My Dividend Growth Portfolio May Update: 42 Holdings, 1 Buy

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Includes: AAPL, ABBV, ABT, AMGN, AMP, APLE, CMI, CSCO, CVS, DIS, EFAS, GLW, GOOG, GOOGL, HD, IRM, ITW, JNJ, JPM, KHC, MA, MDT, MLPA, MMM, MO, NKE, NLY, PCEF, PRU, SBUX, SCHD, SDEM, SDIV, SKT, SPG, SRET, STAG, SWK, T, TROW, TRV, UTX, V, VNQ, VTR, WBA, WPC, XLU
by: Dividend Derek
Summary

I collected $811 in dividends during May and $3,339 YTD (up 16.7% YoY).

Net positions didn't change though I added to a recent new position in Simon Property Group.

The push to $10,000 in yearly dividends is on with an approximate $9,200 yearly rate currently.

Introduction

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 401K 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 34 (birthday), I have approximately 25 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."

Change Log

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.

  • Nothing material this edition

Commentary

May reverted the trend that had been underway throughout 2019. Frankly, May was a crap month as the markets have pulled back due to a variety of news stories. Whether it is the escalation of Chinese tariffs or unexpected Mexican tariffs, there is more uncertainty than there has been recently.

As of this writing, however, the market has regained some steam as there is more dovish talk from the Fed and even the possibility of rate cuts coming.

I closed out May with a balance of $301,626 which was down from $320,740 from the end of April.

I spent more time this month collecting funds to replenish my cash supply that had dwindled below my 5% target. I've been watching a few stories develop and have put in some limit buy orders should their prices continue to slide. Those include MMM, AMGN, IRM and BPR.

2019 Goals

  1. I want my dividend growth holdings to have an average dividend growth rate of at least 7%. (Currently 9.7%)
  2. By the end of 2019, I want to have a projected dividend income of at least $10,000 (was $9,000 and accomplished in April. Originally $7,900 at start of 2019).
  3. I want to suffer no dividend cuts. (Annaly cut in April)

Portfolio Strategy

Buying Criteria

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. I'm currently massively violating this rule, Altria (MO) and AT&T (T) alone make up 14% of my 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.

Selling Criteria

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.

Timing

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. A large increase can be confirmation from management that the business is running quite 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 front-run a dividend increase several times already with Altria Group, Starbucks (SBUX), Corning (GLW), Prudential Financial (PRU), Home Depot (HD), 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.

Dividend Reinvestment

Reinvestment is only on for Visa (V), Mastercard (MA), the Schwab U.S. Dividend Equity ETF (SCHD) and CVS (CVS). As things become extremely undervalued in my mind I may selectively turn them on.

Other than that, I am of the mindset that I'll collect the dividend 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.

My thinking has evolved because the meltdown at the end of 2018 left me with no 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. On the flip side, I have some opportunity to trim some names if I so desired to boost cash.

