My K.I.S.S. Dividend Growth Portfolio: 2nd Quarter 2019 Update

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Includes: AAPL, AFL, AMGN, AMP, APD, ARLP, AVA, BA, BDX, BLK, CBRL, CINF, CMI, CSX, CVS, CVX, D, DE, DLR, DRI, EMN, EMR, FCPT, FLIC, GD, HAS, IBM, ITW, JNJ, JPM, LHX, LMT, LNC, MCD, MSFT, NHI, NLY, NSC, NUS, O, OKE, OMC, PAYX, PEP, PFG, PG, PRU, PTY, QCOM, RTN, SKT, SO, SPG, STT, SYY, TGT, UGI, UTX, WBA, WEC, WMT, WPC
by: The Part-time Investor
Summary

A successful DGI portfolio can be created using very simple criteria.

Just a couple of hours every quarter is all that is necessary to manage a well-designed DGI portfolio.

My K.I.S.S. portfolio continues to provide acceptable (to me) dividend growth.

As my regular readers know one of my primary goals is to keep things simple. By keeping my investment plan simple I think it’s easier for me to carry it out and stick with it. And I’ve seen no evidence that more complicated investment plans are any more successful than simple ones. In reviewing my portfolio and preparing for this quarter’s transactions I felt like my plan had become a little unwieldy. It was getting a little too cumbersome. So, I decided to make some changes and streamline the process a little bit.

1. I’ve decided to separate my Charles Schwab accounts from the rest of my KISS portfolio, which is in my Univest account. Having separate accounts in separate brokerages with different reinvestment plans made it too difficult to keep track of my reinvestments and to do the calculations on total dividends received and DRIP shares received. OK, maybe not difficult, but certainly annoying. So, this quarter I will be selling all the stocks in my Schwab accounts. I will use the money in those two accounts to run two new portfolios which will invest in the Dividend Aristocrats. Going forward these funds and positions will no longer be part of my KISS portfolio, will no longer be considered in my returns, and will no longer be included in these portfolio updates. (More to follow about that in the future.) From now on my KISS portfolio will only refer to my Univest account.

2. I am also going to streamline my KISS screening process. Having three different levels of yield and Chowder Numbers was becoming too cumbersome. And I doubt it helped me find many more good stocks. It simply gave me more stocks to research with FAST graphs. I will remove the three different levels of dividend yield and Chowder numbers and simply go with a single criteria as described below.

3. Since simplysafedividends.com has provided us with such a simple (and hopefully effective) tool to use, I will use it on the sell side as well as the buy side. This will help prevent me from holding on to weak stocks too long, hoping they don’t cut their dividend. I have been using a safety score of 60 or greater as one of my buying criteria. From now on I will use a safety score of under 40 as a sell signal. Any stock which falls below a safety score of 40 will be sold.

4. Finally, I am going to close my portfolio to new money. My future 401(k) contributions will be used for other investments. Only the accumulated dividends that get deposited in my KISS account will be used to buy new stocks or more shares of the stock I already won. This will make it much easier to track my returns and my dividend growth and determine if I am really on track to achieve my goals.

As I mentioned, the goal of all of these changes is to simplify my process, both in terms of my investing plan, and in terms of determining my results. I will give more details on these changes below. Now I’ll proceed with my update.

If you wish to review my previous quarterly updates, you can find them here:

Review of Second-Quarter Dividends and Contributions

These are the total dividends I received during the second quarter and the comparison (in parentheses) to the same months during 2018:

April: $2,367.75 ($2,928.53) (-19.15%)

May: $4,895.91 ($5,554.33) (-11.85%)

June: $6,831.79 ($6,111.35) (+11.79%)

Total dividends collected in the second quarter of 2019: $14,095.45 a decrease of -3.42% as compared with the $14,594.21 I collected during the second quarter of 2018. $1,760.79 of this was immediately reinvested through DRIP plans in my Charles Schwab accounts (see below for details).

I also received $13,750 in my account as my regular 401(k) contribution, and $1,500 as my catch-up contributions.

The K.I.S.S. System

Over the past six years, I have been developing and refining my Keep It Simple, Stupid (K.I.S.S.) system for creating a dividend growth portfolio. The system I developed, and continue developing (see above), has been discussed in my previous updates. But as a quick summary, with the new changes, my criteria for buying stocks are as follows:

For Purchase of Regular Stocks

  • The stock is on the Dividend Champions, Contenders and Challengers (“CCC”) list (as previously compiled by David Fish, but now compiled by Justin Law);
  • The payout ratio < 60%;
  • Stock must have a yield of > 2.0 (No longer three levels)
  • Stock must have a Chowder Number > 16 (No longer three levels with a minimum of 12)
  • A credit rating of BBB- (Investment grade) or better from S&P (found on F.A.S.T. Graphs); and
  • F.A.S.T. Graphs shows a 10-year uptrend in earnings and shows that the stock is not overvalued.
  • A dividend safety rating of 60 or more from simplysafedividends.com.

