Seeking Alpha

My K.I.S.S. Dividend Growth Portfolio: 4th Quarter 2019 Update

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Includes: BA, GD, NSC, REGL, SDY, SPY, VDIGX, WPC
by: The Part-time Investor
The Part-time Investor
Long only, long-term horizon, dividend investing, value
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 and total return.

WOW! What a year for the market! A huge continuation of the raging bull market that has been going on since 2009. Is this the last leg? The blow-out before the bear market hits? Who knows! I don’t try to predict anything. I just stay 100% fully invested, continue to collect and reinvest my dividends, and watch my dividend income go up year after year (except for the last year, which will be explained later), regardless of what the market is doing.

But still, I like to see my portfolio value increase, along with my dividend income, and based on that this year was fun to watch. As one would expect during a strong up year, dividend growth portfolios would likely to trail the market. And that’s exactly what happened with mine this year. Although it turned in a strong performance, one I am thrilled with, I did trail the market by a little bit. Although I was ahead for the year at my 3rd quarter update, over the past three months, the market has moved ahead. Oh well. No big deal. Over the life of my portfolio I’m still ahead, and my dividends continue to grow. I’ll provide all these performance details later in the article.

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 of my portfolio over the past 7 years supports this contention.

This year 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 over the summer:

  • I separated my Charles Schwab accounts from the rest of my KISS portfolio (and moved that money to a Fidelity account). This removed about $168,000 in assets from the portfolio, and therefore a large amount of dividend income, as you will see later.
  • I streamlined my KISS screening process, dropping 3 levels of Chowder numbers down to only one.
  • I began using the Simply Safe Dividend safety score of 40 or less as a sell signal.
  • I took a $50,000 personal loan from my 401(k), which decreased the value of my account by $50,550 (including some fees).
  • 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 Fourth Quarter Dividends

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

  • Oct: $2,325.79 ($1,964.37) (+18.39%)
  • Nov: $4,133.86 ($5,699.93) (-27.47%)
  • Dec: $6,328.74 ($6,170.21) (+2.57%)

Total dividends collected in the third quarter of 2019: $12,788.39, a decrease of 7.46% as compared with the $13,834.51 I collected during the fourth quarter of 2018. But remember, over $200,000 of assets were removed from the portfolio during the last year, so you would expect the dividends to decrease accordingly.

As I mentioned previously, 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, which is very fast and easy, dropped the number of stocks I had to review on FAST Graphs from about 100 down to about 50.

For Purchase of High Yielding stocks (Yield > 4.0%)

  • 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. And notice that in all these cases, my sell decision comes down to the dividend.

Sales And Purchases

Last quarter I bought Beyond Meat Inc. (BYND) on the request of my wife. But I was never comfortable owning BYND in my dividend growth portfolio. It simply had no business being there. Therefore, I sold the shares of BYND I had in the KISS portfolio and repurchased them in a new brokerage account. In this way my wife still has her BYND shares, and I was able to remove them from my portfolio.

I sold 50 shares of Beyond Meat, Inc. @ $111.74 per share (commission $1.50) for a total of $5,585.38.

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. Theoretically, the higher the more undervalued the stock may be.

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.

Another stock on the list, Boeing (BA), already had an over-sized position in the portfolio, so I also chose not to add more shares of these stocks. As I moved down the list, I picked the next three stocks which had safety scores of 60 or over and did not have over-sized positions. These were General Dynamics (GD), W. P. Carey (WPC) and Norfolk Southern (NSC).

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

Note: There is a sale listed above for Proshares SP MidCap 400 Dividend ETF (REGL). Since I cannot DRIP my dividends, as they get deposited into my account I park them in shares of REGL so that I can (hopefully) get some capital gains and dividends while waiting for the end of the quarter to decide what to invest them in long term. Once I’ve decided where to reinvest the dividends, I sell those shares of REGL.

KISS Portfolio

After all the above transactions here is the composition of my KISS portfolio with prices as of 12/31/19.

Stock

Shares

Unit Value

Market Value($)

Dividend

Estimated Ann Inc ($)

Curr Yield

AFLAC Inc.

490

52.90

25,921.00

1.04

509.60

1.97%

Air Products & Chemicals Inc.

119

234.99

27,963.81

4.64

552.16

1.97%

Ameriprise Financial Inc.

274

166.58

45,642.92

3.88

1,063.12

2.33%

Amgen

162

241.07

39,053.34

5.80

939.60

2.41%

Apple Inc.

170

293.65

49,920.50

3.16

537.20

1.08%

Avista Corp.

627

48.09

30,152.43

1.55

973.10

3.23%

Becton Dickinson & Co.

