The Passive DGI Core Portfolio: First-Quarter 2019 Review

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Includes: ABT, ADP, AET, AFL, APD, CL, CLX, CSCO, CVS, CVX, DEA, DWX, EMR, HCP, INTC, ITW, JNJ, LMT, MCD, MDT, MMM, MO, MSFT, NSRGY, O, OHI, PEP, PFE, PG, QCOM, SPY, T, TEVA, UTX, VLO, VTR, WBA, WM, WMT, XOM
by: Financially Free Investor
Summary

A DGI strategy provides almost everything that most retirees would need: decent income, relative safety, and reasonable growth.

Our Passive DGI Portfolio is in its 5th year. We will provide the 1st quarter 2019 review.

The portfolio has returned an annualized return of roughly 11% since inception.

We will provide updates on changes, additional investments, dividends collected and overall performance.

The year 2019 so far has been pretty good for stocks. From the lows of the last quarter of 2018, the S&P 500 gained roughly 13.5% during the first quarter. Our DGI portfolio gained 12.4%. However, during the last 12 months, DGI portfolio beat the S&P 500 by a large margin, 17.7% gain for the DGI portfolio versus 8.28% gain for the S&P 500.

The DGI portfolio completed 4 years as of August 2018 and is in its 5th year. The overall record of this portfolio demonstrates that in turbulent times, this portfolio will not only continue to provide nice dividends but will also provide some element of capital preservation.

Year 2018

Year 2019 (1 st Qtr)

Portfolio Value as of last day of the previous year

$198,470

$230,428

Contribution during the year:

$30,000

$30,000

Total effective beginning value:

$228,470

$260,428

Portfolio value as of the last day :

$230,428

$288,968

Portfolio gain/loss % during the period

(including all dividends)

+0.86%

+12.7%

Gain/loss % for the S&P 500 (SPY) (inclusive of dividends)

-4.57%

+13.52%

Here is the month-wise performance of the Passive DGI portfolio since Jan. 2018:

Why Invest In A DGI Portfolio?

DGI generally means that you invest in a set of dividend-paying stocks that grow their dividend payout year after year. If you are still in the accumulation phase, you could re-invest (drip) the dividends, which would result in more shares and higher future income. With each passing year, this growth of dividend-income becomes bigger and bigger. We should mix high-yielding, slower growth companies with low-yielding fast-growing ones. We should also diversify among various sectors and industries. If implemented with some prudent planning and over an extended period of time, the DGI strategy can provide almost everything that a retiree needs, decent income, relative safety, and reasonable growth.

Sure, there is a drawback with this strategy that it cannot provide a very high level of income, so one would need a sizable amount of savings to generate the required amount of dividend income that one could live off comfortably.

It may be worth reiterating why we believe in the DGI strategy and consider it as the “core” portfolio. A well-thought-out DGI strategy would outperform the broader market over the long term. It will also offer less volatility and smaller drawdowns during recessions and bear markets. It was proven during the 2008-2009 recession as well when the drawdowns of most DGI portfolios were 1/3 rd less than that of the S&P 500. Also, a significant stream of dividend-income would make it a little easier to wait out any downturn. Another big advantage of a DGI portfolio is that it requires little work after the initial set-up. The best part is that it is a far superior strategy to draw 4% inflation-adjusted income (on the invested capital) compared to index investing since it lets you do this without ever selling the shares.

The Passive DGI Core Portfolio: Background

We launched this DGI portfolio nearly over four and a half years ago in August 2014. We wanted to create a well-diversified portfolio with mostly blue-chip companies which had a history of raising dividends year after year and hold them for years. We also wanted to invest over an extended period of time so as to take advantage of Dollar-Cost-Averaging and create a decent enough income stream without the need to ever withdraw the capital by selling shares.

We named this portfolio "Passive" because we thought it would require minimal management. Many times there is no action in this portfolio for months.

Basic Portfolio Structure:

The underlying principles of the portfolio were:

Select 30 plus solid dividend-paying, dividend-growing companies and invest the initial capital divided equally. Invest additional money on fixed intervals according to a pre-determined schedule. Use dollar cost averaging and buy in a spread-out manner on a set timetable. Stay consistent, and rarely sell or replace a company. Reinvest the dividends for the first 5-10 years or more (depends on personal situation), to grow the yield on cost (YOC). Thereafter, reap the benefits!

