Seeking Alpha

My K.I.S.S. Dividend Growth Portfolio: 3rd Quarter 2019 Update

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Includes: AAPL, AFL, AMGN, AMP, APD, AVA, BA, BDX, BLK, BYND, CBRL, CINF, CMI, CSX, CVS, D, DE, DLR, DRI, EMN, EMR, FLIC, GD, HAS, IBM, ITW, JNJ, JPM, LHX, LMT, LNC, MCD, MSFT, NHI, NSC, NUS, O, OMC, PAYX, PEP, PFG, PG, PRU, PTY, QCOM, RTN, SDY, SKT, SPG, SPY, STT, SYY, TGT, TROW, UGI, UTX, VDIGX, 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.

Since my last KISS portfolio update in early August, it’s been a weak two months for the market. Over that time, it’s been down almost 2%. But the KISS portfolio is actually up during that time. I’ll discuss the details later on in the article, but this is another demonstration of how DGI portfolios tend to outperform during down markets.

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. The performance these past two months supports this contention.

Last month I made some changes to my plan and my portfolio to work even more towards my goal of keeping things simple. Here’s a summary of the changes I made last quarter:

  1. I’ve decided to separate my Charles Schwab accounts from the rest of my KISS portfolio. This removed about $168,000 in assets from the portfolio, and therefore a large amount of dividend income, as you will see later.
  2. I streamlined my KISS screening process, dropping 3 levels of Chowder numbers down to only one.
  3. I began using the Simply Safe Dividend safety score of 40 or less as a sell signal.
  4. I closed my portfolio to new money.

As I mentioned, the goal of all of these changes was to simplify my process, both in terms of my investing plan, and in terms of determining my results. I don’t believe they had a direct impact on my actual investment returns, at least not yet. I just think they will make my whole process easier to execute.

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 third quarter and the comparison (in parentheses) to the same months during 2018:

  • July: $1,995.47 ($1,250.73) (+59.54%)
  • Aug: $4,664.62 ($5,466.37) (-14.66%)
  • Sept: $6,769.48 ($6,016.90) (+12.50%)

Total dividends collected in the third quarter of 2019: $13,429.57 an increase of 5.46% as compared with the $12,734.34 I collected during the third quarter of 2018.

As I explained in the last quarterly update the KISS portfolio is now a closed portfolio. I will no longer be adding new money into it. Therefore, there were no contributions added this quarter.

The K.I.S.S. System

Since 2013, 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 dividend safety rating of 60 or more from simplysafedividends.com.
  • 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.

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.

I have also moved the evaluation of the dividend safety score ahead of the evaluation of the FAST Graph to decrease the number of graphs I have to evaluate. Screening by the safety scores dropped the number of stocks I had to review from abut 100 down to about 70.

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%;
  • A dividend safety rating of 60 or more from simplysafedividends.com.
  • 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.

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, S&P and SSD.

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. I will also 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 past quarter our corporation decided to allow people to take loans from their own 401K accounts. I decided to take advantage of this new policy and borrow $50,000 from my 401K. In order to free up the cash for this loan I had to sell some shares of some of my stocks.

After the merger of LLL Corp and Harris Corp I had a very large position in the new company, L3 Harris Inc (LHX). So I chose to sell some of the shares I had to bring my position size back in line with the rest of my portfolio, and to free up some of the cash I needed for my loan.

I sold 190 shares of LHX at a price of $208.47 (commission of $5.70) for a total of $39,602.89.

Microsoft had also become an oversized position in my portfolio, and based on its FAST Graph and its PAAY numbers, it seemed to me that it had become overvalued. And since I needed the cash, I chose this as the second position to trim.

I sold 75 shares of MSFT at a price of $134.47 (Commission of $2.25) for a total of $10,082.80.

Other than these sales to free up money for my loan, there were no sales this quarter.

