A Real Dividend Growth Machine: 2019 Mid-Year Portfolio Review

|
Includes: ABBV, ALC, AMTD, BLK, CVS, FDX, GD, KTB, MO, RTN, T, TXN, UNH
by: Dividend Growth Machine
Summary

Review of recent results from a real dividend growth stock portfolio.

Discussion of portfolio changes in the first half of 2019.

Example of how a dividend growth investor manages his portfolio.

Introduction

The purpose of this article is to review my investing progress in the first half of 2019. I follow a value-oriented dividend growth investing strategy that involves buying attractively valued stocks of companies that consistently pay and grow their dividends. I have two long-term investing goals:

  1. Build a sustainable and rising dividend income stream that beats inflation.
  2. Preserve and grow my capital by attaining a satisfactory total return on my investments.

In this article, I will provide an update on my progress toward achieving these goals since my previous review. As always, I will be presenting real results from a real portfolio involving real money.

I want to elaborate on that last point before jumping into the review. I recently read an article promoting a new dividend service in Seeking Alpha’s Marketplace. As part of the pitch, the authors showed the results of a model portfolio over the past 25 years, highlighting its outperformance of a proxy for the S&P 500 index. Here are some ways in which my results differ from theirs:

  • My results reflect a real (not model) portfolio involving real money. Stocks can only be bought when there is money available to invest. Orders really have to be executed. Transaction fees exist. Taxes have to be considered (for stocks held in my taxable account). Portfolio decisions have actual consequences.
  • My results are real, not the output of a back test involving survivorship bias. Moreover, my results come from the time period during which the portfolio has actually existed (7.5 years), not a fictitious 25-year history.
  • My results emphasize dividends and their growth over time, not total return relative to a market index. I have never presented a graph comparing my portfolio’s return to that of the S&P 500 index because that is irrelevant to my investing goals listed earlier (notice that my second goal is not to “beat the market”).

Model portfolios, back tests, and related exercises are sometimes informative. However, I think there is considerable value in seeing a dividend growth investing strategy actually implemented, which is one of the reasons why I write these reviews about a real dividend growth machine.

Input To The Machine

New capital represents the input to my dividend growth machine and allows me to buy stocks. The figure below shows quarterly contributions of new capital to my investment accounts since 2012:

New Capital Source: Author

I contributed $16,000 in new capital during the first half of 2019 ($12,000 in Q1 and $4,000 in Q2). I am on track to reach my goal of $25,000 by the end of the year. As usual, my contributions tapered off heading into the summer, and the next new capital contribution will likely occur in late Q3.

Going forward, my ability to invest new capital will be helped in two respects. First, I was recently promoted to associate professor with tenure, which means I no longer have to worry about job security. Second, thanks to the promotion, I am expecting a larger-than-usual salary increase this year (the exact amount is still unknown at the time of this writing). Even though I will have more money coming in, I have not altered my annual goal for new capital because I will be saving some money for a planned major expense.

Parts Of The Machine

Dividend growth stocks represent the parts of my dividend growth machine. The table below shows the composition of my portfolio from the start of Q1 to the end of Q2, with changes highlighted.

Portfolio Table Source: Author

A breakdown of all transactions is provided in the following table:

Transactions Source: Author

New positions and spin-offs:

  • TD Ameritrade (AMTD): This financial company provides retail brokerage and advisor services. It also happens to be the brokerage where I keep my dividend growth machine. The company continues to post good operating results and it is on the cusp of becoming a Dividend Contender. I think the stock is moderately undervalued at recent prices (~$50). I started my position in March, then made a couple of additional purchases. I bought 80 shares of AMTD altogether.
  • Raytheon (RTN): Having watched this defense company for several years, I finally started a position in early January (and made an additional purchase in April). The company is a Dividend Contender (15-year dividend growth streak) and I think its stock is slightly undervalued at recent prices. The big news is the recently announced plan to merge with United Technologies (UTX) after the latter spins off its Otis and Carrier segments. I have a neutral to slightly positive view of the merger, which I think benefits UTX (which I also own) more than RTN, but the combined company will be a powerhouse in the aerospace and defense industries. I bought 15 shares of RTN altogether.
  • Texas Instruments (TXN): This well-run semiconductor company rarely seems to be undervalued, but the broad market sell-off in late 2018 enabled me to start a position under $90 in early January. There are many things to like about Texas Instruments, such as its strong free cash flow generation, solid balance sheet, fully funded pension, and 15-year dividend growth streak. I bought 15 shares of TXN.
  • UnitedHealth Group (UNH): This company is the largest private health insurance provider in the United States. Its stock has been under some pressure because of ever-looming healthcare reform, but the company’s size and scale give it a wide moat that will likely keep it highly competitive for years to come. UnitedHealth has a good track record of solid operating results and dividend growth (the recently announced 20% dividend increase elevated it to the status of Dividend Contender). I bought 10 shares of UNH.
  • Kontoor Brands (KTB): This company is the denim apparel segment spun off from VF Corporation (VFC) in May. Management recently reaffirmed its intention to pay a quarterly dividend at the initial rate of $0.56 per share. I received 15 shares of KTB in the spin-off, then purchased an additional 55 shares in my Roth IRA when the stock price fell below $26 in late June. I think the dramatic sell-off after the spin-off likely reflected some indiscriminate selling (e.g., large-cap funds not wanting to hold a small-cap company), resulting in the stock becoming undervalued and motivating my purchase.
  • Alcon (ALC): A leading company in eye care, Alcon was spun off from Novartis (NVS) in April. The company has indicated that it expects to pay a dividend (presumably annually, like NVS) starting in 2020. I received 7 shares of ALC in the spin-off and it is the smallest position in my portfolio.