137

271.97

37,259.89

3.08

421.96

1.13%

BlackRock Inc. Com

51

502.70

25,637.70

13.20

673.20

2.63%

Boeing Co.

199

325.76

64,826.24

8.22

1,635.78

2.52%

ChevronTexaco Corp. Com

173

120.51

20,848.23

4.76

823.48

3.95%

Cincinnati Financial Corp.

396

105.15

41,639.40

2.24

887.04

2.13%

Cracker Barrel Old Country Store Inc.

238

153.74

36,590.12

5.20

1,237.60

3.38%

CSX Corp.

725

72.36

52,461.00

0.96

696.00

1.33%

Cummins Engine Co. Inc.

241

178.96

43,129.36

5.24

1,263.80

2.93%

CVS Corp.

294

74.29

21,841.26

2.00

588.00

2.69%

Darden Restaurants, Inc.

393

109.01

42,840.93

3.52

1,383.36

3.23%

Deere & Co.

193

173.26

33,439.18

3.04

586.72

1.75%

Digital Realty Trust Inc.

291

119.74

34,844.34

4.32

1,257.12

3.61%

Dominion Resources Inc. VA New

335

82.82

27,744.70

3.67

1,230.12

4.43%

Eastman Chemical Co.

254

79.26

20,132.04

2.48

629.92

3.13%

Emerson Elec Co.

337

76.26

25,699.62

2.00

674.00

2.62%

First Long Island Corp.

1,364

25.08

34,209.12

0.72

982.08

2.87%

General Dynamics Corp.

227

176.35

40,031.45

4.08

926.16

2.31%

Hasbro Inc.

386

105.61

40,765.46

2.72

1,049.92

2.58%

Illinois Tool Works Inc.

204

179.63

36,644.52

4.28

873.12

2.38%

Intl Business Machines Corp.

149

134.04

19,971.96

6.48

965.52

4.83%

JPMorgan Chase & Co. Com

200

139.40

27,880.00

3.60

720.00

2.58%

Johnson & Johnson

206

145.87

30,049.22

3.80

782.80

2.61%

L3 Harris Technologies Inc. Com

273

197.87

54,018.51

3.00

819.00

1.52%

Lincoln National Corp. Ind

364

59.01

21,479.64

1.60

582.40

2.71%

Lockheed Martin Corp.

154

389.38

59,964.52

9.60

1,478.40

2.47%

McDonalds Corp.

184

197.61

36,360.24

5.00

920.00

2.53%

Microsoft Corporation

420

157.70

66,234.00

2.04

856.80

1.29%

National Health Investors, Inc.

271

81.48

22,081.08

4.20

1,138.20

5.15%

Norfolk Southern Corp.

191

194.13

37,078.83

3.76

718.16

1.94%

NU Skin Enterprises Inc.

394

40.98

16,146.12

1.48

583.12

3.61%

Omnicom Group, Inc.

314

81.02

25,440.28

2.60

816.40

3.21%

Oneok Inc.

405

75.67

30,646.35

3.66

1,482.30

4.84%

Paychex Inc

438

85.06

37,256.28

2.48

1,086.24

2.92%

PepsiCo Inc.

186

136.67

25,420.62

3.82

710.52

2.80%

Pimco Corporate & Income Opportunity

1,389.00

19.00

26,391.00

1.56

2,166.84

8.21%

Principal Financial Group Inc.

385

55.00

21,175.00

2.20

847.00

4.00%

Procter & Gamble Co.

166

124.90

20,733.40

2.98

495.34

2.39%

Prudential Financial, Inc.

137

93.74

12,842.38

4.00

548.00

4.27%

Qualcomm Incorporated

425

88.23

37,497.75

2.48

1,054.00

2.81%

Raytheon Co.

215

219.74

47,244.10

3.77

810.98

1.72%

Realty Income Corporation

386

73.63

28,421.18

2.74

1,056.10

3.72%

Simon Property Group Inc.

126

148.96

18,768.96

8.40

1,058.40

5.64%

Southern Co.

341

63.70

21,721.70

2.48

845.68

3.89%

State Street Corp.

313

79.10

24,758.30

2.08

651.04

2.63%

Sysco Corp.

372

85.54

31,820.88

1.80

669.60

2.10%

T. Rowe Price Group

344

121.84

41,912.96

3.04

1,045.76

2.50%

Tanger Factory Outlet Ctrs Inc.

891

14.73

13,124.43

1.42

1,265.22

9.64%

Target Corp.

384

128.21

49,232.64

2.64

1,013.76

2.06%

UGI Corp.

687

45.16

31,024.92

1.30

893.10

2.88%

United Technologies Corp.