This is what we have done so far:

  • $1,000 invested on August 1, 2014, in each of 30 original stocks, total $30,000.
  • $1,000 invested on November 3, 2014, the first trading day of November 2014, in each of 30 stocks, total $30,000.
  • Starting February 2015, every year on the first day of trading in February, we invested $1,000 in each of the 30 stocks (total $30,000 each year). This was completed for the years 2015, 2016, 2017, 2018 and 2019. These annual investments will continue until the year 2024.
  • In 2017, we stopped reinvesting dividends automatically. Instead, we now let the cash accumulate and invest when we feel the price is right.

The original article that launched the portfolio can be accessed here and here.

Over the years, we added a few additional stocks. Below is the current list of 38 stocks with the industry/sector information for easy reference.

Industry

Company Name

Aerospace & Defense

Lockheed Martin Corp. (NYSE: LMT)

United Technologies Corp. (NYSE: UTX)

Beverages - Non-Alcoholic

PepsiCo Inc. (NYSE: PEP)

Business Services

Automatic Data Processing (NASDAQ: ADP)

Consumer Goods (Packaged, Food, and Cleaning products)

Colgate-Palmolive Co. (NYSE: CL)

Nestle SA ADR (OTCPK: NSRGY)

Procter & Gamble Co. (NYSE: PG)

Clorox Co. (NYSE: CLX)

Drug Manufacturers

Johnson & Johnson (NYSE: JNJ)

Teva Pharmaceutical ADR (NYSE: TEVA)

Pfizer Inc. (NYSE: PFE)

ETF - International Dividend (Foreign Large Value)

SPDR S&P International Dividend (NYSEARCA: DWX)

Industrial Products and Chemicals

Emerson Electric Co. (NYSE: EMR)

Air Products and Chemicals (NYSE: APD)

3M Company (MMM)

Illinois Tool Works Inc. (ITW)

Insurance - Life

Aflac Inc. (NYSE: AFL)

Medical Devices

Abbott Laboratories (NYSE: ABT)

Medtronic Inc. (NYSE: MDT)

Oil & Gas

Chevron Corp. (NYSE: CVX)

Exxon Mobil Corp. (NYSE: XOM)

Valero Energy Corporation (VLO)

REITs

Realty Income Corp. (NYSE: O)

HCP, Inc. (NYSE: HCP)

Omega Healthcare Investors, Inc. (NYSE: OHI)

Ventas, Inc. (NYSE: VTR)

Easterly Government Properties, Inc. (DEA)

Restaurants

McDonald's Corp. (NYSE: MCD)

Retail - Defensive, Drugstores

Walmart Inc. (NYSE: WMT)

Walgreens Boots Alliance (NASDAQ: WBA)

CVS Health Corp. (CVS)

Technology

Microsoft Corp. (NASDAQ: MSFT)

Qualcomm Inc. (NASDAQ: QCOM)

Intel Corp. (NASDAQ: INTC)

Cisco Systems, Inc. (NASDAQ: CSCO)

Tobacco Products

Altria Group, Inc. (NYSE: MO)

Telecommunications Services

AT&T Inc. (T)

Waste Management

Waste Management, Inc. (NYSE: WM)

Brief Highlights from Annual Investments (February 2019)

As per our annual schedule of contribution in the first week of February, we added $30,000 of new money to this portfolio. We invested $1,000 into 15 out of 38 securities at the time. The reason we invested in only 15 stocks was that we wanted to be selective since we only wanted to invest in stocks that were not too expensive. The other reason was that we were low on cash and wanted to keep some reserve for future opportunistic purchases. The criteria that we used in selecting the 15 out of our existing 36 stocks are described below.

We had 38 positions in the portfolio. We needed to select 15 out of 38 positions to invest $1,000 in each of them. Our criteria for selection were two-fold. First, we would see the relative valuation and second the safety and growth of the dividend. We selected the following 15 stocks for purchase as of the first week of February. In the table below, the last column “Dividend Safety Score” is derived giving equal weight to four factors, i.e., Credit Rating, Debt/Asset Ratio, Payout-Ratio, and 5-Yr Dividend Growth.

The portfolio table below was sorted on the performance since the beginning of 2018 in ascending order (discount offered by current prices compared to the beginning of 2018). The rows highlighted in GREEN color are selected for the additional investment of $1,000 each.

