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 401(k) plan.
The goal of my portfolio is to generate a perpetually growing income stream for my wife and I during our golden years. The aim is to live off dividends without touching the principal. Dividend growth stocks and ETFs are the chosen vehicle to meet that goal. Now 34, 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."
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 major this month
July continued the trend from June pushing new highs seemingly every day. The S&P peaked to over 3,027 near the end of the month. Portfolio values were never higher!
And then the last day of the month happened. The Fed did cut their benchmark rate twenty-five basis points as was expected but the market did not like it. I'll let the prognosticators prognosticate, but there seemed to be some disagreement about the size of the cut or with the wording around potential future cuts.
In any event, August 1st seemed to have turned the tide with all the major indices in big positive territory until some additional trade war tweets turned them sour once more. As I write this on the 2nd, markets again are down once more.
With all of that said, I have continued to focus on my own portfolio and goals. I continue to maintain a healthy cash balance though I did use some of it this month as I'll detail in my "Buys" section. The balance will continue to accrue as both contributions will still come in and many of my dividends are not reinvested (though some are).
Should the market settle and continue its trajectory upwards, I am still of the mindset that I won't hesitate to take advantage of prices being offered for securities I am willing to part with. That's a fancy way of saying I will sell and lock in some great profits.
I ended the month with a balance of $329,729 which was up from $322,896 month over month (+2.1%).
Last month I noted the following:
I don't have any pending buy orders though my CMI shares will probably sell over the next month.
I'll cover it below but that did end up coming to fruition.
- I want my dividend growth holdings to have an average dividend growth rate of at least 7% (currently 9.4%).
- By the end of 2019, I want to have a projected dividend income of at least $10,000 (accomplished in July. Was $9,000 and accomplished in April. Originally $7,900 at start of 2019).
- I want to suffer no dividend cuts. (Annaly (NYSE:NLY) cut in April)
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.
This is the first round of questions to review during an initial filtering process of investments.
- 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?
- Is the opportunity here better than an ETF?
- There needs to be something materially different that isn't readily duplicated with another product. This could be a yield that I can't easily get or some major upside potential / limited downside that can be defined. This could be historically low P/E as an example.
- How long is their dividend growth streak?
- Chowder rule > 10%. High yield investments may get a pass on this. Like mentioned above, I want some additional "kicker" that can provide additional upside with less risk.
- 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 investigate 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.
Here are my guidelines when I may consider a stock sale.
- 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. Think "Selling into Strength".
- 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.
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.
At the end of 2018, I turned off my dividend reinvestment as I wanted a continual cash flow coming in. As time goes on that continues to evolve. Analyzing my data, I came up with a simple metric for determining whether to turn it on or off. If the current share price is below my cost basis, I may turn it on. I would do this if as my cash is above my target (5% and it currently is). This is not universal, and I have reinvestment on for some other names.
To keep track of this, I just added some basic conditional formatting to my spreadsheet. I'll highlight cells green if I have an opportunity to lower my cost basis.
I can quickly cross reference this with my upcoming dividend calendar for my dividend alerts. Additionally, I added an extra column on my spreadsheet for whether it's on or off. I may look to add this as an extra feature on CSA.
The important note is that I always want cash on hand after the Q4 2018 meltdown left me with minimal ammo to take advantage of the sales.
With that said, here is the current state of where reinvestment is on. I created another table on my sheet to just capture this information, so I can see at a glance how I stand. You'll note that reinvestment is on for some generational ideas like Mastercard (NYSE:MA), Visa (NYSE:V) and my favorite dividend ETF SCHD.
|Name||Ticker||My Basis||Current Share Price||Reinvest On?|
|Global X US SuperDividend||DIV||$23.25||$22.88||Yes|
|Global X MSCI SuperDividend||EFAS||$16.06||$15.26||Yes|
|Annaly Capital Management||NLY||$9.76||$9.36||Yes|
|Schwab US Dividend ETF||SCHD||$51.34||$52.82||Yes|
|Global X MSCI SuperDividend Emerging||SDEM||$13.94||$13.00||Yes|
|Global X SuperDividend® ETF||SDIV||$17.97||$16.73||Yes|
|Tanger Factory Outlets||SKT||$21.37||$15.66||Yes|
|Simon Property Group||SPG||$169.80||$159.40||Yes|
|Global X SuperDividend REIT||SRET||$14.91||$14.74||Yes|
- Stanley Black & Decker (NYSE:SWK) declares $0.69/share quarterly dividend, 4.5% increase from prior dividend of $0.66.