So, whereas before I had three different levels of Chowder Numbers corresponding to three different levels of dividend yield, I have coalesced that down now to just one. A yield of 2.0% with a Chowder Number of 16. I think this will still catch most of the dividend growth stocks I’m looking for, especially the higher growth ones, while weeding out the slower growing ones I’m trying to avoid.

For Purchase of REITs and Utilities (High Yielders)

  • The stock is on CCC list;
  • Yield > 4%;
  • Chowder Number > 8%;
  • DGR for all time periods (1-year, 3-year, 5-year and 10-year) of at least 4.0%;
  • F.A.S.T. Graph shows a 10-year uptrend (or for the life of the company, if less than 10 years) in funds from operations (FFO); and
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.
  • A dividend safety rating of 60 or more from simplysafedividends.com.

The time it takes to run this screen is only about two or three hours per quarter since most of the work has already been done for us by way of the CCC list, F.A.S.T. Graphs and S&P.

Previously my criteria for selling a stock was very simple. I would only sell if the stock cuts its dividend. But now, as I mentioned above, I have added the rule that if the dividend safety rating falls below 40 I will sell it. OK, I have a third selling criteria. I will sell spin-offs from my stocks if those new companies don't have dividend policies I'm comfortable or familiar with. But that is a rare situation. In all these cases, my sell decision comes down to the dividend.

Sales and Purchases

This was a complicated transaction period for me. This is why my quarterly update has been so delayed. As I mentioned above, I have sold all my positions in my two Charles Schwab accounts and moved them to Fidelity. The reason I moved them, rather than just simply selling them, is so I could take advantage of the 500 free trades Fidelity offered to move the accounts. This should allow me to trade commission free in these accounts for the next two years. It took a few weeks for the portfolio moves to be finalized.

The reason I am removing these accounts from my over-all portfolio is twofold. One, by removing them, it will make all my returns and dividend calculations much simpler. Two, I will be using these new accounts to start two new Dividend Aristocrats portfolios with different investing methods. In one I will buy all the Aristocrats in equal dollar values. In the other I will only buy the most undervalued Aristocrats based on the PAAY. I wrote an article showing a back test of the latter method, and now I want to actually use it moving forward in a real world account. I will be reporting on these portfolios in future articles.

Because I was removing the Charles Schwab accounts from my KISS portfolio, I had to eliminate approximately $170,000 worth of stock. To do this I had to make some decisions about which stocks to sell. What I decided to do goes along with my new sell criteria, which is to sell any stock with a dividend safety score of less than 40. This led me to sell all of my Annaly (NLY), the only stock with a score below 40 (It was 12!). Next, out of the rest of my stocks, I chose to sell the ones with the lowest dividend safety scores. This led me to sell Alliance Resources (ARLP, 42), Four Corner Properties (FCPT, 46) and Omega Healthcare Investors (OHI, 46). Finally, I had to sell some of my ONEOK (OKE) position which was partially held in one of the Charles Schwab accounts.

A note about PIMCO (NYSE:PTY). I chose to keep it, even though it has no safety score, because PTY has consistently provided me with excellent dividend income, which I use to invest in other DGI stocks. And since 2013 PTY has produced a return of 11.50% with dividends reinvested. Although it has never raised its dividend in that time it has been a very stable dividend payer. ARLP and NLY, two of the stocks I chose to sell, have not been anywhere near as stable, have cut their dividends in the recent past, and have returned less than 5% per year since 2013. OHI and FCPT have performed well, but they both have a safety score of only 46. Since I had to sell something to carry out my plan, I chose OHI and FCPT rather than PTY because of the risky safety scores, and because PTY produces more stable income.

Some of the positions sold in the Schwab accounts had to be repurchased in my Univest account since I wanted to maintain full positions in these particular stocks. Therefore, all available money in my Univest account was used to reform these positions. For example, all my Chevron (CVX) stock was held in the Schwab accounts. This was a position I wanted to maintain, so I sold all 173 shares in the Schwab accounts and repurchased them in my Univest account.

All of my available money had to be used in this way. In fact, my full ONOEK position could not be repurchased since I did not have enough funds to replace all the OKE stock I sold in the Schwab accounts. This is why, as you can see below, the number of shares of OKE has decreased form last quarter to this quarter.