As you all review my portfolio listed down below, you'll notice that I bought 50 shares of Beyond Meat (BYND). THIS IS NOT A DIVIDEND GROWTH PURCHASE! This was done for the purposes of marital harmony as my wife, who is vegan (or plant based) wanted me to buy some. Since it took cash from my portfolio to do this, and will affect my returns, I feel I have to include it in my portfolio totals. <sigh>

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 through 2018. 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.)

Here are the stocks in my portfolio with the highest PAAY.

Stock

Close

Latest Dividend

Yield

1 yr Average Yield

1 yr PAAY

Rank

Nu Skin Enterprises (NUS)

42.21

0.370

3.51%

2.76%

26.96%

1

Tanger Factory Outlet Centers (SKT)

15.61

0.355

9.10%

7.45%

22.10%

2

UGI Corporation (UGI)

50.45

0.325

2.58%

2.12%

21.39%

3

State Street Corporation (STT)

59.80

0.520

3.48%

2.96%

17.50%

4

Walgreens Boots Alliance (WBA)

54.41

0.458

3.36%

2.88%

16.88%

5

Simon Property Group (SPG)

157.96

2.100

5.32%

4.80%

10.83%

6

Darden Restaurants (DRI)

116.36

0.880

3.03%

2.73%

10.79%

7

Johnson & Johnson (JNJ)

128.60

0.950

2.95%

2.72%

8.79%

8

Norfolk Southern Corporation (NSC)

180.87

0.940

2.08%

1.91%

8.77%

9

Prudential Financial (PRU)

90.16

1.000

4.44%

4.11%

7.83%

10

When I looked up these ten stocks in Simply Safe Dividends NUS and SKT had safety scores lower than 60. Although I will hold stocks with safety scores between 40 and 60, I will only buy more shares of stocks with scores of 60 and above. Therefore, I chose not to reinvest in NUS and SKT. Instead, I moved on to the two stocks with the next highest PAAY, and they were CMI and CSX. Both had safety scores over 60.

Cummins Inc. (CMI)

161.30

1.311

3.25%

3.03%

7.17%

11

CSX Corporation (CSX)

68.91

0.240

1.39%

1.30%

6.99%

12

Therefore, I made the following purchases with my accumulated dividends.

DRIP

Due to the changes in my portfolio I described in my previous update there will no longer be any DRIP transactions.

KISS PORTFOLIO

After all the above transactions here is the composition of my KISS portfolio with prices as of 10/1/19.

Stock

Shares

Price

Market Value($)

Dividend

Estimated Ann Inc ($)

Curr Yield

AFLAC Inc. (AFL)

490

51.54

$25,254.60

1.08

$529.20

2.10%

Air Products & Chemicals Inc (APD)

119

216.48

$25,761.12

4.64

$552.16

2.14%

Ameriprise Financial Inc. (AMP)

274

140.74

$38,562.76

3.88

$1,063.12

2.76%

Amgen (AMGN)

162

193.19

$31,296.78

5.80

$939.60

3.00%

Apple Inc. (AAPL)

170

224.59

$38,180.30

3.08

$523.60

1.37%

Avista Corp (AVA)

627

48.57

$30,453.39

1.55

$971.85

3.19%

Becton Dickinson & CO (BDX)

137

250.64

$34,337.68

3.08

$421.96

1.23%

Beyond Meat Inc (BYND)

50

146.42

$7,321.00

0.00

$0.00

0.00%

BlackRock Inc. Com (BLK)

51

433.69

$22,118.19

13.20

$673.20

3.04%

Boeing Co (BA)

199

374.94

$74,613.06

8.22

$1,635.78

2.19%

ChevronTexaco Corp Com (NYSE:CVX)

173

116.01

$20,069.73

4.76

$823.48

4.10%

Cincinnati Financial Corp (CINF)

396

114.2

$45,223.20

2.24

$887.04

1.96%

Cracker Barrel Old Country Store Inc. (CBRL)

