DGI For The DIY: Q1 2019 Dividend Portfolio Update

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Includes: ADP, AVGO, CHD, CMCSA, CVX, D, DLR, GILD, HD, HRL, IBM, KO, MKC, MMM, MO, NEE, NSC, O, PII, ROST, SKT, STAG, TGT, UNH, UNP, WFC, XEL
by: Eric Landis
Summary

The DGI for the DIY portfolio had an excellent first quarter, with new all-time highs set for income and value.

Q1 dividend income increased by 12.4% over 2018, and new dividend increase announcements point to even higher income going forward.

Several trades were made in February in an attempt to shed laggards and boost growth in the portfolio.

Project Background

The DGI For The DIY portfolio was created in 2013 when I liquidated the mutual funds in my IRA and used the proceeds to create a new portfolio of dividend growth stocks. I've been writing quarterly updates on the portfolio ever since, documenting the its progress and my lessons learned as a Do-It-Yourself "DIY" dividend growth investor "DGI".

I am a forty-year-old civil engineer, married, and have three young children. I share my personal story in an attempt to inspire others to take control of their finances and plan for their future. I've found that writing these updates keeps me focused on the goal ahead, which is securing a growing income stream to help fund my future retirement. Knowing that I'll be documenting everything for others to see helps me to stay on the right path and keeps me disciplined in the process.

I know it can seem like a daunting task to start investing from scratch, especially with the limited spare cash to invest and limited spare time for stock research that comes with a busy household. But my journey has shown that a successful portfolio can be built with limited initial knowledge and just a few hundred dollars a month in contributions.

This is an IRA that initially saw just $300 in monthly deposits, and is now funded solely by dividend reinvestment as contributions ended last October following a merger of the company I worked for.

If you'd like to read the history of, and more information about the portfolio, I have included links to all prior quarterly updates here.

Portfolio Guidelines

As my investing approach has evolved, I've established guidelines that help meet my goal of building a portfolio that produces a consistent and reliably increasing stream of dividend income.

  1. Buy companies that consistently show positive growth in earnings and then pass those earnings on to shareholders through increasing dividend payouts.
  2. Focus on companies that are investment grade, with S&P credit ratings of BBB or higher.
  3. Maintain a diversified portfolio spread across multiple industries.
  4. Reinvest all dividends back into the companies that pay them.
  5. Consider for sale any company that cuts or freezes its dividend.

As mentioned, the purpose of this portfolio is to fund a portion of my future retirement. Being forty years old, I have another roughly twenty-five years to reach that milestone. This portfolio will be just one piece of our retirement puzzle, as we have other investment accounts, will (hopefully) be receiving social security benefits, and my wife will have a pension earned by her service in the military.

Before I switched to dividend growth investing, the question was: How big of a nest egg do I need for retirement? While that is still a consideration, my focus has instead shifted more towards: How much income do I need at retirement?

Changing the perspective from portfolio size to portfolio income has been helpful because it gives me an easier way to benchmark my goals. Rather than focusing on the daily swings in portfolio value, I can instead concentrate on the steadily increasing dividend income that it provides. Not only is income easier to plan for, but it is also less volatile, making the ups and downs of the market much easier to stomach.

I switched to dividend growth investing back in 2013, but it was towards the end of 2017 that I also established a goal of 10% annual income growth for the portfolio. I finished that year with $2,005 in dividend income, and calculated that with a 10% annual income growth rate, this portfolio would produce over $26,000 in dividend income in 2044, the year I turn sixty-six years old.

DGI For The DIY - Dividend Scorecard

The portfolio earned $2,299 in 2018, which was $99 above my targeted goal, and a 14.6% increase over 2017's income of $2,005. This income growth came from organic dividend growth and reinvestment of dividends, as there are no longer any cash contributions being made into this account.

It's great seeing progress being made, and that I'm beating the pace set for the portfolio. It's especially reassuring to see this when considering the volatility in the market, as December's big correction had zero impact on the income coming in to the account.

Market Overview

Following December's correction, the market rebounded strongly during Q1. All three major indices saw double-digit gains, led by a 16.5% gain from the NASDAQ.

Chart Data by YCharts

The portfolio also rebounded strongly, as the total value increased from $69,009 to $77,730, a gain of 12.63%. This lagged the NASDAQ and S&P 500, but did manage to beat the DJIA.

DGI For The DIY - Portfolio Progress Not only did the portfolio value hit new highs, but dividend income did so as well. First quarter income of $643.09 was 12.4% higher than income seen during Q1 of 2018, and March income of $294.40 was a new monthly record for the portfolio.

