Seeking Alpha

DGI For The DIY: Q2 2019 Dividend Portfolio Update

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Includes: AAPL, AMP, AWK, CBRL, CMCSA, DLR, EOG, FLO, IBM, JNJ, KMI, LOW, O, T, TGT, UNH, WFC, XOM
by: Eric Landis
Summary

Trade wars and recession fears have contributed to a volatile market.

Despite market volatility, the DGI For The DIY portfolio continues to produce ever increasing dividend income.

Recent dividend increases keep the portfolio on track to meet income growth goals in 2019.

DGI For The DIY: Portfolio Update 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 its progress and my lessons learned as a Do-It-Yourself "DIY" dividend growth investor "DGI".

I am a 41-year old 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.

If you'd like to read the history of, and learn 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-one years old, I have roughly twenty-five years to reach that milestone. This portfolio will be just one piece of my wife and I's 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 in early 2013, but it was near 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.

At quarter's end the portfolio was projected to produce nearly $2,500 of income over the next twelve months, meaning I'm on track to beat 2019's goal.

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 the roller-coaster market has zero impact on the income coming into the account.

Market Overview

The second quarter continued the trend of market volatility, as there was a nearly 10% intra-quarter swing from the end of April highs to the early June lows before all three indices ended slightly higher at quarter's end.

Chart Data by YCharts

My portfolio performed similarly, as total value increased from $77,730 to $79,721, a gain of 2.56%. This gain outpaced the S&P 500 and the DOW, but slightly lagged the 2.6% returns from the Nasdaq composite. This also marks a new high-water mark in valuation for the portfolio.

Here is a historical look at the valuation and dividend income for the portfolio:

DGI For The DIY: Portfolio History The portfolio value hit a new high, but income dipped slightly during Q2 due to a combination of factors. First, Digital Realty Trust (DLR) has an uneven payout schedule, as it makes two dividend payouts during Q1 and just one payment during Q2. Second, I made a handful of transactions during Q1 that shifted dividend payments around, and reduced share count in some of the higher paying stocks I own.

Not all is lost however, because even though the income dipped slightly from Q1, it was still 7.4% higher than Q2 of 2018. Also, looking at the whole first half of the year, income is up nearly 10% from 2018, keeping me on pace to meet my income growth goals.

Here is a closer look at portfolio income since the portfolio's inception:

DGI For The DIY: Portfolio Income History I love this table; being able to see the progress over the years. Dividend growth investing isn't a get-rich-quick process, but rather a steady progression as compounding grows income. Each year's income adds more and more shares owned, keeping the snowball growing over time.

But it's not just dividend reinvestment adding to income, there's increasing payouts from the companies I own as well. It was a good quarter for increases, as fifteen companies raised payouts:

Announce Date Company Ticker Previous Payout Rate New Payout Rate Sequential Increase Year Ago Payout Rate YoY Increase Dividend Yield Link
4/17/2019 American Water Works Company Inc. (AWK) $0.4550 $0.5000 9.89% $0.4550 9.89% 1.59% LINK
4/17/2019 Kinder Morgan Inc. (KMI) $0.2000 $0.2500 25.00% $0.2000 25.00% 4.94% LINK
4/24/2019 Exxon Mobil Corporation (XOM) $0.8200 $0.8700 6.10% $0.8200 6.10% 5.14% LINK
4/24/2019 Ameriprise Financial, Inc. (AMP) $0.9000 $0.9700 7.78% $0.9000 7.78% 3.08% LINK
4/25/2019 Johnson & Johnson (JNJ) $0.9000 $0.9500 5.56% $0.9000 5.56% 2.95% LINK
4/30/2019 IBM Common Stock (IBM) $1.5700 $1.6200 3.18% $1.5700 3.18% 4.88% LINK
4/30/2019 Apple Inc. (AAPL) $0.7300 $0.7700 5.48% $0.7300 5.48% 1.50% LINK
5/2/2019 EOG Resources Inc. (EOG) $0.2200 $0.2875 30.68% $0.1850 55.41% 1.59% LINK
5/23/2019 Flowers Foods, Inc. (FLO) $0.1800 $0.1900 5.56% $0.1800 5.56% 3.31% LINK
6/3/2019 Lowe's Companies, Inc. (LOW) $0.4800 $0.5500 14.58% $0.4800 14.58% 2.03% LINK
6/4/2019 Cracker Barrel Old Country Store, Inc. (CBRL) $1.2500 $1.3000 4.00% $1.2500 4.00% 3.26% LINK
6/5/2019 UnitedHealth Group Inc. (UNH) $0.9000 $1.0800 20.00% $0.9000 20.00% 1.90% LINK
6/12/2019 Realty Income Corp. (O) $0.2260 $0.2265 0.22% $0.2200 2.95% 3.70% LINK
6/13/2019 Target Corporation (TGT) $0.6400 $0.6600 3.13% $0.6400 3.13% 2.48% LINK
6/27/2019 Wells Fargo & Co. (WFC) $0.4500 $0.5100 13.33% $0.4300 18.60% 4.49% LINK
Average: 10.30% 12.48% 3.12%