- Annaly Capital Management in April
|Name||Ticker||Percent of Portfolio||CCC Status||S&P Credit Rating|
|Global X US SuperDividend||(DIV)||0.70%|
|Global X MSCI SuperDividend||(EFAS)||1.40%||Challenger||A|
|First Global Dow Jones Global Dividend Index||(FGD)||1.35%|
|iShares International Select Dividend ETF||(IDV)||0.91%|
|Illinois Tool Works||ITW||2.90%||Champion||A+|
|Johnson & Johnson||JNJ||2.39%||Champion||AAA|
|Kraft Heinz Company||(KHC)||0.97%||None||BBB|
|Global X MLP ETF||(MLPA)||0.80%|
|Annaly Capital Management||NLY||0.88%||None|
|Invesco CEF Income ETF||(PCEF)||0.69%|
|iShares mREIT ETF||(REM)||1.30%|
|Schwab US Dividend ETF||(SCHD)||3.29%|
|Global X MSCI SuperDividend Emerging||(SDEM)||1.19%|
|Global X SuperDividend® ETF||(SDIV)||2.56%|
|Tanger Factory Outlet||(SKT)||1.96%||Contender||BBB|
|Simon Property Group||(SPG)||1.94%||Contender||A|
|SPDR S&P High Dividend||(SPYD)||1.14%|
|Global X SuperDividend REIT||(SRET)||0.90%|
|Stanley Black & Decker||SWK||2.47%||Champion||A|
|T. Rowe Price||(TROW)||1.42%||Champion||A+|
|United Technologies Corporation||(UTX)||1.81%||Contender||A-|
Here are the values behind the "CCC Status" category:
- King: 50+ years
- Champion/Aristocrat: 25+ years
- Contender: 10-24 years
- Challenger: 5+ years
|Ticker||Owned Since||Versus S&P||Benchmark||Versus Benchmark|
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 can 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%.
I've begun calculating a few aggregate statistics for my portfolio. I created a few metrics to look at the portfolio.
|YOC (Divi Companies)||5.11%|
|Yield (Divi Companies)||3.93%|
|Yield w/Cash Drag||3.22%|
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.
"Selling into strength" is one of my mantras. For taking additional equity risk by owning specific companies I remain willing to part with a stock. I also see a broad overvaluation in the market and truly wonder how much further we can push upwards before we have another Q4 2018. I do plan on rolling some profits into a similar investment - as an example I had sold some Dividend Champions and plan to buy the equivalent ETF (ProShares S&P 500 Dividend Aristocrats ETF (NOBL)) at a later date.
Cummins was my only sale this month and it was primarily on valuation concerns. I had set a limit at $170 as the stock continued pushing new highs and it ultimately triggered. At the time of writing the stock is back down into the $150s post earnings. Based on my own calculations, I scored an 86.6% return which also bested the S&P by 27.9% during that same time.
From the Fast Graph it appears quite reasonably valued but these truck markets are highly cyclical. The analyst scorecard also leaves something to be desired with anyone's prediction of future earnings.
I was also willing to part with shares of a company that I am more or less neutral on. As part of my initial framework one of my questions was whether I am excited about the business. Couple that with:
- A perception the markets are getting expensive
- Desire to raise some more rainy-day cash
- A business I don't know I will ride through thick and thin with
I think it becomes easier to see why I would be willing to part with shares. Especially when they were offering me such a sweet return. In truth I would rather just take that money and put it into SCHD or another "in-kind" ETF.
Just to further highlight my point, while the original peak cycle was back in early 2018, the yield has not been this low in 18 months and was a reasonable time for me to exit.
Most of the month was inactivity with a burst at the end of the month. I made all my ETF buys after the Fed announced their rate cut on the 31st of July. Save for that, this was a very quiet month.
I added a few more shares on July 11th in another effort to front run a dividend payment. Shares were already trading below my basis and I do believe in the company long term. From my upcoming dividend alerts I knew that AbbVie went ex-dividend on the 12th.
Global X US SuperDividend ETF - DIV
This was my one new position this month. I must admit I have enjoyed having the cash machine ETFs offered by Global X. I will also admit they are on the more expensive side than many dividend-centric ETFs by having cost basis in the 40 to 60 basis point range. I do know this will be a turn-off for people but with monthly payments and above average yields this is not easily duplicated with a basket of stocks without a ton of due diligence.
DIV separates itself from some of the offerings by being restricted to the US and selecting 50 of the highest yielding equities with some filtering based on low volatility. Based on the most recent rebalancing earlier this year here are the current top holdings.
Of course, some holdings will be dogs, but a few have been standouts. Here is the chart for Compass Diversified Holdings and since the rebalancing in February the stock has done exceptionally well while also delivering a fat dividend.