DGI For The DIY - Dividend Progress With those solid results in the Q1, the portfolio is well on pace to exceed my 10% income growth goal for the year. Annualizing the $643 quarter would produce $2,572 for the year, which would be a nearly 12% increase over 2018's total. The snowball keeps growing!

In addition to the higher payouts already seen in the portfolio, there were also several dividend increase announcements made that bode well for future income growth.

Announce Date Company Ticker Previous Payout Rate New Payout Rate Sequential Increase Year Ago Payout Rate YoY Increase Dividend Yield Link
1/10/2019 Stag Industrial Inc (STAG) $0.1183 $0.1192 0.70% $0.1183 0.70% 4.94% LINK
1/16/2019 Realty Income Corp (O) $0.2210 $0.2255 2.04% $0.2190 2.97% 3.86% LINK
1/22/2019 Wells Fargo & Co (WFC) $0.4300 $0.4500 4.65% $0.3900 15.38% 3.79% LINK
1/23/2019 Norfolk Southern Corp. (NSC) $0.8000 $0.8600 7.50% $0.7200 19.44% 1.70% LINK
1/30/2019 Chevron Corporation (CVX) $1.1200 $1.1900 6.25% $1.1200 6.25% 4.04% LINK
1/31/2019 Polaris Industries Inc. (PII) $0.6000 $0.6100 1.67% $0.6000 1.67% 2.57% LINK
2/4/2019 Gilead Sciences, Inc. (GILD) $0.5700 $0.6300 10.53% $0.5700 10.53% 3.93% LINK
2/4/2019 Church & Dwight Co., Inc. (CHD) $0.2175 $0.2275 4.60% $0.2175 4.60% 1.24% LINK
2/5/2019 3M Co (MMM) $1.3600 $1.4400 5.88% $1.3600 5.88% 3.02% LINK
2/7/2019 Union Pacific Corporation (UNP) $0.8000 $0.8800 10.00% $0.7300 20.55% 2.01% LINK
2/13/2019 Tanger Factory Outlet Centers Inc. (SKT) $0.3500 $0.3550 1.43% $0.3500 1.43% 7.52% LINK
2/15/2019 NextEra Energy Inc (NEE) $1.1100 $1.2500 12.61% $1.1100 12.61% 2.62% LINK
2/20/2019 Xcel Energy Inc (XEL) $0.3800 $0.4050 6.58% $0.3800 6.58% 2.89% LINK
2/21/2019 The Coca-Cola Co (KO) $0.3900 $0.4000 2.56% $0.3900 2.56% 3.34% LINK
2/21/2019 DIGITAL RLTY TR/SH (DLR) $1.0100 $1.0800 6.93% $1.0100 6.93% 3.61% LINK
2/26/2019 Home Depot Inc (HD) $1.0300 $1.3600 32.04% $1.0300 32.04% 2.63% LINK
3/5/2019 Ross Stores, Inc. (ROST) $0.2250 $0.2550 13.33% $0.2250 13.33% 1.04% LINK
3/12/2019 Realty Income Corp (O) $0.2255 $0.2260 0.22% $0.2190 3.20% 3.87% LINK
Average: 7.20% 9.26% 3.26%

There were eighteen dividend rate increases declared during the quarter, with an average increase of about 7.2% sequentially and 9.3% annually. Double-digit year-over-year gains came from Wells Fargo (WFC), Norfolk Southern Corp. (NSC), Gilead Sciences, Inc. (GILD), Union Pacific Corp. (UNP), NextEra Energy Inc. (NEE), Home Depot Inc., and Ross Stores, Inc. (ROST).

The average increase was smaller than what was seen in each of the last two quarters (13.2% and 16.1%), and I expect this to continue through the rest of the year. Last year's large increases were driven largely by the lowered corporate tax rate, and now that the new tax rate has normalized, dividend increases will likely be smaller along with lower EPS growth by companies.

The small increases from Polaris, Church & Dwight, Coca-Cola and Tanger Factory Outlet Centers, and the large increase from Home Depot all factored into some trades made in the portfolio during the quarter, which I will discuss next.

Portfolio Transactions

As mentioned, following my employment change, there are no longer cash contributions being made into this account. Therefore, the only way to open new positions or add to existing ones is through trades.

There were few trades during 2018, as the only moves made were the sales of Chatham Lodging Trust (CLDT) and Dr Pepper Snapple Group (KDP) and purchases of Hormel Foods (HRL), McCormick & Co. (MKC) and Altria Group (MO).

