10 Dividend Blue Chips I'm Looking To Add To My Retirement Portfolio

by: Dividend Sensei

I'm steadily building out my dividend growth retirement portfolio, with a low-risk, 100% blue-chip, and value-focused strategy.

My approach is based on the mantra "quality first, valuation second, and discipline and patience always."

I currently have 10 limits set to buy ALB, MO, UPS, MMM, AMTD, MDT, MSM, TU, KO and WFC. I can afford up to five limit orders right now.

If they fill, I'll be buying these blue-chips at 14% to 38% discounts to their historical fair value and could enjoy 10.9% to 21.0% long-term CAGR total returns.

Just remember that even the bluest of blue chips can fail, so always use good risk management and proper asset allocation when investing. I'm personally targeting 5% position caps and 20% sector caps and minimal use of bonds only as a cash alternative (due to my long investing horizon and very high income and savings rate).

(Source: imgflip)

Earnings seasons is a glorious and exciting time for value dividend investors. Even the highest quality blue-chips can plunge if they miss earnings, as recently happened with 3M (MMM) when its 3rd straight miss and guidance cut caused its shares to plunge 13% in a single day. That's the worst single-day percentage decline since Black Monday, 1987 when the S&P 500 suffered a 22% day crash, the worst in market history.

Plenty of other beloved blue-chips miss earnings, such as Altria (MO) (fell 6% during its earnings freakout), which allows opportunistic and patient value investors to scoop up shares at good discounts to fair value. Apply such an approach long enough and you can build up a large portfolio of quality income producing assets, that pay generous, safe and steadily rising dividends, no matter what the market or economy are doing.

Readers seem to enjoy my new limit order series, so I thought I'd provide an update about a minor tweak I'm making to my approach, as well as highlighting the 10 dividend blue-chips I'm hoping to possibly buy soon.

A Minor Adjustment To My Limit Order Blue-Chip Buying Strategy

The reason I'm such a fan of limit buy orders is because of Buffett's famous quote,

"We don't have to be smarter than the rest. We have to be more disciplined than the rest."

My goal is to earn solid double-digit returns, on low-risk companies, all while enjoying market-beating dividend growth (S&P 500's 20-year median payout growth is 6.6%) and long-term total returns (9.1% CAGR since 1871).

That's why I focus only on blue-chip level companies based on my 11-point Sensei Quality Score. That factors in dividend safety, business model, and management quality. While level 8-11 quality companies are not guaranteed to do well over time, it minimizes the probability of suffering a large and permanent loss of capital, which is based on another famous Buffett saying,

"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

The logic behind my 100% blue-chip approach is that a vast majority (virtually all) of the market's historically great returns come from just a handful of companies.

According to a study by JPMorgan Asset Management, between 1980 and 2014, 66% of companies underperformed the Russell 3000 (a proxy for the broader US market), and a shocking 40% of suffered 70+% permanent declines.

The median return over the time period was deeply negative. While blue-chips with competitive advantages and wide moats are not guaranteed to avoid disaster, the probability of their business models failing is smaller, thanks to proven management teams and greater financial flexibility that allows them to adapt over time.

And, we can't forget that blue-chip dividend stocks tend to offer safer dividends that don't get cut during a recession.

While recessions and bear markets typically cause stocks to crash over 30%, dividends fall 16 times less. That's especially true if you own the famous dividend aristocrats (S&P 500 companies with 25+ consecutive years of dividend growth).

(Source: Ploutos Research)

Since 1990, the aristocrats, despite being stable, mature, and relatively slow-growing companies, have managed to beat the market by 25% annually and with 18% lower volatility.

The minor tweak I've made from my last limit order article was to open up my buying to opportunistic crashes such as occurred with 3M and Altria last week. 3M gave me increased diversification (into industrials), as well as increasing my number of companies to 23. Altria, I locked in at a 6.3% yield and also enhanced my exposure to consumer staples and boosted my holdings to 24 (including my loan bond ETF MINT).