Increases to existing positions:

  • AbbVie (ABBV): I have owned ABBV ever since it was spun off from Abbott Laboratories (ABT). Perceived undervaluation led to my purchase in early February, a few months before the company announced its plan to acquire Allergan (AGN). I have a mostly positive view of the acquisition, which will help diversify AbbVie’s product lines, although I am not thrilled about the higher debt load. I bought 15 shares of ABBV, for a total of 75 shares.
  • BlackRock (BLK): I continued building my position in BlackRock, a financial company that provides investment management and advisory services. I deemed the Dividend Contender to be undervalued when I made my purchase at the start of January. I bought 5 shares of BLK, for a total of 20 shares.
  • CVS Health (CVS): This healthcare stock continues to be unloved and undervalued by the market, mainly because of lingering uncertainty about its merger with Aetna. As a result, I took the opportunity to lower my cost basis at the end of February. I bought 15 shares of CVS, for a total of 135 shares.
  • FedEx (FDX): Still a relatively new position my portfolio, transportation giant FedEx continues to trade at an attractive valuation due to current concerns about global trade, operational issues, and guidance. I view this as a long-term investment, though, which is why I increased my position at the start of January. I bought 5 shares of FDX, for a total of 20 shares.
  • General Dynamics (GD): I have owned this defense and aerospace company since 2012. It is a great dividend growth stock (22-year streak of dividend increases) and has traded recently at a reasonable valuation. Consequently, I made purchases in February, March, and April. I bought 25 shares of GD altogether, for a total of 65 shares.
  • Altria (MO): I made a modest increase to my position in MO in my Roth IRA at the start of January. I think this tobacco stock continues to be undervalued. I bought 25 shares of MO, for a total of 150 shares.
  • AT&T (T): With its stock trading below $30 at the start of February, I took the opportunity to add to my position in AT&T, a well-known telecom company and a Dividend Champion. I bought 30 shares of T, for a total of 245 shares.

In summary, I made 17 purchases and zero sales during the first half of 2019, keeping with my desire to have low portfolio turnover. Transaction fees (year-to-date) have averaged a mere 0.09% of my total costs, thanks to multiple commission-free transactions earlier in the year.

Besides adding or removing parts from my machine, I want to make sure all the parts are running smoothly. I monitor the operating results of my companies and stay on the lookout for dividend increases (or decreases). Thus far in 2019, there have been dividend increases for 33 of the 52 stocks in my portfolio. The mean and median increases have been 7.4% and 6.2%, respectively, roughly in line with my expectations.

Output Of The Machine

Dividends and capital gains represent the output of my dividend growth machine, all of which is selectively reinvested when sufficient funds are available. As mentioned earlier, my primary goal is to build a sustainable and rising dividend income stream. The figure below shows the dividends I have received.

Dividends Received Source: Author

I received $2,636 in dividends in Q1 (up 27.2%, year over year) and $3,064 in Q2 (up 15.8%), resulting in a year-to-date total of $5,700. For comparison, that half-year total almost equals what I received in dividends for all of 2015 ($5,991). As usual, the increase reflects a combination of organic dividend growth, selective dividend reinvestment, and new capital investment. At the end of Q2 2019, my forward 12-month dividend total was $11,495, so I am now averaging over $950 in dividends per month.

My secondary goal is to attain a satisfactory total return on my investments. The figure below shows end-of-month portfolio values and the cumulative amount of new capital added since the start of 2012.

Portfolio Value and Cumulative Capital Added Source: Author

My portfolio finished Q2 at $454,919, which is 21.8% higher than its value at the start of 2019. Most of the increase reflected capital gains, especially during Q1 and near the end of Q2.

For completeness, I will also summarize the investments outside of my dividend growth machine. I participate in retirement plans with my employer, for which I have allocated 100% of contributions to the Vanguard Institutional Index Fund (VINIX). The fund tracks the S&P 500 index and has an expense ratio of 0.04%. The combined value of the plans was $103,572 at the end of Q2. I also have a Health Savings Account to which I contribute each year and it has a value of $18,765. Thus, the combined value of all my investment accounts is $577,256.

Outlook For The Rest Of 2019

My eighth year as a dividend growth investor seems to be going well. New capital contributions will resume near the end of Q3 and I should be able to easily reach my goal of $25,000 for the year. No purchases are planned for July, but I anticipate making some purchases later, depending on available money and the availability of good investing opportunities. No sales are planned. In other words, it will be investing as usual. My next portfolio update will likely be my annual review for 2019.

Disclosure: I am/we are long ALL STOCKS LISTED IN PORTFOLIO TABLE. 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 own shares of TD Ameritrade (AMTD), which is the brokerage that holds my portfolio.