PAAY and Reinvesting

When reinvesting I put my available cash not back into the stocks that paid the dividend but instead into more shares of my most undervalued positions. This is where my "Percent Above Average Yield" (PAAY) system comes in. I discussed how I use PAAY in a previous article, and I recently published an article showing the results of my PAAY reinvestments over the past five years. As I explain in the article, as of the end of 2018, my PAAY investments had returned 15.47% as compared to the S&P which would have returned 14.27%. Please note that I use PAAY only to rank the companies already in my portfolio for purposes of reinvesting my dividends, not for new purchases. (It would be too difficult to calculate the PAAY for all stocks under consideration for purchase.)

Since all my available funds were used to buy back the sold Schwab stocks in my Univest account, no reinvestments were made this quarter using PAAY.

DRIP

As mentioned above some of my stocks that had been held in the two Schwab accounts were enrolled in DRIP plans. I received the following shares of these stocks. (Most of my portfolio is held in a Univest account that does not offer DRIPs):

STOCK

SHARES

Alliance Resource Partners LP (ARLP)

41.4902

Avista Corp. (AVA)

4.4068

Chevron Corporation (CVX)

0.2495

Annaly Capital Management, Inc. (NLY)

56.6891

ONEOK Inc. (OKE)

5.7889

PIMCO Corporate & Income Opportunity Fund (PTY)

34.5584

W.P. Carey Inc. (WPC)

3.1793

Four Corners Property (FCPT)

3.1284

(The ARLP, NLY, and FCPT positions were all later sold as described above. The rest of these, although sold, were repurchased in the Univest account.)

After all the above transactions here is the composition of my KISS portfolio with prices as of 7/27/19.

Company Name

Shares

Price

Market Value($)

Curr. Dividend

Curr. Yield

Estimated Ann Inc ($)

Dividend Safety score

Apple Inc. (AAPL)

170

207.74

35,315.80

3.08

1.48%

$523.60

99

Aflac Incorporated (AFL)

490

53.89

26,406.10

1.08

2.00%

$529.20

99

Amgen Inc. (AMGN)

162

175.34

28,405.08

5.80

3.31%

$939.60

74

Ameriprise Financial, Inc. (AMP)

274

149.93

41,080.82

3.88

2.59%

$1,063.12

90

Air Products and Chemicals, Inc. (APD)

119

230.55

27,435.45

4.64

2.01%

$552.16

95

Avista Corporation (AVA)

627

45.73

28,672.71

1.55

3.39%

$971.85

65

Boeing Company (BA)

199

345

68,655.00

8.22

2.38%

$1,635.78

98

Becton, Dickinson and Company (BDX)

137

254.39

34,851.43

3.08

1.21%

$421.96

91

BlackRock, Inc. (BLK)

51

478.17

24,386.67

13.20

2.76%

$673.20

98

Cracker Barrel Old Country Store, Inc. (CBRL)

225

173

38,925.00

5.20

3.01%

$1,170.00

76

Cincinnati Financial Corporation (CINF)

396

107.83

42,700.68

2.24

2.08%

$887.04

71

Cummins Inc. (CMI)

234

174.74

40,889.16

5.24

3.00%

$1,226.16

98

CSX Corporation (CSX)

709

68.96

48,892.64

0.96

1.39%

$680.64

85

CVS Health Corporation (CVS)

294

55.54

16,328.76

2.00

3.60%

$588.00

67

Chevron Corporation (CVX)

173

123.72

21,403.56

4.76

3.84%

$823.48

85

Dominion Energy, Inc. (D)

335

75.15

25,175.25

3.67

4.88%

$1,229.45

75

Deere & Company (DE)

193

170.39

32,885.27

3.04

1.78%

$586.72

83

Digital Realty Trust, Inc. (DLR)

291

111.53

32,455.23

4.32

3.87%

$1,257.12

94

Darden Restaurants, Inc. (DRI)

365

125.96

45,975.40

3.52

2.79%

$1,284.80

72

Eastman Chemical Company (EMN)

254

77.65

19,723.10

2.48

3.19%

$629.92

85

Emerson Electric Co. (EMR)

337

66.66

22,464.42

1.96

2.94%

$660.52

78

First of Long Island Corporation (FLIC)

1364

21.99

29,994.36

0.68

3.09%

$927.52

70

General Dynamics Corporation (GD)

215

189.73

40,791.95

4.08

2.15%

$877.20

97

Hasbro, Inc. (HAS)

386

123.67

47,736.62

2.72

2.20%

$1,049.92

67

International Business Machines Corporation (IBM)