Those fifteen increases averaged 10.3% on a sequential basis, and nearly 12.5% on an annual basis. These are both higher than what's been given in recent quarters, and is a nice boost to the portfolio.

One of the bigger increases came from a recent acquisition, as UnitedHealth Group continued its streak of 20%+ dividend growth, its tenth straight year beating that mark.

Other notable increases came from Kinder Morgan Inc., which lived up to its promise of a 25% dividend increase; Wells Fargo, with a nice 13.33% increase and enormous buyback; and EOG Resources, which gave its second large increase in the last year despite weak crude oil prices.

Portfolio Holdings

There have been no trades in the portfolio since February, so other than dividend reinvestment, there hasn't been any changes to the portfolio makeup since the last update.

Here are the holdings as of quarter's end:

DGI For The DIY: Portfolio Holdings DGI For The DIY: Portfolio Holdings The portfolio value of $79,721 is a new record, and the projected dividend income is now just a dollar away from the $2,500 level. The new portfolio high is a bit surprising considering the relatively high weighting of energy and industrial stocks compared to the market.

However, the slack was picked up by some of the larger holdings, as Microsoft and Lockheed Martin saw big gains. A positive court ruling also caused a huge spike in the price of Qualcomm, and Starbucks also had a very good quarter.

Chart Data by YCharts

Portfolio Weightings

The strength of technology and weakness in energy and consumer staples are reflected in the updated portfolio weightings. Here is the portfolio makeup at quarter's end:

DGI For The DIY: Portfolio Weighting Consumer staples now make up 9.8% of the portfolio value, and energy just 8.5%, compared with 10.8% and 9.2% after Q1. Meanwhile, technology has gained a percentage point to 16.7%, compared with 15.7% last quarter.

Lockheed Martin's big gain also helped the industrial sector's weighting, as it increased from 10.7% to 11.4%.

On The Radar

With the busyness of summer and now fall, I haven't had as much time to watch the market lately, but a quick glance at the portfolio reveals a few stocks that look attractive to me.

First off, UnitedHealth is trading 19% below 52-week highs, and is now well below the "fair value" line on its five-year FAST Graph. It's also projected to grow EPS at a double-digit clip going forward, a number it will likely meet or exceed with dividend growth.

UNH FAST Graph It's trading at its most attractive valuation since late 2013, and I think is at a nice entry point for those interested in the company.

AT&T (T) also looks attractive to me, even after its 40% gain off the 52-week low. Shares are still dirt cheap at a P/E below 11, and the 5.5% yield is one of the best in the market for blue chip companies.

AT&T FAST GRAPH The company seems to be making progress in integrating the recent acquisitions and coming forward with a strategy to capitalize on its content. It's also paying down the huge debt load while still growing the dividend (albeit at a currently slow rate). I think the stock remains an excellent opportunity for long-term investors.

My final pick is one of my recent additions, and one that I've done well with so far. Comcast Corp. (CMCSA) was purchased for the portfolio back in February, and has risen more than 20% since purchase.

Shares aren't quite the bargain they were a few months ago, but I think still represent a good opportunity. Comcast should continue to benefit as a broadband supplier, and it also owns content through NBCUniversal and Sky.

CMCSA FAST Graph

I don't see myself making any big trades in the portfolio right now, but I do think these are some interesting names. For all the concerns about the market being near all-time highs again, there's still value to be found.

Closing Thoughts

Market volatility caused portfolio valuation to fluctuate during the quarter, but my dividend income continues its steady climb higher. With no new cash contributions coming into the account, I haven't made any big purchases since February. However, dividend reinvestment continues to add shares in all stocks I own, which keeps the dividend snowball rolling.

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.