225

160.05

$36,011.25

5.20

$1,170.00

3.25%

CSX Corp (CSX)

725

67.02

$47,517.18

0.94

$680.64

1.40%

Cummins Engine CO Inc (CMI)

241

157.54

$36,864.36

5.24

$1,262.84

3.33%

CVS Corp. (CVS)

294

62.35

$18,330.90

2.00

$588.00

3.21%

Darden Restaurants, Inc. (DRI)

374

117.01

$42,708.65

3.52

$1,316.48

3.01%

Deere & CO (DE)

193

165.5

$31,941.50

3.04

$586.72

1.84%

Digital Realty Trust Inc. (DLR)

291

129.06

$37,556.46

4.32

$1,257.12

3.35%

Dominion Resources Inc. VA New (D)

335

81.22

$27,208.70

3.67

$1,229.45

4.52%

Eastman Chemical CO (EMN)

254

71.69

$18,209.26

2.48

$629.92

3.46%

Emerson Elec Co (EMR)

337

65.25

$21,989.25

1.96

$660.52

3.00%

First Long Island Corp (FLIC)

1,364

22.31

$30,430.84

0.72

$982.08

3.23%

General Dynamics Corp (GD)

215

178.71

$38,422.65

4.08

$877.20

2.28%

Hasbro Inc (HAS)

386

117.1

$45,200.60

2.72

$1,049.92

2.32%

Illinois Tool Works Inc (ITW)

204

152.73

$31,156.92

4.28

$873.12

2.80%

Intl Business Machines Corp (IBM)

134

143.66

$19,250.44

6.48

$868.32

4.51%

J. P. Morgan Chase & Co. Com (JPM)

200

115.55

$23,110.00

3.60

$720.00

3.12%

Johnson & Johnson (JNJ)

206

129.99

$25,738.02

3.80

$782.80

2.92%

L3 Harris Technologies Inc Com (LHX)

273

203.69

$55,607.37

3.00

$819.00

1.47%

Lincoln National Corp Ind (LNC)

328

57.73

$18,935.44

1.48

$485.44

2.56%

Lockheed Martin Corp (LMT)

154

384.19

$59,165.26

9.60

$1,478.40

2.50%

McDonalds Corp (MCD)

173

209.02

$36,160.46

5.00

$865.00

2.39%

Microsoft Corporation (MSFT)

420

137.07

$57,569.40

2.04

$856.80

1.49%

National Health Investors, Inc. (NHI)

271

81.91

$22,197.61

4.20

$1,138.20

5.13%

Norfolk Southern Corp (NSC)

180

174.98

$30,446.52

3.76

$676.80

2.15%

NU Skin Enterprises Inc. (NUS)

394

42.4

$16,705.60

1.48

$583.12

3.49%

Omnicom Group, Inc. (OMC)

314

78.13

$24,532.82

2.60

$816.40

3.33%

Oneok Inc. (NYSE:OKE)

405

72.71

$29,447.55

3.47

$1,405.35

4.77%

Paychex Inc (PAYX)

438

81.89

$35,867.82

2.48

$1,086.24

3.03%

Pepsico Inc (PEP)

186

137.37

$25,550.82

3.82

$710.52

2.78%

Pimco Corporate & Income Opportunity (PTY)

1,389

18.15

$25,210.35

1.56

$2,166.84

8.60%

Principal Financial Group Inc (PFG)

385

55.18

$21,244.30

2.17

$835.45

3.93%

Procter & Gamble Co (PG)

166

123.85

$20,559.10

2.98

$495.28

2.41%

Prudential Financial, Inc. (PRU)

137

87.28

$10,910.00

4.00

$548.00

4.58%

Qualcomm Incorporated (QCOM)

425

75.47

$32,074.75

2.48

$1,054.00

3.29%

Raytheon Co. (RTN)