I was a bit more active during Q1 however, as I made nine sales and seven buys in an attempt to shuffle the deck a bit and create more growth in the portfolio.

The first set of trades was made on February 15th with the sales of Polaris Industries (PII) and Tanger Factory Outlet Centers and the trimming of positions in International Business Machines Corp. (IBM) and Target Corp. (TGT) to open new positions in Broadcom Inc. (AVGO) and Home Depot Inc. (HD).

DGI For The DIY - Q1 2019 Transactions Polaris Industries had been in the portfolio since February of 2013, and was a roller-coaster ride over the six years I owned it. I originally bought Polaris as a "growthier" stock for the portfolio, and it initially filled that role nicely.

However, it has struggled to grow EPS in recent years, and is on pace to earn less in 2019 than what it made back in 2014. As a result, its dividend growth has slowed considerably, with the last four increases being just 3.8%, 5.5%, 3.5%, and 1.7%.

PII FAST Graph

I admire the fact that Polaris continues to keep the dividend growth coming, but considering it has struggled this much during a good economy, I felt it was time to cut it loose and put the capital into other ideas.

Tanger Factory Outlet Centers has also struggled to grow in recent years, and is on pace to produce a lower FFO this year than back in 2015. This has caused the payout ratio to expand to 63%, which is well above its typical ~50% payout rate. Dividend growth has stalled as a result, with the last two increases coming in at 2.2% and 1.4%.

SKT FAST Graph I still think Tanger is a quality company, and don't believe the dividend is in danger, but with the general struggles for retail and little growth on the horizon, it was time to move on.

The other two stocks sold were trims of existing positions IBM and Target. These are two stocks that have been in the portfolio for a while now, and are similar in that they've both seen steadily decreasing dividend growth rates as they've struggled to grow income.

IBM has been the prototypical "value trap" since I bought it in 2013 and added to the position twice in 2014. It's seen EPS continue to fall over the last five years as the company has tried to evolve in a changing tech industry. Its recent acquisition of Red Hat, Inc. (RHT) shows that management is committed to reinventing the business, but IBM paid a high price, and that probably doesn't bode well for dividend growth in the near term.

Dividend growth has slowed in recent years even before the acquisition, with the three most recent increases falling from 7.7% to 7.1% to 4.7%. I expect the upcoming increase will be small as well.

IBM FAST Graph I do still have hopes that the company can turn things around, but not enough conviction to keep it an overweight position in the portfolio. Therefore, I decided to sell off roughly 1/3 of the position to free up some capital. I'll let the rest ride and see what happens with Red Hat.

Target was an original purchase in the portfolio, and was another I added to again in June of 2014. Like many retail companies, it has struggled to grow in a tough sector, although analysts are optimistic that growth may tick up a bit going forward.

Like IBM, Target has seen dividend growth slow over the last few years, with the last four increases being 7.7%, 7.1%, 3.3%, and 3.2% as the payout ratio has stayed above a previously targeted 40%. Based on 2020 estimates of $5.86 in earnings, the current payout ratio sits at nearly 44%, so I expect at least another year or two of sub-par income growth.

TGT FAST Graph I do like what Target has been doing with its business, and believe it should benefit from the recent store closings from the likes of K-Mart, Shopko, and Sears. But with the slower income growth, I don't like it enough to keep it overweight, so I sold roughly 1/3 of the position.

The first replacement company, Home Depot, is one that I've had on the wish list for several years, but never found room to add it. I've done quite well with Lowe's Companies since buying it in 2016, and decided that it was finally time to add the other half of the home improvement duopoly.

Home Depot has been a tremendous performer over the last decade, with annual EPS growth over 15% every year since the recession. It's also grown the dividend at a similar rate, and following its 32% dividend increase in February, was yielding nearly 3%.

HD FAST Graph That near 3% yield is lower than some of the others that I sold, but I believe Home Depot has a much better pathway for future income growth than the likes of Tanger, Polaris, or Target. Even after the large dividend boost, the payout ratio still remains below the 55% target set by management. And with analysts expecting a long-term growth rate in the double-digits, the move should pay off in the future.

The other addition, Broadcom Inc., doesn't have the length of track record nor the financial strength that Home Depot does, but it does have the growth. The buy adds another position to my tech holdings and gives me another semiconductor company to partner with Qualcomm in the portfolio.

