Seeking Alpha

Monthly Portfolio Update: September 2019

Includes: ABBV, ALB, MO, PM, TXN
by: Danube Dividends
Danube Dividends
Dividend investing, long-term horizon

Addressing the effect of inflation on our $1M portfolio goal.

Summary of dividend payments and increases during September 2019.

Adding to our existing positions in ABBV, ALB, MO and PM.

Addressing the effect of inflation

Just a month ago, our initial article unveiling our real-money, real-life dividend growth portfolio was published, receiving a warm welcome from the Seeking Alpha community, for which we could not be more grateful.

As outlined in our business plan, we are committed to deploying on average $1000 a month into high quality dividend growth stocks, with a long-term target of achieving $40k a year in dividend income, reinvesting dividends until that point. Our simulation model considering 4% initial yield and 5% average annual dividend growth rate (DGR) resulted in a target portfolio size of $1M by the end of year 25.

Source: Author's own illustration

As one of our readers pointed out however, even if $40k a year would be a comfortable sum to cover a family's living expenses right now, this annual passive income target should be adjusted for inflation as well.

Assuming a 2.5% average annual inflation rate going forward (as indicated by the diagram below), the previous $40k income target needs to be increased to $74k by the end of year 25 in order to provide the same purchasing power.

Source: Statista

In order to counteract the effect of inflation, annual cash deposits to our portfolio will need to be adjusted to accelerate the income growth year by year. Our simulation shows, that with the above parameters (4% initial yield, 5% DGR), our yearly cash contributions need to be increased by 7% on average, in order to achieve the target $74k payout level after 25 years, resulting in a portfolio value of $2M in this scenario. Comparing this revision to the previous $12k constant annual cash deposit target, by year 10, the total new cash requirement grows to $22k, whereas in year 20, we need to deploy a whopping $43k into our DGI portfolio.

Source: Author's own illustration

Keeping up with inflation is therefore a very challenging endeavor for all aspiring dividend growth investors, that can be counterbalanced by either increasing annual cash contributions above inflation levels or purchasing shares in companies with more aggressive DGR values and higher starting yields.

Dividend payments and increases during the month

In September 2019, we received dividend payments from 17 companies totaling $195, in line with the current average monthly income forecast for our portfolio.

Source: Author's own illustration

Since the beginning of the year, we received dividends of $1839 in total, arriving at a monthly average payout of $203 so far.

Source: Author's own illustration

Considering dividend increases, the highlight of the month was Texas Instruments' (TXN) announcement of a 17% increase, followed by Altria's (MO) 5% raise along with Phillip Morris' (PM) 2.5% hike.

Cash allocation and portfolio snapshot

During September, we allocated $877 dollars in total into shares of already held stocks in our portfolio, which is slightly less than our monthly target of $1000 new cash plus reinvested dividends due to seasonal effects in our spending around this time of the year.

Source: Author's own illustration

Our purchase in AbbVie (NYSE:ABBV) at around $69 in the value of $200 highlights our confidence in management's plan to diversify the company away from its overdependence on the blockbuster drug Humira by acquiring Allergan with its diversified portfolio. Despite the positive news, the company still trades at a rock-bottom valuation below a P/E ratio of 10, offering an attractive entry opportunity for dividend growth investors.

The average cost basis of our ABBV shares stands at $2200, equaling 2.2% of our target mid-term portfolio size of $100k. Should the company trade at current levels over a longer period of time providing a 6%+ entry yield, we plan to gradually build our position towards the $3000 or 3% range.

Source: FASTGraphs

We also acquired further shares in Albemarle (NYSE:ALB), mainly due to its depressed valuation and future dividend growth potential fueled by the company's massive lithium expansion plans, as outlined in detail in our previous article. Our current allocation by cost stands at ca. $1300, and we would like to increase our position towards the $2000 range, equaling 2% of our mid-term $100k target portfolio size.

Source: FASTGraphs

Last but not least, we also increased our holdings in the tobacco giants Altria and Philip Morris, by ca. $385 and $78 respectively, as both companies were trading at the higher end of their dividend yield curve during the month, with Altria being exceptionally attractive above 8%.

Source: FASTGraphs

We welcome the news about declining traditional tobacco volumes, and consider the heat-not-burn (IQOS) product portfolio to be a massive catalyst for both companies going forward. Over the long-term, we see especially Altria profiting from the cannabis legalization wave, given its already existing exposure in the space.

In total, we have currently ~$4.5k allocation to PM and MO, about equally weighted. Our combined position size limit is $5k, or 5% of our mid-term $100k target portfolio size, as we think the two companies will eventually merge over time. Therefore, we plan to add to our shares cautiously at current levels until reaching that limit.

Looking at our overall portfolio, cash contributions and reinvested dividends since inception are totaling $50,180 as of September 2019. The current value of the portfolio sits at $61,621, producing $2,342 in forward annual net dividend income. The portfolio consists of 33 companies, with an average forward net yield of 4.67%.

Source: Author's own illustration

Disclosure: I am/we are long ALB, ABBV, PM, MO, TXN. 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: We are also long all of the stocks listed in our portfolio.