(T), (ITW), (QCOM), (DEA), (MMM), (XOM), (DWX), (VLO), (CVS), (UTX), (PEP), (JNJ), (VTR), (MDT), (MSFT)

(Data as of Jan 25th, 2019)

Ticker

Performance last 12 months

Credit Rating (S&P)

Debt/ Asset

Payout Ratio

5-Year Divi. Growth Rate

Based on column 3-6

Dividend Safety Score (0-10)

MO

-38.05%

BBB

0.32

75.47%

10.27%

214

6.4

T

-21.14%

BBB

0.34

57.11%

2.02%

189

5.7

ITW

-20.14%

A+

0.48

49.77%

17.35%

274

8.2

QCOM

-19.87%

A-

0.5

64.88%

18.60%

253

7.6

DEA

-18.04%

NR

0.37

83.20%

NA

80

NA

CL

-18.04%

AA-

0.53

55.45%

4.53%

201

6

MMM

-16.77%

AA-

0.4

50.76%

16.45%

278

8.4

XOM

-14.25%

AA+

0.11

70.99%

5.60%

241

7.2

DWX

-10.77%

NA

X

X

X

0

NA

LMT

-10.59%

BBB+

0.32

44.97%

4.65%

218

6.5

VLO

-10.58%

BBB

0.18

43.84%

31.05%

308

9.2

CVS

-9.72%

BBB

0.48

27.18%

12.90%

259

7.8

CVX

-9.56%

AA

0.14

61.27%

2.81%

229

6.9

UTX

-9.22%

BBB+

0.34

37.38%

5.25%

227

6.8

PEP

-8.81%

A+

0.48

63.31%

9.88%

223

6.7

EMR

-8.25%

A

0.23

53.86%

3.40%

220

6.6

JNJ

-8.22%

AAA

0.2

41.95%

6.45%

270

8.1

APD

-1.93%

A

0.2

56.85%

10.88%

258

7.7

WMT

-1.83%

AA

0.27

43.02%

2.04%

230

6.9

WBA

-1.01%

BBB

0.23

27.08%

7.32%

257

7.7

CLX

-0.71%

A-

0.51

60.79%

6.62%

196

5.9

NSRGY

0.00%

AA-

0.27

57.36%

2.76%

216

6.5

PG

1.87%

AA-

0.27

64.51%

3.72%

214

6.4

INTC

1.91%

A+

0.21

28.03%

5.92%

266

8

TEVA

3.22%

BB

0.45

X

X

60

NA

VTR

4.03%

BBB+

0.46

76.20%

9.04%

195

5.9

MCD

6.90%

BBB+

0.94

56.39%

6.07%

152

4.6

MDT

7.76%

A

0.28

39.02%

13.30%

279

8.4

AFL

8.38%

A-

0.04

24.70%

7.93%

286

8.6

WM

9.97%

A-

0.44

41.96%

4.96%

214

6.4

PFE

12.20%

AA

0.29

47.34%

1.22%

220

6.6

O

14.38%

A-

0.45

89.01%

3.92%

161

4.8

ADP

16.40%

AA

0.05

59.95%

18.66%

318

9.6

HCP

16.45%

BBB+

0.52

71.84%

0

148

4.4

CSCO

20.44%

AA-

0.24

43.48%

20%

320

9.6

ABT

24.67%

BBB

0.33

39.89%

14.87%

271

8.1

MSFT

25.29%

AAA

0.3

41.45%

12.14%

289

8.7

OHI

41.32%

BBB-

0.53

77.65%

7.26%

146

4.4

Dividends:

Note: Starting in April 2017, we made a change with regards to the dividend reinvestment policy. We stopped reinvesting the dividends automatically. This was to allow us to build some cash position and make some opportunistic buys from time to time.

Dividends in 2014

$560

Dividends in 2015

$2,830

Dividends in 2016

$4,025

Dividends in 2017

$5,207

Dividends in 2018

$6,622

Dividends in 2019 (until March 31st, 2019)

$1,928

Total dividends since inception

$21,172

Current Yield: (4*1928/289,525)

2.66%

Yield On Cost [YOC] (4*1928/210,000)

3.67%

Dividend Cuts or Freezes in 2016/2017/2018/2019

In 2017, CVS (CVS Health) froze its dividend at $0.50 per share due to its acquisition of Aetna Inc. (NYSE: AET). The acquisition has now been completed in 2018. HCP had to cut its dividend by 35% in 2017, following ManorCare assets spin-off in 2016. Since then, it has been paying a constant amount of $0.37 per share. TEVA eliminated the dividends entirely in the fourth quarter of 2017.

Dividend Increase Restored

CVX (Chevron) had paid the same $1.08 quarterly dividend for five quarters, until February 2018. It finally raised the dividend in 2018 to $1.12 per share, followed by a raise in 2019 to $1.19 per share.

Dividend Increases Declared In 2019

2017 summary:

Out of 35 individual stocks in 2017, dividends were increased by 30 companies, kept the same by 4 companies, and cut by one.

2018 summary:

A total of 33 companies announced dividend increases in 2018. The average increase was roughly 8.8%. If we were to count all of the 38 positions, the average came to roughly 7.6%.