However, I only buy opportunistically if the company is of sufficient quality (like a dividend aristocrat or king) AND if DYT and Morningstar's generally more conservative discounted cash flow fair value estimates say a company is undervalued.

My retirement portfolio is meant to generate a steadily rising stream of income that can eventually allow me to retire (which I define as working just four days per week instead of six) by living on 50% of my post-tax dividends alone.

My $257,000 portfolio isn't yet large enough to support that goal, though it is generating an average of $36.70 per day (including weekends and holidays) in safe and rapidly growing income.

(Source: Simply Safe Dividends)

The dividend stream is recession-resistant and, over the past decade, has been growing at a double-digit rate.

(Source: Simply Safe Dividends)

While maintaining 13.8% or even 10% long-term dividend growth may not be attainable (though I'll give it my best shot), according to Morningstar, my portfolio's weighted average five-year projected EPS (and thus dividend growth) is 7.4%, which is above my 6.6% goal.

(Source: Morningstar)

The portfolio's forward PE ratio is also a very low 13.8, 19% less than the S&P 500's and about where the market was trading on December 24th, the bottom of the most severe correction in 10 years. In other words, while the broader market has largely run out of room to rally on multiple expansion, my companies have plenty of room to run.

(Source: Simply Safe Dividends)

If I can maintain about 7.5% long-term dividend growth then, even assuming I never invest another penny (I'm saving and investing about $10,000 per month), my annual dividend income will double every decade and hit about $55,000 within 20 years.

So, with my new hybrid approach to blue-chip limiting buying, here are the 10 limit orders I have open.

My Current Buy Limit Orders

(Source: Google Sheets) - data as of April 26th close

This is the watchlist that I use to run my retirement portfolio, at least in terms of what new companies I mostly buy and at what prices. I've programmed it to track all 137 (and counting) blue-chip level companies I track on an annual basis (at a minimum).

I'm growing that watchlist over time, as I perform Simply Safe Dividends' (where I'm an analyst covering over 200 companies per year) annual thesis reviews. I also check once per week to see what blue-chips are trading near 52-week lows, which is another way I grow the list over time.

To minimize the risk of overpaying for a company, I demand the company be historically undervalued, per dividend yield theory. That is a time-tested valuation approach to blue-chip dividend stocks which asset manager/newsletter publisher Investment Quality Trends has been using exclusively since 1966.

(Source: Investment Quality Trends)

Over the past 30 years, according to Hulbert Financial Digest, IQT's DYT-driven blue-chip dividend growth approach has delivered the best risk-adjusted total returns of any investing newsletter in America. But just to make sure I'm getting a good deal, I'm also looking to typically buy a company near its 52-week low (sometimes multi-year lows) and only if Morningstar's conservative DCF based valuation estimates say it's trading beneath its intrinsic value.

My spreadsheet tells me not just a good limit to set but also when a company is within 5% of that price, and a separate column tells me how far from the limit any stock is currently trading. I short all companies by distance to limit once a day and then look at what's within 10% of my target price.

I set the limits for the next week if a company is within 10% of my limit price or if I've bought it opportunistically and have a follow-on buy order set to add more if it keeps falling (catch a falling blue-chip with conviction).

Company Ticker Quality Score (Out Of 11 Points) Current Price Limit Price

Distance To Limit Price

Albemarle (ALB) 10 (SWAN) $75.56 $75.48 0.1%
3M (MMM) 11 (SWAN) $191.67 $185.81 3.9%
Altria (MO) 9 (SWAN) $52.79 $50.01 5.3%
MSC Industrial (MSM) 9 (SWAN) $81.55 $76.94 5.6%
Wells Fargo (WFC) 8 (Blue-Chip) $47.96 $45.17 5.8%
Medtronic (MDT) 10 (SWAN) $87.35 $82.20 5.8%
TELUS (TU) 8 (Blue-Chip) $36.68 $34.08 7.1%
TD Ameritrade (AMTD) 9 (SWAN) $51.73 $47.99 7.2%
UPS (UPS) 9 (SWAN) $103.95 $94.38 9.2%
Coca-Cola (KO) 10 (SWAN) $48.26 $43.52 9.8%