134

151.36

20,282.24

6.48

4.28%

$868.32

65

Illinois Tool Works Inc. (ITW)

204

155.63

31,748.52

4.00

2.57%

$816.00

81

Johnson & Johnson (JNJ)

198

116.22

23,011.56

3.80

3.27%

$752.40

99

JPMorgan Chase & Co. (JPM)

200

130.73

26,146.00

3.60

2.75%

$720.00

79

L3Harris Technologies, Inc. (LHX)

463.8

199.83

92,681.15

2.74

1.37%

$1,270.81

80

Lockheed Martin Corporation (LMT)

154

369.46

56,896.84

8.80

2.38%

$1,355.20

84

Lincoln National Corporation (LNC)

328

66.64

21,857.92

1.48

2.22%

$485.44

88

McDonald's Corporation (MCD)

173

215.58

37,295.34

4.64

2.15%

$802.72

77

Microsoft Corporation (MSFT)

495

141.34

69,963.30

1.84

1.30%

$910.80

99

National Health Investors, Inc. (NHI)

271

79.24

21,474.04

4.20

5.30%

$1,138.20

61

Norfolk Southern Corporation (NSC)

174

189.99

33,058.26

3.76

1.98%

$654.24

86

Nu Skin Enterprises, Inc. (NUS)

394

40.9

16,114.60

1.48

3.62%

$583.12

55

Realty Income Corporation (O)

386

69.54

26,842.44

2.72

3.91%

$1,049.92

86

Oneok Inc (OKE)

405

68.49

27,738.45

3.56

5.20%

$1,441.80

54

Omnicom Group Inc. (OMC)

314

81.69

25,650.66

2.60

3.18%

$816.40

86

Paychex, Inc. (PAYX)

438

86.58

37,922.04

2.48

2.86%

$1,086.24

61

PepsiCo, Inc. (PEP)

186

131.22

24,406.92

3.82

2.91%

$710.52

93

Principal Financial Group, Inc. (PFG)

385

60.68

23,361.80

2.15

3.54%

$827.75

72

Procter & Gamble Company (PG)

166

114.73

19,045.18

2.98

2.60%

$494.68

99

Prudential Financial, Inc. (PRU)

125

103.27

12,908.75

4.00

3.87%

$500.00

75

PIMCO Corporate & Income Opportunity Fund (PTY)*

1389

18.56

25,779.84

1.56

8.41%

$2,166.84

***

QUALCOMM Incorporated (QCOM)

425

75.22

31,968.50

2.48

3.30%

$1,054.00

54

Raytheon Company (RTN)

215

189.79

40,804.85

3.77

1.99%

$810.55

99

Tanger Factory Outlet Centers, Inc. (SKT)

891

16.58

14,772.78

1.42

8.56%

$1,265.22

52

Southern Company (SO)

341

55.74

19,007.34

2.48

4.45%

$845.68

65

Simon Property Group, Inc. (SPG)

105

158.33

16,624.65

8.10

5.12%

$850.50

65

State Street Corporation (STT)

295

60.37

17,809.15

1.88

3.11%

$554.60

77

Sysco Corporation (SYY)

372

70.89

26,371.08

1.56

2.20%

$580.32

92

T. Rowe Price Group, Inc. (NASDAQ:TROW)

344

115.2

39,628.80

3.04

2.64%

$1,045.76

94

Target Corporation (TGT)

384

87.06

33,431.04

2.64

3.03%

$1,013.76

74

UGI Corporation (UGI)

618

50.92

31,468.56

1.30

2.55%

$803.40

99

United Technologies Corporation (UTX)

108

135.63

14,648.04

2.94

2.17%

$317.52

96

Walgreens Boots Alliance, Inc. (WBA)

379

55.05

20,863.95

1.83

3.32%

$693.57

79

WEC Energy Group, Inc. (WEC)

336

86.66

29,117.76

2.36

2.72%

$792.96

87

Walmart Inc. (WMT)

184

113.02

20,795.68

2.10

1.86%

$386.40

78

W. P. Carey Inc. (WPC)

294

85.19

25,045.86

4.12

4.84%

$1,211.28

73

1,875,192.35

2.82%

$52,869.56

80.95

*PTY has no Dividend Safety Score

Returns

My portfolio has increased in value this quarter from $1,897,420.41 to $2,015,762.83. Not including the 401(k) contribution of $15,250, this is a return of 5.43%. In the same time period, the "market," as represented by SPDR S&P 500 (NYSEARCA:SPY), was up 6.23%.