Global X SuperDividend ETF - SDIV
I added to my high-yield / broad basket of SDIV again this month, buying on the way down. With 100 holdings and globally focused, I'm content with just receiving monthly dividends to fuel my income generation. I also have the reinvestment now turned on to lower my cost basis with the current share price below my basis.
Global X MSCI SuperDividend EAFE ETF - EFAS
For both EFAS and SDEM that follow, the one trend is that globally speaking, ex-US countries have much better valuations.
EFAS holds 50 high yielding equities from developed markets.
Global X MSCI SuperDividend Emerging Markets ETF - SDEM
SDEM takes the same 50 holding approach but applies it to emerging markets. Notice the difference in P/E ratios between the two ETFs but then compared to the S&P at 21.7.
AT&T - January 17, 2020 call
With AT&T back at their 52-week high, I took the opportunity to write a covered call on what is already an overweight position for me.
I sold 1 contract of the $35 January call when AT&T shares were just over $34. Should they be exercised, that will lock in a $35 price for 100 shares where my basis is $31.71. I collected $1.12 per share up-front in options premium. Again, if they are exercised that will reduce my over-exposure and will dramatically lower my cost basis.
If shares are not called, the $112 gained will represent a 3.3% return in under 6 months so we can call it 6.6% annualized if I were to do this again. It's a nice way to juice income on an income stock.
Charts And Graphs
After a slight letdown in June, July was a new high for the month. I received $801 which was bolstered by the $85 from SCHD that got paid out in July due to how the calendar fell.
- My monthly ETF suite (EFAS, PCEF, SDEM, SDIV and SRET) provided $114.
- This was my first time receiving the IRM and NLY dividends.
- As noted, SCHD landed in July which added that extra $85
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.
For July, I had to edit the scales on my chart to help fit in SDIV since the expected income is now over $800 annually.
Comparing June year over year, the $801 was a whopping 67% higher than the $478 received in 2018. To the right of that figure, the 16.27% is a rolling comparison to 2018 (a total of $4,891 versus $4,206). This rolling figure helps smooth out the monthly variances.
This 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. In July, I crossed over the $10,000 in expected dividends and my current dividend projection is $10,418 in dividends over the next rolling 12 months. My next stop is $12,000 (average $1,000/month). That figure is possible this year, but it will require a meaningful correction to help boost yields.
At the moment, the year-over-year growth is up 57% and up 55% YTD. I saw a 4.2% month over month increase.
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.
Next is 20% allocated to high-yielding stocks. I use these as the income portion of my dividend machine. Dividends may be directly reinvested if current prices are right or they will be harvested and tactically allocated to the best investment idea at the time. It also helps me shore up my "balance sheet" by having more cash being generated alongside my regular 401(k) 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.
For illustrative purposes, I specifically have the circles overlapping most of the area to highlight the main focus on dividend growth stocks.
The changes I've made during the year have gotten me where I'm looking to be. There are some slight deltas but I'm happy with it.
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.
Income By Sector
I have about 1/3 of my dividends coming from different ETFs, leaving 2/3 spread across the remaining sectors. Individual REITs are the big standout from a specific sector standpoint.
About 20% of my overall invested money is in ETFs. The rest is split appropriately across the rest of the sectors. Technology is a close second with 19% allocation.
Champion, Contender, Challenger View
I lost one Contender this month with Cummins. I still plan on buying the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL) at some point in the future when prudence dictates.
Things Coming Up
I don't believe any of my holdings are due to announce their increases in August. I'm curious to see if we have started to see a meaningful pullback this year after the market has been on a tear in 2019. Just in the time of writing this we've had a rate cut, a couple down days and a big rout on Monday.
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 (I also remove this filter to allow REITs to show up)
- Sorted by their 52-week lows
ROL is interesting but they still have a really high valuation. SPG and ABBV are existing holdings though I may take a wait and see approach before adding more.
I wrapped up July with $801 in dividends which brings the yearly total to $4,891. I collected 67% more dividends than July of 2018. Year to date, I've collected 16.3% more than 2018.
I made 5 purchases and 1 sale in June which added $421 of projected income over the next year. Year to date, my projected income has grown 55% to $10,418. I finished with 41 dividend paying holdings.
SWK had a 4.5% dividend increase this month which is lower than my 7% target.
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, AMZN, APLE, BRK.B, CVS, DIS, DIV, EFAS, FB, FGD, GLW, GOOG, HD, IDV, IRM, ITW, JNJ, JPM, KHC, KWEB, MA, MDT, MLPA, MMM, MO, NKE, NLY, PCEF, PRU, REM, SBUX, SCHD, SDEM, SDIV, SKT, SPG, SPYD, SQ, SRET, SWK, T, TROW, TRV, UTX, V, WBA. 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.