108

149.76

16,174.08

2.94

317.52

1.96%

W. P. Carey Inc.

320

80.04

25,612.80

4.14

1,326.08

5.18%

Walmart Stores Inc.

184

118.84

21,866.56

2.12

390.08

1.78%

Walgreens Boots Alliance Inc.

399

58.96

23,525.04

1.83

730.97

3.11%

WEC Energy Group Inc.

336

92.23

30,989.28

2.36

792.96

2.56%

1,954,103.57

54,032.46

2.77%

Returns

My portfolio has increased in value this quarter from $1,840,792.24 to $1,954,103.57. This is a return of 6.15%. In the same time period, the "market," as represented by SPDR S&P 500 (SPY), was up 10.30%. Even with my strong returns this quarter, which I’m very happy with, it’s over this time period when I fell behind the market. A greater than 10% return over the quarter is tough to beat.

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. My comparison against the other two benchmarks was mixed. I did well against VDIGX, but trailed SDY.

The returns of my benchmarks in this second quarter of 2019 were:

  • SPY -------- 10.30%
  • SDY ------ 7.26%
  • VDIGX ----- 2.95%

For the year my portfolio was up 28.49%. If my benchmarks had deposits and withdrawals at the same times and amounts as the KISS portfolio, the yearly returns would have been:

  • SPY ------- 30.56%
  • SDY ------ 23.13%
  • VDIGX ---- 27.18%

So, I did well against both of the dividend growth benchmarks, but I couldn’t quite keep up with SPY this year. However, when we look at the annual returns over the life of the portfolio, I am still beating all of my benchmarks. Since the beginning of 2013 the returns for the KISS portfolio, and for the benchmarks, are as follows:

  • KISS ------ 14.62%
  • SPY ------ 13.90%
  • SDY ------ 12.34%
  • VDIGX ---- 12.55%

Dividends

During the fourth quarter of 2019, I collected $12,788.39 in dividends. This is a decrease of 7.46% compared to the $13,834.51 I collected in the fourth quarter of 2018. But as mentioned before, this would have been higher except for the changes I made to my portfolio this past year, which included removing the two Charles Schwab accounts worth over $168,000. This probably dropped my dividend income by about $1,400-$1,500 this quarter.

My ED12 (estimated dividends in the next 12 months) last quarter was $53,036.10. That has now increased to $54,032.46, which is an improvement of 1.87% (This would equate to a yearly dividend growth of approximately 7.5%). The present yield of my portfolio is 2.77%.

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 and from the $50,000 loan I withdrew. Eventually, once the portfolio changes have fallen further into the past, I expect the dividend growth will accelerate once again.

Conclusion

The classic teaching is that dividend growth portfolios will underperform during bull markets, but compensate for this by overperforming during bear markets. This is exactly what was seen these past 6 months. From July through Sept, when the market was weak, the KISS portfolio surpassed the return of the market, so much so that it was ahead for the year. But then when the market went on a 10% bull run the past 3 months my portfolio fell behind. This is exactly what I would expect.

And yet, this has not been only a 3-month bull market, it has been a 10-year bull market. And at least for the past seven years, while the KISS portfolio has been in existence, this simple dividend growth portfolio, with simple buying and selling rules, has beaten the market by about 0.7% annually. I feel that this is due to a focus on valuation, as well as dividend growth. I make it a rule never to buy an overvalued stock, no matter how good the company is. I think that helps to explain at least some of the out-performance by the KISS portfolio. When a bear market does eventually come, I expect my out-performance will increase even more.

I know that in this article I’m talking a lot about portfolio returns. But as a dividend growth investor (as I claim to be) I’m supposed to be focused on the dividend income, not total return. Right? So why do I talk so much about the returns? It’s because when I decided to make my portfolio public for all to see, one of the main reasons I chose to do so was so that people just starting their investing lives could see, in real-time, that a well-constructed, simple, "DGI" portfolio could, in fact, beat the market.

It’s often said that dividend stocks are for boring, defensive retirement portfolios, and that young people will not get the returns they desire if they buy a lot of dividend stocks. That, instead, they should be in the growth stocks. I wanted to show that this is not the case. I KNEW that over the long-term dividend growth investing outperforms other forms of investing. But I also knew that for some people out there, only seeing is believing. So, I set out to show them. This is why I make sure to highlight my market-beating returns, to counter the narrative out there against dividend growth investing as an acceptable technique for young people.

However, having said that, as I've said before and must reiterate, my mindset, still, 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, by focusing on quality dividend growth stocks, with good valuations, 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 importantly, 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 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 article, except for BYND.