These calculations were made prior to the closing of the Schwab accounts. After that was completed the new value of the portfolio was $1,875,192.35. This will be the baseline used to calculate future returns.

I run three paper portfolios to compare to my returns: SPY, SPDR S&P Dividend (NYSEARCA:SDY) and Vanguard Dividend Growth Fund Investor Shares (MUTF:VDIGX). For each of these portfolios, whenever I have cash contributions put into my real-life account I also put the same amount into the paper portfolios and "buy" more shares of the individual indices. And when SPY, SDY or VDIGX pays a dividend, it gets reinvested into more paper shares, just like I reinvest my real-life dividends in my portfolio. As far as I can tell, this is the most accurate way I have to compare their performances.

The returns of my benchmarks in this second quarter of 2019 (assuming they received the same amount of reinvestments as my portfolio did, and at the same time) were:

SPY 6.23%

SDY 3.48%

VDIGX 7.92%

Dividends

During the second quarter of 2019, I collected $14,095.45 in dividends. This is a decrease of 3.42% as compared with the $14,594.21 I collected in the second quarter of 2018. This is because last quarter I sold some higher-yielding foreign stocks and replaced them with some relatively lower-yielding domestic stocks.

Prior to closing the Schwab accounts, with the dividends that had already been declared for each of my companies, the amount of dividends I would have expected to collect in the next 12 months (ED12) was $61,331.28. This would have been below the $61,743.43 that I reported for my ED12 in my third quarter of 2018. This is due to the sale of BPL last year and the sale of IVZ and the other stocks last quarter, and the replacement of these stocks with other stocks with a lower yield.

After the closure of the Schwab accounts my ED12 is $52,869.56. This will be my new baseline moving forward for measuring dividend growth.

The present yield of my portfolio is 2.86%. This is significantly lower than it has been in the past due to the sale of ARLP, NLY OHI and FCPY, all relatively high-yielding stocks. I expect that my future dividend growth and reinvestment will eventually make up for this lost dividend income.

As shown in the following graph, my dividend income continues to grow year by year (if not quarter by quarter). Next quarter the graph will show the significant drop in income due to the change in the configuration of my portfolio.

Conclusion

Prior to the portfolio changes I had a very good return of 5.43% for the quarter. Although I trailed the S&P 500 this would be expected in strong bull markets. Even with this slight underperformance, over the life of the portfolio, I am still ahead of the S&P 500 in both dividend production and total return. My portfolio continues to meet both my needs (for my eventual retirement) and my desires for market matching returns.

Moving forward, since I have simplified my portfolio, it will be easier to track my returns, my dividend production and dividend growth. And this will help me evaluate if my portfolio is performing the way I want it to.

I am a part-time investor. I do it as a hobby, and because I trust myself to look after my interests more than I trust anybody else to do so. I am not a professional and have no formal training in finance, economics or investing. Most of what I know I have learned here on Seeking Alpha. If I can produce dividend income and total returns that match, or even beat the market, then anybody can. All you have to do is take the time to read about DGI from some of the best contributors here on SA (DVK, Chowder, Mike Nadel, Bob Wells, etc.), set up a system that you are comfortable with and stick to that system. And try to keep it as simple as possible. The more complicated it is, the harder it is to follow, and in my opinion, the worse your results will be in the end.

As I've already said, but must reiterate, my mindset is to grow the dividend income produced by my portfolio, and not necessarily to focus on growing the size of my portfolio. In the long run, by maintaining my discipline and carrying out my K.I.S.S. criteria, I believe my portfolio will significantly increase in size, and in the end I will beat the market.

DGI has taught me to have a long-term focus, and for that focus to be on the dividends, and not so much on price movement. The prices of some of my stocks may fall from time to time, but as long as the dividends continue to rise I know the stock prices will eventually recover. More important, while waiting for that to happen, I will continue to collect dividends from those stocks. And as the dividends increase, if the prices stay low, it will just give me even more opportunities to buy more shares of undervalued stocks. I'm already enjoying some of the benefits of my patience, as over the years I was able to buy more stocks at depressed prices, which means I will collect even more dividends in the coming years.

So, my plan going forward is to continue to focus on the dividends and to follow my simple K.I.S.S. rules. They have been working very well so far. I believe my results continue to support my hypothesis: that by using simple, straightforward, easy-to-understand criteria for buying and selling, and by using the hard work of other people (thank you David Fish, Justin Law, Chuck Carnevale, S&P and all the wonderful SA contributors I have learned from!), someone can achieve excellent investment results without having to put an inordinate amount of time into the process.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I am/we are long AAPL. 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 almost all the stocks mentioned in this article.