Broadcom has been a consolidator in the industry, and actually tried to acquire Qualcomm in 2018 before being rebuffed by the government due to CFIUS concerns. The acquisitions have helped the company achieve growth, but are also the reason behind the sub-par BBB- S&P credit rating.

AVGO FAST Graph Broadcom's 30%+ growth days are likely behind it, but analysts are still expecting an attractive 10-12% growth going forward. This is pretty attractive when coupled with a 3.5% yield, and in comparison to the slower growers that were swapped for it.

The second "shuffle" was made on February 27, and was a bit more extensive. This trade involved five sales and five buys, and was made for a variety of reasons.

DGI For The DIY - Q1 Transactions2 First of all, the five sales were made for three different reasons: overvaluation, slow growth, and overexposure.

Nike and Church & Dwight were both excellent performers in the portfolio, but extreme overvaluation has dropped their yields to the just 1% and 1.2%, and this seemed like a good opportunity to lock in gains on the shares.

Nike is trading for nearly 35 times earnings, a record high for the stock. This is despite negative EPS growth in 2018 and expectations for just 4% growth in 2019. Analysts are expecting growth to accelerate in 2020 and 2021, but this still seems an awfully expensive price to pay for that potential growth.

NKE FAST Graph Church & Dwight trades at a 30 PE, which is also a high for the company. Church & Dwight is one of the most consistent performers in the market, so I understand it deserving a premium price, but I think it's gotten to a level where the risk/reward just isn't there anymore, especially when only one of the last four dividend increases have been in the double-digits. I'm just not seeing enough growth on the 1.2% yield for my liking.

CHD FAST Graph General Mills and Coca-Cola were both long-time holdings in the portfolio, and between General Mills' frozen dividend following the Blue Buffalo acquisition, and Coke's slowing dividend growth and expanding payout ratio, I'm not very optimistic that either will meet my goal of 10%+ income growth.

General Mills had seen its dividend growth slow even before the acquisition, and with its credit rating down to the BBB level, I expect it to focus more on paying off debt than raising dividends over the next few years.

Coke has also seen slowing dividend growth, with the last five increases going from 8.2%, 6.1%, 5.7%, 5.4% and now 2.6%. During this time its payout ratio increased to over 75%. The company has been doing everything it can to get earnings growing again, but that is difficult to do with such a large company, there just aren't many acquisitions that can move the needle for it in the consumer staples sector.

Finally, Omega Healthcare was trimmed to bring it more in line with its risk profile in the portfolio. The stock is trading near 52-week highs and as a result was once again one of the larger positions in the portfolio. Not only was it one of the largest sized positions, but due to its high yield, it was also by far my biggest income producer.

OHI FAST Graph

It is operating in a difficult industry with a somewhat questionable business model due to concerns about future reimbursement rates, so I decided the run-up in price gave me a good opportunity to reduce my exposure a bit.

For the new buys I decided to fill out, and actually go overweight, in my positions in Dominion Energy Inc. (D) and Altria Group (MO). Both companies were trading at attractive valuations, with yields near 5% and 6.2% at time of purchase. Adding to these positions helped offset the loss of yield from Omega Healthcare and General Mills, and think both Dominion and Altria should continue growing dividends into the future.

The other three purchases, Automatic Data Processing (ADP), Comcast Corp. (CMCSA), and UnitedHealth Group Inc. (UNH) were made in attempt to replace the growth lost from Church & Dwight and Nike, but at more attractive valuations and yields.

Payroll and benefits manager ADP is a Dividend Champion with a 43-year streak of dividend growth, and has grown the dividend at an 11% rate over the last decade. At a 31 PE, shares are far from cheap, but a higher payout ratio raises the yield to near 2%; much better than what Nike and Church & Dwight were offering.

It is also expected to accelerate EPS growth, as analysts are expecting 16.5% annual growth over the next five years, while management is forecasting annualized EPS growth of 16-19% through 2021.

ADP FAST Graph Comcast was selected as a replacement for Nike in my consumer discretionary group. The stock trades at half the PE of Nike and offers twice the yield, while providing similar historical and projected growth rates.

The company has seen good growth from high-speed internet offerings, and its ownership of NBC, Universal Pictures, Illumination, and Dreamworks positions it well for the ongoing content wars. It's managed to grow EPS at a mid-teens rate over the last decade, and analysts expect double-digit growth going forward as well. I think this makes it a good fit for the portfolio, and expect it to more than meet my 10% income growth goals.

CMCSA The final company, UnitedHealth Group, is one that I've watch for several years, but just never pulled the trigger on. During that time it's more than doubled in price, and more than doubled the dividend.

