First and foremost, I consider myself in the DGI camp, that is Dividend Growth Investing. I typically buy companies that have long histories of paying dividends and plan to hold those companies long-term.
This is my “All About Interest” business plan. My original version was posted on my blog, https://www.allaboutinterest.com, in 2013. Over the last 4 years I've changed my plan somewhat as I was reading and learning as much as I could. My dividend growth plan will focus on investing in sound companies that meet certain criteria listed below. These are companies that typically have a long track record of paying and increasing their dividend each year at rates higher than inflation.
This update is overdue but I’ve been practicing it for some time. Maybe my plan will help some others create their plan for financial independence (FI).
Main Goal: Produce a consistent income stream from dividends that will grow each year at a rate higher than inflation. The companies producing these dividends should be hand-picked and meet all of the criteria in my plan.
1.) At least 90% of all stocks chosen should be in the CCC lists, that is the Champions, Contenders and Challengers list maintained by David Fish. This list is now maintained by Justin Law on Seeking Alpha with the latest version being located here.
2.) Small-Cap or larger ( >250 million market cap).
3.) 10-year YOC should be 10% or higher (typically using 5-year CAGR).see a monthly CCC Ranking to find out how i calculate this metric here.
4.) Dividend growth over last 5 years (5-year CAGR) must be over 4%.
5.) Large moat or competitive advantages.
6.) Sound fundamentals.
7.) Baa1 / BBB+ credit ratings or better from Moody's / S&P.
Changes: I removed the 2.5% yield requirement. My original plan required a 2.5% yield for each position. This would have eliminated great companies like Visa (V) that have a lower yield but really high dividend growth. I now pay attention to average portfolio yield that I've included in Portfolio Composition below. I originally didn't include any credit ratings, and now I keep an eye on them to be investment grade.
Stocks chosen should be at “Fair” value or better. Valuation is determined by P/E multiples, payout ratios, future growth projections, cash flows and debt levels. I mainly use Morningstar ratings.
1.) Target of 25 total companies in final portfolio.
2.) Target weight of 4%. If the total number of companies do not equal 25, then the target weight percentage will be calculated by dividing 100 by the current number of companies (i.e., 20 companies will give 5%). The max allowed weight will be four times this number.
3.) Total portfolio yield > 3%. That means to produce $60k in yearly income, I’d need a portfolio size of $2,000,000.
Changes: I've reduced my target number of holdings to 25 from 40. I believe that's plenty of diversification and I can focus heavier on my top ideas. I've updated target weight and max percentage weight accordingly. I've changed total portfolio yield to be greater than 3% from 3.5%.
All dividends should collect and not be automatically reinvested. Instead they will be added with fresh capital and deployed into my best ideas at the time. This prevents investing in a company when I think it’s overvalued.
When to Sell or Strongly Consider Selling:
1.) Dividend is eliminated, cut or held constant
2.) A major reorganization happens
3.) The company has serious changes to fundamentals
4.) The company becomes extremely overvalued
5.) The company has a total return less than 5%/year over last 5 years
6.) The company loses competitive advantages, i.e. moat deteriorates.
7.) The company plans to be acquired or merges
Changes: I removed "The company increased its dividend at a rate below inflation." I've added "The company loses competive advantages, i.e. moat deteriorates."
1.) Target Sector Weights:
Energy & MLP’s – 10%
Healthcare – 15%
Consumer Staples – 20%
Financial & REIT’s – 12%
Industrials – 10%
Telecom Services – 8%
Utilities – 5%
Materials – 5%
Information Technology – 12%
Consumer Discretionary – 3%
Changes: I've decreased Energy target to 10% from 15%. I've increased consumer staples to 20% from 15%. I've decreased Utilities to 5% from 8%. I've decreased Materials to 5% from 8%. I've increased Information Technology from 10% to 12%.
2.) Target Geographical Exposure:
U.S. – 75%
International – 25% 3.) Target Market Caps:
Mega-cap: Over $200 billion – 25%
Large-cap: $10 billion – $200 billion – 45%
Mid-cap: $2 billion–$10 billion – 25%
Small-cap: $250 million–$2 billion – 5%
Micro-cap: $50 million to $250 million – 0%
Nano-cap: Below $50 million – 0%
Changes: I've increased Mega-cap weight to 25% from 10%. I've decreased Large-cap to 45% from 60%.
Recent Portolio Changes:
I always keep a live version of my portfolio on my blog. You can check out my portfolio here.
I currently have 29 positions which means my target portfolio weight is 3.45%. This means my target max weight is 4 times this or 13.8%. I only have 1 position over this threshold.
Over the past year I sold out of WBA, OHI, OMI, GILD, GE mainly due to credit profiles and debt but in the case of GE, it was also due to mismanagement.
I've aggressively been adding to Altria Group (MO) since the beginning of last year and am probably about done. I believe in their management and the future of their recent investments, namely Cronos Group and JUUL. I realize there are headwinds with any new FDA regulations to reduce nicotine and the percentage of smokers continues to decline. However, this has been happening for over 30 years. Altria Group (MO) sells inelastic products and has more than made up for the declining demand with price hikes. I believe an IQOS approval for the U.S. will give both Altria Group (MO) and Philip Morris (PM) a nice pop and I love their diversification; such as the A.B. Inbev (BUD) ownership.
Morningstar rates Altria Group (MO) undervalued with 4 stars and a wide economic moat. They have their fair value estimate at $62.00 and their forward dividend is currently 5.64%. With two hikes last year, I just couldn't pass up the value and juicy dividend here.
Visa (V) is my next largest holding and is over 10% portfolio weight. I've been buying the company since right before that last split. My only regret is I haven't bought more of this wonderful stock!
Visa (V) has increased their dividend for 11 straight years. Visa's earnings estimates are for the company to nearly double earnings from 4.61 to 8.58 per share by 2022. The company is riding one of the largest tailwinds in history as the world switches over to a cash-less society. There is still plenty of international growth ahead for the company. They have low debt and a payout ratio below 20% so there's plenty more room for double-digit dividend growth ahead.
The biggest complaint I hear about the company is that their dividend is only 0.6%. Well this is because the company's share price appreciates so fast. They have a 5-year CAGR (compound annual growth rate) of 20.4% and 10-year CAGR of 32.6%! That's exactly what I call dividend growth.
I also own a fairly large position in AT&T (T), currently at an almost 6% portfolio weighting. They do have a large amount of debt but I believe they have the plan and cash flow to pay it down while integrating their new acquisition, WarnerMedia. They now own HBO and a small HULU stake plus lots of other content from this acquisition. I also like the future of their streaming business. I believe the uncertainties are priced in here and at a 6.4% yield, you can get a nice dividend while you wait.
Morningstar currently rates AT&T (T) as undervalued with a 4-star rating and gives the stock a $37.00 fair value estimate.
Looking Ahead & Lessons Learned:
I believe I had a good initial plan and I've made some good changes as I've learned from a few mistakes. There are parts of my plan that are subjective and I’ve left room to improve upon or modify this plan as I get closer to FI, financial independence. I have tried to set some good guidelines to use for myself in building up my “All About Interest” plan. I also realize I have a couple of companies that don’t meet all of these guidelines. I've already started to reduce exposure to any speculative positions and this will continue as I approach FI.
One big lesson I've learned is to pay attention to a company's debt levels and credit rating. This has minimized the mistakes I've made.
I believe the longer your timeline to retirement or financial independence, the more of these fast dividend growers you want to balance out some of your larger dividend payers but slower growers like AT&T (T).
Disclosure: I am/we are long PM, MO, V, T. 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.