Dividend Increases

  • None

Dividend Cuts

  • Annaly Capital Management (NLY) in April

The Portfolio

Name Ticker Percent of Portfolio CCC Status S&P Credit Rating
Apple (AAPL) 3.79% Challenger AA+
AbbVie (ABBV) 1.25% Challenger A-
Abbott Laboratories (ABT) 1.37% Challenger A+
Ameriprise Financial (AMP) 2.79% Challenger A
Apple Hospitality (APLE) 0.51% None
Cummins (CMI) 1.78% Contender A+
Cisco Systems (CSCO) 0.54% Challenger AA-
CVS Health (CVS) 1.96% None BBB
Walt Disney (DIS) 3.39% Challenger A
Global X MSCI SuperDividend (EFAS) 1.01% Challenger A
Corning (GLW) 2.77% Contender BBB+
Home Depot (HD) 2.32% Challenger A
Iron Mountain (IRM) 1.00% Challenger BB-
Illinois Tool Works (ITW) 2.96% Champion A+
Johnson & Johnson (JNJ) 2.62% Champion AAA
JPMorgan Chase (JPM) 2.93% Challenger A-
Kraft Heinz Company (KHC) 0.93% None BBB
MasterCard (MA) 2.84% Challenger A+
Medtronic (MDT) 2.09% Champion A
Global X MLP ETF (MLPA) 0.85%
3M (MMM) 1.08% Champion AA-
Altria (MO) 3.17% Champion BBB
Nike (NKE) 0.82% Contender AA-
Annaly Capital Management (NLY) 0.60% None
Invesco CEF Income ETF (PCEF) 0.71%
Prudential Financial (PRU) 2.47% Challenger A
Starbucks (SBUX) 2.91% Challenger BBB+
Schwab US Dividend ETF (SCHD) 3.39%
Global X MSCI SuperDividend Emerging (SDEM) 0.86%
Global X SuperDividend® ETF (SDIV) 1.66%
Tanger Factory Outlets (SKT) 1.74% Contender BBB
Simon Property Group (SPG) 2.10% Contender A
Global X SuperDividend REIT (SRET) 0.95%
STAG Industrial (STAG) 1.46% Challenger N/R
Stanley Black & Decker (SWK) 2.49% Champion A
AT&T (T) 3.36% Champion BBB
T. Rowe Price (TROW) 1.41% Champion A+
Travelers Companies (TRV) 2.78% Contender A
United Technologies Corporation (UTX) 1.93% Contender A-
Visa (V) 2.91% Contender AA-
Walgreens (WBA) 1.67% Champion BBB
W.P. Carey (WPC) 0.94% Contender BBB

Here are the values behind the "CCC Status" category:

  • King: 50+ years
  • Champion/Aristocrat: 25+ years
  • Contender: 10-24 years
  • Challenger: 5+ years

Performance

Ticker Owned Since Versus S&P Benchmark Versus Benchmark
AAPL 4/13/2015 6.74% SPY 6.74%
ABBV 1/28/2019 -4.78% SPY -4.78%
ABT 12/6/2016 77.54% SPY 77.54%
AMP 9/29/2016 25.27% SPY 25.27%
APLE 1/28/2019 -3.62% VNQ -4.54%
CMI 10/30/2015 24.14% SPY 24.14%
CSCO 4/6/2016 65.82% SPY 65.82%
CVS 10/7/2016 -66.46% SPY -66.46%
DIS 12/28/2015 -14.13% SPY -14.13%
EFAS 2/20/2019 -4.27% SPY -4.27%
GLW 10/14/2015 40.85% SPY 40.85%
HD 5/3/2016 11.54% SPY 11.54%
IRM 4/25/2019 -1.48% VNQ -6.33%
ITW 8/24/2018 9.37% SPY 9.37%
JNJ 12/9/2015 -1.82% SPY -1.82%
JPM 7/15/2016 45.13% SPY 45.13%
KHC 4/10/2019 -8.57% SPY -8.57%
MA 7/26/2018 19.27% SPY 19.27%
MDT 11/22/2016 2.10% SPY 2.10%
MLPA 2/6/2019 0.27% SPY 0.27%
MMM 5/24/2018 -19.80% SPY -19.80%
MO 10/31/2013 -4.50% SPY -4.50%
NKE 5/3/2016 -3.17% SPY -3.17%
NLY 4/3/2019 -5.87% REM -5.42%
PCEF 2/15/2019 SPY
PRU 4/7/2016 9.56% SPY 9.56%
SBUX 12/3/2015 -4.50% SPY -4.50%
SCHD 9/24/2018 1.28% SPY 1.28%
SDEM 2/20/2019 -4.65% SPY -4.65%
SDIV 2/20/2019 -9.00% SPY -9.00%
SKT 7/26/2017 -46.49% VNQ -40.78%
SPG 4/30/2019 -0.80% VNQ -6.55%
SRET 2/20/2019 -0.42% SPY -0.42%
STAG 5/20/2016 26.38% VNQ 50.15%
SWK 1/28/2016 -5.02% SPY -5.02%
T 11/3/2015 -29.57% SPY -29.57%
TROW 9/29/2016 29.86% SPY 29.86%
TRV 4/28/2014 19.55% SPY 19.55%
UTX 1/28/2016 5.32% SPY 5.32%
V 7/26/2018 13.99% SPY 13.99%
WBA 4/9/2019 -1.98% SPY -1.98%
WPC 5/15/2017 31.05% VNQ 35.96%

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 for use in spreadsheets) 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 (VTR) 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. ABT was one of the hottest stocks I owned and around the time I trimmed it, it was beating the S&P by 82% (down a little to 77% now).