The company has grown EPS at a mid-teens rate over the last decade, and analysts are expecting 13% going forward. Management agrees with this, as it has guided for 13-16% growth on investor presentations. Dividend growth has been even more robust in recent years, as the payout ratio has expanded from 15% to 25%.

UnitedHealth has sold off along with much of the healthcare sector, as Democratic presidential candidates have discussed the potential of single-payer healthcare, but I think this has little chance of happening, as the votes simply aren't there in the House and Senate to get something that significant passed.

UNH FAST Graph The company is expected to raise the dividend again with its next declaration in June, and I think another 20%+ increase is likely. With such a low payout ratio and the optimistic forecast for continued earnings growth, I felt this was a good opportunity for the portfolio.

Portfolio Holdings

Here is how the portfolio looked at the end of the quarter following the transactions:

DGI For The DIY - Q1 2019 Portfolio DGI For The DIY - Q1 2019 Portfolio2 A few notes on the spreadsheet. First, the orange shading in the "Shares Bought" column shows the positions that have been trimmed. I had a hard time deciding how to handle the sales and how to show them on the spreadsheet. In the end, for simplicity's sake I decided to just remove the number of shares sold from the total and leave the rest as is.

The other thing you'll notice is the small 0.5293 position in Tanger Factory Outlet Centers. This was due to me not turning off the dividend reinvestment option with my broker prior to selling the stock. I didn't realize that I was selling the stock after the ex-div date at the time, and was surprised a few days letter when a partial share showed up in the account. Since it's not worth spending the commission to sell out, I'll keep it and continue to reinvest what's left.

The portfolio hit a new all-time high of $77,730 at quarter's end, which was 12.6% higher than the end of 2018, and $254 higher than the previous all-time high set in Q3 of 2018.

Gains were seen across many stocks in the portfolio following the big sell-off in December. Some especially impressive price increases came from Apple, Ameriprise Financial, Kinder Morgan, IBM, Mastercard, Norfolk Southern, Union Pacific, Philip Morris, and Target, as they all were up more than 20%.

Chart Data by YCharts

Dividend reinvestment was also a factor in setting new highs, as it contributed $643 during the quarter.

Portfolio Weightings

Here are the updated portfolio weightings following the transactions:

DGI For The DIY - Q1 2019 Portfolio Weighting The flurry of transactions this quarter did have some impact on the weightings in the portfolio. By selling off Tanger and trimming my Omega Healthcare the REIT sector's income weighting dropped from 21.7% to 18.3% and the value weighting dropped from 14.2% to 12.6%.

Meanwhile, due to the additions of Automatic Data Processing, Broadcom, and UnitedHealth Group, the technology and health care sectors both cracked the 10% income weighting for the first time.

I like how the moves impacted the portfolio, as they lessened my exposure to REITs a bit and expanded some of the growthier sectors in tech and health care.

On The Radar

With the flurry of moves in Q1, my wish list of stocks to add has dropped considerably. One change is that Church & Dwight and Nike now go from positions in the portfolio to ones on the watch list. I still think they are excellent companies, and if either sees a significant correction, I'd like to own them again.

I don't see myself making any moves this quarter, as I'll probably let things settle for a bit before making any additional trades. I am still watching the market though, and see a few stocks that look interesting.

UnitedHealth Group is nearly 20% off of 52-week highs, and is trading at its lowest valuation since 2015. I am also interested in seeing what Altria Group and Philip Morris do in the coming months after it was announced that the FDA has approved iQOS for sale in the United States. This was a highly anticipated announcement, and I think could be a big development for both companies.

Closing Thoughts

It was a busy and successful quarter for the portfolio, as some trades changed the complexion of my holdings, while the value and dividend income hit new all-time highs.

Q2 is off to a great start, as there's already been seven dividend increase announcements made, led by Kinder Morgan's 25% increase on April 17. It seems that earning's season is also going fairly well, which hopefully leads to more gains in the market.

I hope this update finds you well, happy investing!

Disclosure: I am/we are long AAPL, ABBV, ABT, ADP, AMGN, AMP, AVGO, AWK, BDX, CBRL, CMCSA, CMI, CVS, CVX, D, DLR, EOG, FLO, GILD, HD, HRL, IBM, JNJ, KMI, LMT, LOW, MA, MCD, MKC, MMM, MO, MSFT, NEE, NSC, O, OHI, OXY, PM, QCOM, ROST, SBUX, SKT, STAG, T, TGT, THO, UNH, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM. 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: I am an engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.