2019 Summary (until March 2019):

16 companies have already raised dividends in the year 2019, with an average raise of 5.71%. Two companies (CVS, HCP) have their dividends frozen currently. Another position DWX is an ETF that pays a variable dividend.

Symbol

Previous year

Dividend Amt

New Dividend Amt

% Increase

ABT

$1.12

$1.28

14.29%

AFL

$1.04

$1.08

3.85%

APD

$4.40

$4.64

5.45%

CL

$1.68

$1.72

2.38%

CSCO

$1.32

$1.40

6.06%

CVX

$4.48

$4.76

6.25%

INTC

$1.20

$1.26

5.00%

KO

$1.56

$1.60

2.56%

MMM

$5.44

$5.76

5.88%

O

$2.63

$2.71

3.20%

PFE

$1.36

$1.44

5.88%

PG

$2.87

$2.98

4.04%

T

$2.00

$2.04

2.00%

VLO

$3.20

$3.60

12.50%

WM

$1.86

$2.05

10.11%

WMT

$2.08

$2.12

1.92%

Average Dividend Growth in 2019 ===>

5.71%

Portfolio Positions, Total Return and Relative Performance:

Here is a snapshot of relative performance as of 11th April 2019, created using the Morningstar Portfolio Tool. The DGI portfolio and Morningstar Market-Index are represented by green and blue lines, respectively:

Note: Morningstar describes ‘Personal Return’ as follows: The calculation of Personal Return illustrates how your allocation of capital has affected the performance of your portfolio.

Portfolio positions as of 04/11/2019:

The above image (Google-sheet) may be too small to read; here is the portfolio from Morningstar:

Ticker

Close prices 04/11/2019

Shares Held

Value

% Weight

Total Cost

Gain/loss Since Purch

% Gain/loss Since Purch

ABT

78.51

140.14

11,002.15

3.8

5,995.69

5,006.46

83.5

ADP

161.67

70.97

11,472.96

3.96

5,901.84

5,571.12

94.4

AFL

49.37

195.7

9,661.51

3.34

5,954.38

3,707.13

62.26

APD

193.55

43.29

8,379.40

2.89

5,887.10

2,492.30

42.33

CASH$

1

20,560.89

20,560.89

7.1

20,560.89

0

0

CL

68.09

90.62

6,170.51

2.13

5,904.52

266

4.5

CLX

155.33

55.56

8,630.21

2.98

5,980.90

2,649.31

44.3

COP

66.37

0

0

0

0

0

0

CSCO

55.6

102.21

5,682.96

1.96

2,988.99

2,693.97

90.13

CVS

52.69

39

2,054.91

0.71

2,853.18

-798.27

-27.98

CVX

125.99

58.42

7,359.71

2.54

5,978.52

1,381.19

23.1

DEA

17.89

283

5,062.87

1.75

4,985.81

77.06

1.55

DWX

38.41

160.87

6,179.10

2.13

5,958.14

220.96

3.71

EMR

71.46

105.77

7,558.05

2.61

5,943.80

1,614.26

27.16

HCP

30.87

78.74

2,430.76

0.84

2,999.99

-569.23

-18.97

INTC

55.71

176.99

9,860.22

3.41

5,940.29

3,919.93

65.99

ITW

154.33

16

2,469.28

0.85

2,003.91

465.37

23.22

JNJ

135.21

64.77

8,757.65

3.02

6,972.77

1,784.88

25.6

LMT

305.59

29.97

9,157.40

3.16

6,124.37

3,033.03

49.52

MCD

188.88

56.14

10,604.48

3.66

5,830.39

4,774.09

81.88

MDT

87.6

95.4

8,357.16

2.89

6,888.84

1,468.32

21.31

MMM

213.53

14

2,989.42

1.03

2,801.47

187.95

6.71

MO

55.98

115.08

6,442.00

2.23

5,946.31

495.69

8.34

MSFT

120.33

128.06

15,409.46

5.32

6,891.91

8,517.55

123.59

NSRGY

96.05

84.38

8,104.64

2.8

6,006.78

2,097.87

34.92

O

71.4

124.2

8,867.69

3.06

5,944.24

2,923.44

49.18

OHI

37.1

191.9

7,119.36

2.46

5,984.68

1,134.68

18.96

PEP

121.42

71.1

8,633.10

2.98

6,872.08

1,761.02

25.63

PFE

42.27

58

2,451.66

0.85

1,976.18

475.48

24.06

PG

104.75

72.84

7,629.99

2.64

5,867.59

1,762.40

30.04

QCOM

56

65.35

3,659.67

1.26

3,992.20

-332.53

-8.33

T

32.2

223

7,180.60

2.48

6,988.04

192.56

2.76

TEVA

14.49

73.52

1,065.30

0.37

3,974.94

-2,909.64

-73.2

UTX

132.82

65.76

8,734.47

3.02

6,918.78

1,815.69

26.24

VLO

89.04

92

8,191.68

2.83

6,842.02

1,349.66

19.73

VTR

61.89

68.29

4,226.72

1.46

3,886.27

340.45

8.76

WBA

53.44

83.23

4,447.76

1.54

5,975.22

-1,527.45

-25.56

WM

100.57

111.71

11,234.72

3.88

5,925.14

5,309.59

89.61

WMT

100.8

71.81

7,238.73

2.5

4,996.37

2,242.36

44.88

XOM

81.95

54.74

4,486.01

1.55

4,000.00

486.01

12.15

TOTAL

289,525.16

100

210,000.00

79,525.16

37.87%

In the above table, P/L columns do not account for the dividends that were not reinvested. Also, the total cost in the last row represents the sum total that was invested in the portfolio.

The Good, the Bad and the Ugly:

As of 04/11/2019, the portfolio has 38 positions, and when we include all of the dividends (the amounts that were not dripped), this is how they performed:

Gain/Loss %

Number of positions

Tickers

Positions > 100% gain

2

MSFT, ADP

Positions > 50% gain but <= 100%

10

CSCO, WM, MCD, ABT, INTC, AFL, O, LMT, WMT, CLX

Positions > 30% gain but <= 50%

10

APD, NSRGY, PG, OHI, EMR, PEP, CVX., JNJ, UTX, PFE

Positions > 10% gain but <= 30%

7

MDT, ITW, VLO, MO, XOM, VTR, DWX

Positions > 0% gain but <= 10%

4

CL, MMM, T, DEA,

Positions < 0% but >= -10% loss

7

QCOM, HCP,

Positions < -10% but >= -25% loss

2

WBA, CVS

Positions > - 25% loss

1

TEVA

Stocks That Are In Serious Negative Territory:

CVS and WBA:

Both CVS and WBA (Walgreens) have been repeatedly hit on the fears of Amazon's entry into the pharmaceutical business and the headwinds faced by the retail business in general. However, Amazon's threat has been overhyped. Let’s not forget that CVS and WBA have huge advantages in terms of their expertise in the pharmaceutical business and having their retail pharmacy stores within 5 miles of 75% of the US population. Nonetheless, there is no denying that these stocks have vastly underperformed the broader market and will probably continue to do so in a foreseeable future. But they are not going extinct and they will keep paying nice dividends to the patient investors, while they work through their challenges.

TEVA: We still maintain a small position in TEVA, though it pays no dividends. The position weight is almost insignificant and less than 0.50%. We have written enough about or reasoning why we still have this stock. Please see our past review here.

We know that there are always going to be a couple of stocks in your portfolio that are not going to pan out according to your expectations. That's why diversification is so important. But more importantly, this demonstrates that one or two bad choices are not going to have any meaningful impact on the overall portfolio.

Concluding Remarks

The DGI portfolio plays an important and foundational role in our overall investments strategy. We believe the DGI strategy described above is one of the simplest ways to accumulate wealth over a long period of time. This portfolio is simple, easy to implement and hassle-free.

Our allocation model follows a multi-basket strategy. The model suggests investing 30-50% of the investment assets into DGI. The rest is allocated to other compelling strategies that provide us the strategic diversification. We invest in alternate portfolio strategies, mainly to enhance the current income and to hedge the risks by using Rotation strategies. A multi-basket approach certainly requires more effort and may not be suitable for everyone. For more passive type investors, a DGI strategy is ideally suited as it requires very little effort, mostly just a few times a year.

It is a well-accepted notion that over a long period of time, the dividend-paying companies provide a higher total-return compared to non-dividend-paying companies. We feel in the long term this portfolio will offer better returns, lower volatility and drawdowns, and consistent and growing income. In addition, it requires minimal management.

Below is our investment allocation model. These allocations are just for broad guidance; everyone should decide what is right for them based on his/her goals, income needs, and risk tolerance.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LYB, HCP, HTA, O, OHI, VTR, NNN, STAG, WPC, MAIN, NLY, ARCC, DNP, GOF, PCI, PDI, PFF, RFI, RNP, STK, UTF, EVT, FFC, HQH, KYN, NMZ, NBB, JPS, JPC, JRI, TLT. 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.

Additional disclosure: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolio presented here is a model portfolio for demonstration purposes; however, the author holds many of the same stocks in his personal portfolio.