Portfolio Yield

I've begun calculating a few aggregate statistics for my portfolio. I created a few metrics to look at the portfolio as a whole.

Projected Income $ 9,173.70
Cash Ratio 5.59%
Total Value $307,571.34
YOC (Divi Companies) 4.61%
Yield (Divi Companies) 3.56%
Yield Ex-Cash 3.15%
Yield w/Cash Drag 2.98%

Projected Income - the sum of all known dividends for all holdings

Cash Ratio - percentage of cash in the portfolio

Total Value - self explanatory

For these next batch, the numerator in each calculation is my "Projected Income".

YOC (Divi Companies) = "Projected Income" / ("sum of invested capital" - (cash + cost of all non-dividend paying companies)). This is my yield based on what I put in, this is separate from current market valuations.

Yield (Divi Companies) = "Projected Income" / ("Portfolio Value" - (cash + value of all non-dividend paying companies)). Said another way, this is the yield from all my dividend paying companies.

Yield Ex-Cash = "Projected Income" / ("Portfolio Value" - Cash). This is the yield based on all my invested money and their respective prices today.

Yield w/Cash Drag = "Projected Income" / ("Portfolio Value"). All in, this is the yield given my expected income divided by the full portfolio value.

My Sells

None

My Buys

Simon Property Group

I added more shares at the end of May to SPG. I did a blog post here but to me the story hasn't changed and has only become more compelling with slumping prices. The yield jumped over 5% which was my next stopping ground for adding shares. My estimate is now shares are trading at about 13x FFO for the full year.

Using the research from Simply Safe Dividends, SPG scores very well for safety which is especially impressive given they are a REIT.

Options

None this month

Charts and Graphs

Dividends

The purple bars represent 2019 and May was a great improvement over 2018 ($811 versus $634). It was also my highest middle month of a quarter by a long shot. It nearly eclipsed my highest monthly total set in June 2018 with $867.

Notes

  • Right off the bat, I got $103 from my ETF suite (EFAS, SDEM, PCEF, SDIV and SRET) that I added in February and will repeat monthly forever. Sure, the amounts may bounce around but this is an automatic boost to every month from here on out. MLPA is another high yield ETF that pays in this month in a given quarter which added another $54.
  • This was my first time receiving the ABBV dividend.
  • My ABT dividend was halved as I trimmed half my position leaving me with a negative cost basis.
  • My SKT dividend was $110 versus $73 by adding another 100 shares during the past 3 months
  • The $61 from SPG was my first dividend from them - which will also be higher next time around from my recent add that missed this recent payment.
  • Net change over February was $811 versus $567.

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.

I circled SPG as they got a boost in size and scope this month. They now sit in the middle in terms of dividends per year by a percentage of my portfolio.

There are two distinct clusters, the bottom left cluster features companies that make up less of my portfolio but contribute more to my income. That group contains names like APLE, WPC, KHC, STAG, IRM and MLPX.

The other circle is more of the traditional dividend growth companies, lower current yields but are larger positions to provide a similar level of income. These are the Home Depots, Travelers, Cornings, JPMorgans and Stanley Black & Deckers of the world.

Just below that features the binary planet system of Visa and Mastercard. Out in right field are T and MO from the sheer amount of income they provide.

Growth

Comparing May year over year, the $811 was 27.82% higher than the $634 received in 2018. To the right of that figure, the 16.69% is a rolling comparison to 2018 (a total of $3,339 versus $2,861). That figure is to help smooth out the monthly to monthly variations.

This last table 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.