215

192.13

$41,307.95

3.77

$810.55

1.96%

Realty Income Corporation (O)

386

76.84

$29,660.24

2.72

$1,051.46

3.55%

Simon Property Group Inc. (SPG)

112

152.36

$15,997.80

8.20

$918.40

5.38%

Southern Co

341

61.88

$21,101.08

2.48

$845.68

4.01%

State Street Corp (STT)

313

56.87

$16,776.65

2.08

$651.04

3.66%

Sysco Corp (SYY)

372

79.36

$29,521.92

1.56

$580.32

1.97%

T. Rowe Price Group (TROW)

344

111.41

$38,325.04

3.04

$1,045.76

2.73%

Tanger Factory Outlet Ctrs Inc (SKT)

891

15.16

$13,507.56

1.42

$1,265.22

9.37%

Target Corp. (TGT)

384

105.94

$40,680.96

2.64

$1,013.76

2.49%

UGI Corp (UGI)

640

49.3

$30,467.40

1.30

$832.00

2.64%

United Technologies Corp (UTX)

108

133.79

$14,449.32

2.94

$317.52

2.20%

W. P. Carey Inc. (WPC)

294

90.08

$26,483.52

4.13

$1,214.22

4.58%

Wal-Mart Stores Inc (WMT)

184

117.85

$21,684.40

2.12

$390.08

1.80%

Walgreens Boots Alliance Inc. (WBA)

399

54.7

$20,731.30

1.83

$730.17

3.35%

WEC Energy Group Inc (WEC)

336

95.19

$31,983.84

2.36

$792.96

2.48%

Cash

$1,089.30

$1,840,792.24

$53,036.10

2.88%

Returns

My portfolio has decreased in value this quarter from $1,875,192.35 to $1,840,792.24. But this includes the $50,650 that was removed from the portfolio when I took out my loan ($50,000 for the loan and $650 I had to pay in fees). Had this money not been taken out, my portfolio value would have been 1,891,442.24, up $16,249.89 from last quarter. This is a return of 0.86%. In the same time period, the "market," as represented by SPDR S&P 500 (SPY), was down 1.91%.

I run three paper portfolios to compare to my returns: SPY, SPDR S&P Dividend (SDY) and Vanguard Dividend Growth Fund Investor Shares (VDIGX). 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 were:

  • SPY -1.91%
  • SDY -1.21%
  • VDIGX -.69%

Dividends

During the third quarter of 2019, I collected $13,429.57 in dividends. This is an increase of 5.46% compared to the $12,734.34 I collected in the third quarter of 2018. This would have been higher except for the changes I made to my portfolio last quarter, which included removing the two Charles Schwab accounts worth over $168,000. This probably dropped my dividend income by about $1,400 this quarter.

After the closure of the Schwab accounts last quarter my ED12 (estimated dividend income over the next 12 months) was $52,869.56. That has now increased to $53,036.10, an increase of 0.31%. The present yield of my portfolio is 2.88%.

As shown in the following graph, my dividend growth has stagnated, but again, this is due to the loss of the dividend income I was previously receiving from my Charles Schwab accounts. Eventually, once the portfolio changes have fallen further into the past, I expect the dividend growth will accelerate once again.

Conclusion

This was a down quarter for the market. SPY was down almost 2% in August and September. Yet the KISS portfolio was up over this same time period (taking into consideration the $50,650 removed for my loan). This demonstrates once again one of the strengths of DGI and why it outperforms other forms of investing over the long term. During weak periods in the market DGI portfolios tend to outperform the market as a whole. With these results over the past 2 months the KISS portfolio has actually passed SPY and is now outperforming the market YTD. And it continues to outperform over the life of the portfolio.

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 have been able to buy more stocks at depressed prices, which means I will collect even more dividends in the coming years.

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, by focusing on the dividends, and not on price movement, 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 MSFT, AAPL, BA. 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 long all the stocks mentioned in this portfolio