the fat $775 received during March 2018.
Stepping back now that Q1 is in the books, I can compare the actual dividends received on a broader basis than month by month. Dividends collected jumped 13% year over year which I am very happy about.
Lastly is my forward looking 12 month dividend view. This is where I sum up what I would earn in the next 12 months based on the shares I own and the currently declared dividend rates.
After the huge boost in February from adding a slew of high yield ETFs, March saw a modest gain which surprised me. I sold thousands of dollars of shares more than I purchased but it was mostly low yield holdings. I should probably inch past $8,000 during April with the dividend announcements I'm expecting alone.
I'm still targeting $9,000 for this number by the end of the year. I have a ton of dry powder available if stock prices cooperate; i.e. decline.
The idea of a target portfolio means something different to everyone but I went through the exercise of creating one for me. This is how I would like to allocate money across different equity (not asset) classes. I'm an equity guy and things like commodities, currencies or bonds don't really interest me.
I first allocated 20% to growth stocks. This scratches my itch for having shares in Berkshire (BRK.A) 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 (GOOG)).
Next is 20% allocated to high yielding stocks. I use these 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 401K contributions.
The main portion of the portfolio at 55% is core dividend growth. This is where I am to pick names that I expect to surpass the high yielders decades down the road. I would consider names like Apple (AAPL), Nike (NKE) or Home Depot (HD) to be generational winners.
Lastly, the remaining 5% is allocated to cash. I think for any "active" investor there must be some cash on the sidelines at all times for opportunities that present themselves. Frequently these opportunities may only last a day and with no cash available either leads to a missed opportunity or a need to scramble to sell something else. This will help prevent FOMO.
Another way to view the core portfolio would be through a Venn diagram across the three equity categories.
For illustrative purposes, I specifically have the circles overlapping most of the area to highlight the main focus on dividend growth stocks.
Here is how I currently track against my ideal portfolio. Cash jumbled up 6% in the month with growth taking a hit by selling SCHB. Core dividend growth also fell with the trims with a very slight buoy effect by adding to CVS. High yield rose slightly by adding more Tanger.
The classifications are completely subjective but here is how I grouped them. One example of the subjective nature is Altria (MO) is pegged as a dividend growth stock but AT&T (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.
Income By Sector
I highlighted last month that ETF now has its own lump in the pie. ETF is not a sector of course, but at this point I have no interest in trying to juggle all of the changing holdings, weights for each ETF I may own. The chart didn't move too much this month, and it's fairly well balanced. To note, part of that ETF bundle includes MLPA which is 100% Energy which gives that sector some specific allocation.
In a similar fashion to the previous pie chart, this one has now gained an "ETF" allocation slice. About 12% of my overall money is invested into an ETF. The rest is split appropriately across the rest of the sectors. Nothing stands out to me that needs to be adjusted because of over-allocation.
Technology and communications are heavily spoken for but these also contain most of my growth stock holdings too.
Champion, Contender, Challenger View
My two "None" holdings are Apple Hospitality (by design) and CVS (not by design). Other than those, I have a nice spread of companies with various dividend growth streaks.
Things Coming Up
There are a few notable dividend increases I am looking forward to in April.
- Johnson & Johnson
- Travelers Companies
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
WBA took it on the chin the day before I wrote this article so they are currently low man on the totem pole. NLY sticks out to me as an interesting option given how popular it is on SA. As noted I already recently added to CVS so I have a few on this list.
I wrapped up the first quarter of 2019 with $663 in dividends in March. For the quarter I cleared $2,000 dividends for the first time which represented 13% year over year quarterly growth.
I trimmed back some of my most expensive holdings and it appears I may have more shares called away in April. I'll be able to analyze my option writing after the final chapter is written this month.
There's never anything bad about locking in a great profit. That profit enables me to continue the cycle of buying undervalued stocks, collecting great dividends and using market folly to my gain. Those realized gains have now provided me with a $0 cost basis in Abbott and a laughably low $14/sh basis in Nike.
By truly going against the current consensus, I added to two hated companies in CVS and Tanger. Those small nibbles added another $200 in yearly dividends to my dividend machine I'm building.
I sit at both record portfolio values as well as cash levels while I wait for reasonable opportunities to present themselves.
Thanks for reading, I hope you've enjoyed reading it as much as I've enjoyed writing it. I encourage you to "follow me" if you don't already!
Disclosure: I am/we are long AAPL, ABBV, ABT, AMP, AMZN, APLE, BRK.B, CMI, CSCO, CVS, DIS, EFAS, FB, GLW, GOOG, HD, IQ, ITW, JNJ, JPM, KWEB, MA, MDT, MLPA, MMM, MO, NKE, PCEF, PRU, SBUX, SCHD, SDEM, SDIV, SKT, SQ, SRET, 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.