January to February saw a huge jump from the high yield ETFs added and the moves made during April continued that trend. I still sit with a projection of over $9,000 in dividends over the next rolling 12 months. The next stop is $10,000 and then $12,000 (average $1,000/month) after that. $10,000 is achievable this year.

Looking at the values in the May row show that my projected income is 20.7% higher than last year and 36% higher than just the start of this calendar year.

Target Portfolio

I created a target portfolio that captures my need for a lot of various dividend sources while also having allocation to growth. 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 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) (GOOGL)).

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, Nike or Home Depot 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.https://static.seekingalpha.com/uploads/2019/3/6/9020091-15518710183814197.png

For illustrative purposes, I specifically have the circles overlapping most of the area to highlight the main focus on dividend growth stocks.

Actual Portfolio

At this point I'm essentially at my target allocation. My high yielding allocation is about 19%, cash is slightly over 5% and though the dividend growth percentage is higher than the original target, it feels "right". It comes at the expense of the growth bucket which again feels OK to me.

The classifications are subjective, but I try to be logically consistent here is how I grouped them. One example of the subjective nature is Altria is pegged as a dividend growth stock but AT&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.

Ticker Classification
AAPL Dividend Growth
ABBV Dividend Growth
ABT Dividend Growth
AMP Dividend Growth
AMZN Growth
APLE High Yield
BRK.B Growth
CMI Dividend Growth
CSCO Dividend Growth
CVS Dividend Growth
DIS Dividend Growth
EFAS High Yield
FB Growth
GLW Dividend Growth
GOOG Growth
HD Dividend Growth
IQ Growth
IRM High Yield
ITW Dividend Growth
JNJ Dividend Growth
JPM Dividend Growth
KHC High Yield
KWEB Growth
MA Dividend Growth
MDT Dividend Growth
MLPA High Yield
MMM Dividend Growth
MO Dividend Growth
NKE Dividend Growth
NLY High Yield
PCEF High Yield
PRU Dividend Growth
SBUX Dividend Growth
SCHD Dividend Growth
SDEM High Yield
SDIV High Yield
SKT High Yield
SPG High Yield
SQ Growth
SRET High Yield
STAG High Yield
SWK Dividend Growth
T High Yield
TROW Dividend Growth
TRV Dividend Growth
UTX Dividend Growth
V Dividend Growth
WBA Dividend Growth
WPC High Yield

Visualizations

Income By Sector

About 20% of my dividends come from ETFs and close to 19% from REITs directly.

ETFs still have their own "slice", though they are comprised of real sectors. I have not gone through the exercise of weighing the sector allocations out of each ETF and adding them to their appropriate bucket. I had done that when I just owned SCHD but with a slew of ETFs it is a bit tedious to do and maintain.

Sector Allocations

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. REITs directly have about 10% allocation versus the 19% of income they provide.

Technology and communications are heavily spoken for, but these also contain most of my growth stock holdings too.

Champion, Contender, Challenger View

No changes here this month, most holdings will fit into one of the "CCC" dividend categories based on their streak of dividend growth.

Things Coming Up

I believe just Walgreens is expected to announce their yearly increase during June. Other than that, I believe I am poised for a big month in dividends, the last month in a quarter is always the largest coupled with all of the moves I've made over the past few months should finally all kick in.

I like to run this screener to get some idea generation going and I've included it 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

I still have my eye on Amgen (AMGN) and 3M from this list.

Conclusion

I wrapped up May with $811 dividends which brings the yearly total to $3,339. I collected 27% more dividends than May of 2018. Year to date, I've collected 16.7% more than 2018.

I made 1 purchase in SPG which added $82 of projected income over the next year. Year to date, my projected income has grown 36%.

I did not trim, sell or write any options this month. None of my holdings announced their dividend increases this month.

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, IRM, ITW, JNJ, JPM, KHC, KWEB, MA, MDT, MLPA, MMM, MO, NKE, NLY, PCEF, PRU, SBUX, SCHD, SDEM, SDIV, SKT, SPG, SQ, SRET, STAG, SWK, T, TROW, TRV, UTX, V, WBA, 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.