(Sources: Google Sheets) - data as of April 18th close

For opportunistic buys, like 3M or Altria, I set my follow-on limits at 0.1% higher yield. For blue-chips trading near 52-week lows, I generally use $1 below the initial cost basis unless it's an expensive stock ($2 for companies over $100, $3 for over $200, and so on).

The reason I'm using limits at these prices is to maximize the change of earning a good yield and buying at low enough valuations that double-digit long-term returns become likely.

Company Yield At Limit Price Historical Discount To Fair Value (At Limit Price) Long-Term Expected Growth Rate (Analyst Consensus Or Management Guidance) 10-Year Valuation-Adjusted Total Return Potential
Albemarle 2.0% 22% 13.3% 17.8%
3M 3.1% 19% 6.4% 11.6%
Altria 6.4% 38% 8.0% 19.2%
MSC Industrial 3.3% 27% 10.7% 17.2%
Wells Fargo 4.0% 30% 13.4% 21.0%
Medtronic 2.6% (factoring in imminent dividend raise) 19% 8.0% 12.7%
TELUS 4.8% 13% 8.0% 14.2%
TD Ameritrade 2.5% 32% 14.0% 20.4%
UPS 4.1% 29% 9.4% 17.0%
Coca-Cola 3.7% 14% 5.7% 10.9%
Average 3.7% 24% 9.7% 16.2%

(Sources: Simply Safe Dividends, F.A.S.T. Graphs, Yahoo Finance, management guidance, analyst estimates, Gordon Dividend Growth Model, Dividend Yield Theory, Moneychimp). Note: margin of error on total return potential is historically 20%.

As you can see, the average yield on my target companies is double the market's 1.8% yield. And, the long-term expected earnings and dividend growth rate is similarly impressive, above the market's long-term 6.6% median. Best of all, the average limit is for a blue-chip company I'd love to own for the long term, that's 24% below its historical fair value.

That's what creates a strong margin of safety and likely very strong total returns when these blue-chips revert back to their historical yields (the entire basis of DYT, which has crushed most other investing approaches for over 50 years).

Things To Keep In Mind

I can't stress this enough, I am NOT predicting that any of these companies will fall to these limit prices. I don't do 12-month price targets since short-term price action is 100% based on fickle sentiment.

I'm also not saying that my limits are perfect for everyone. They are merely meant to be a logical approach to buying great companies at discounts to fair value.

If my limits don't fill, then I simply store up cash, via the PIMCO Enhanced Short Maturity Active ETF (MINT), which is what I buy with any spare cash each Friday. That's how I can store up buying power for future limits. However, my goal isn't to avoid buying, which is why in five weeks of using this approach, not a week has gone by without me adding something to my portfolio.

That ETF pays 2.5% yield after expenses, on a monthly basis, and is a cash-equivalent, meaning it trades flat as a pancake. Note that MINT is a Morningstar five-star rated ETF, but I'm not saying it's necessarily the world's best cash equivalent. It's merely good enough to serve my needs.

Should the market melt up and none of my limits fills for a few weeks or even months, then I'll end up with a ton of dry powder to put to work during the next correction or market pullback.

Fortunately, there are so many undervalued companies at any given time that typically I'm able to add to my portfolio on a weekly basis and expect that to continue for the foreseeable future.

But I must also point out two important facts. First, everyone's investing goals are slightly different, and my retirement portfolio is meant to meet my needs, not necessarily yours. For example, right now, I'm 1% in bonds (via MINT) and will likely never hold anywhere near the amount of bonds/cash that most investors need (30% to 50% for most people).

During recessions, stocks tend to decline a lot. In fact, since WWII, the average recessionary bear market has seen stocks decline a peak of 37%. In contrast, bonds and cash (T-bills) remain stable or rise. That's the reason that good asset allocation (mix of stocks/cash/bonds) is critical to your long-term goals.

I'll likely never be more than 10% to 20% in bonds (possibly a lot less), but you'll want to make sure you have enough cash/bonds to sell to meet expenses during the average three-year bear market (since 1926 measured from the market peak to next all-time high).

That's especially important for retirees using the 4% rule, or any variant of it (like 3% to 5%). The last thing you want to do in a correction/bear market is overweight in stocks and have to sell to pay the bills at historically low valuations. Use how you felt in December's crash (S&P 500 fell 17% in a three-week period) to judge whether your current asset allocation is appropriate for you.

Even blue-chip dividend stocks like aristocrats and kings are NOT a true bond alternative. During the Great Recession, just three aristocrats/kings (out of 81 companies) posted 0+% total returns. The rest fell but typically less than the 57% crash in the S&P 500.

Finally, remember that these 10 companies are NOT 100% guarantees to make money. As legendary investor Peter Lynch (who delivered 29% CAGR total returns at the Magellan Fund from 1977 to 1990) explains,

In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."

All investing is probabilistic, which is why good risk management and asset allocation is so important.

My goal is to exceed Lynch's 60% "good analyst" threshold and have 70% to 80% of my recommendations pay off over time. Thus far, I'm doing pretty well, at least on a forward 12-month basis, as tracked by TipRanks.

(Source: TipRanks)

Only time will tell if I can stay in my target range, but I'm willing to risk 100% my life savings on my low-risk dividend growth blue-chip approach.

Thus far, it has allowed me to "be greedy when others are fearful", which has netted me my top gainers, including nine blue-chip quality companies that are up double-digits in six to 12 months (not counting dividends).

(Source: Interactive Brokers)

Some of my recent opportunistic buys are already paying off such as CVS Health (CVS) being up 1.2% in a month and UnitedHealth (NYSE:UNH) being up 6.4% in 1.5 weeks. My Altria post earnings freakout buy is also showing a profit after just two days, which is nice, though I'd prefer to buy more at yields of 6.4% or higher.

But the point is that all my articles, including those about my retirement portfolio or personal investing strategy, are merely meant to offer ideas, and not necessarily to be mirrored precisely.

While I'm confident that buying these 10 blue-chips at the prices I've described will turn out well (or at least isn't likely to lead to large permanent losses).

Bottom Line: I've Adapting My Approach A Bit, But Still Sticking To An Opportunistic Blue-Chip Strategy

Ultimately, good investing is about being generally right, about a time-tested strategy that has the highest probability of meeting your long-term financial goals.

My new hybrid approach of combining limit orders with opportunistic buying (mostly on earnings-induced crashes) and follow-on limits is a low-risk strategy that I'm confident will allow my retirement portfolio to become a source of generous, safe and rapidly growing dividends. That's based on its core stats which include:

  • Portfolio yield on cost: 5.3%
  • historical dividend growth rate: 11.0%
  • expected long-term dividend growth: 7.3%
  • Average valuation (per Morningstar's DCF estimates): 12% undervalued
  • Expected Long-Term CAGR Total Return (ignoring valuation): 12.6%
  • Valuation (and margin of error) adjusted total return potential: 11.0% to 16.6%

But to anyone mirroring my limits or retirement portfolio moves, never forget that your financial goals/needs may be different than mine.

While my 100% low-risk blue-chip focus is one that many conservative investors might safely follow, never forget that good portfolio management isn't just about what stocks you buy and at what prices.

You also need a well-diversified portfolio with enough cash/bonds to endure the unpredictable but inevitable corrections/bear markets of the future without becoming a forced seller of great companies at fire-sale prices.

Disclosure: I am/we are long MMM, MO, MINT, CVS, UNH. 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.