At the beginning of March, I was optimistic that we were finally catching a break from the market's relentless upward moves. This proved not to be the case for most of the dividend growth companies. There aren't many great deals available currently, but there are plenty of fairly priced companies. As a dividend growth strategy is a multi-decade play, buying at a fair price isn't bad.
Towards the end of 2020, it was apparent I needed more dividend growth within my portfolio. Some of my largest income producers were no longer generating the dividend growth they had in the past. For this reason, I decided to focus on adding to positions that were yielding 3% and had the potential to grow dividends at 7% over the long run.
This goal would allow me to reach my 10% annual dividend growth, which also equates to doubling my income about every seven years. Additionally, the 7% targeted dividend growth allows the dividends to double every ten years once I stop reinvesting dividends.
I came up with a list of nine companies I wanted to target that all looked like they might fit the bill at the time. Today most of these are well outside my initial yield target. These are shown with the current yields in the table below.
| Company | Current Yield |
| Pepsi (PEP) | 2.89% |
| Automatic Data Processing (ADP) | 1.96% |
| Medtronic (MDT) | 1.96% |
| Johnson & Johnson (JNJ) | 2.48% |
| Ameriprise Financial (AMP) | 1.77% |
| Lockheed Martin (LMT) | 2.80% |
| Texas Instruments (TXN) | 2.12% |
| Air Products & Chemicals (APD) | 2.11% |
| Home Depot (HD) | 2.14% |
Source (Wyo Investments)
When I built this list, the 3% initial yield goal looked attainable for all these companies. Of course, some of these companies historically hit 3% more often than others. It's pretty rare to be able to pick up ADP or MDT at a 3% yield.
Today, only Pepsi and Lockheed Martin are in an acceptable range. However, I am not adding to Pepsi, as it regularly hits 3%, and I believe taking a patient stance here is warranted. I did add some LMT early in March, but it ran up throughout the month. I think that better prices lie ahead for LMT than at present.
I was disappointed that Home Depot didn't quite reach my buy point last month, dipping as low as $246 before reversing the course and marching much higher. But, as a DGI investor, I have a lot of patience. Someday, I will add it to my portfolio at the price I want.
How am I doing in 2021?
The portfolio tracked here is my taxable dividend growth portfolio. I also maintain a few other portfolios, most of which are dividend growth oriented, and have a large real estate portfolio. I focus on "passive" income.
In my taxable account, I am somewhat conservative with the companies I purchase. I average less than two sales per year in this account, as I buy with the intent to hold forever. At present, I am focused on purchasing companies with a 3% initial yield that can maintain a 7% dividend growth for decades. However, entering 2021, I was only projecting 6.5% income growth without dividends reinvested.
Currently, I am estimating a 9.1% dividend growth for 2021, with dividends reinvested thru the end of March. This brings my projected income to $13,094, still short of my $13,200 goal for the year. But with nine months of reinvestment remaining, it looks like I am well on track to hit my overall goal of 10% annual income growth. However, a large chunk of this year's growth was repositioning a significantly overvalued position and an unexpected increase in the first quarter payout from Blackstone Group (BX).
Source (Wyo Investments)
For the month, there were no dividend increases announced on any of my holdings in this account. The second quarter doesn't usually have many announcements, but I am looking forward to seeing a few. After last year's relatively small increase for Apple (AAPL), I hope they can meet my 7% projection. Next up will be Ameriprise, one of my biggest income producers. I'm hoping it will exceed my 7% prediction.
I'm particularly interested to see if Phillips 66 (PSX) will increase, as my expectations are minimal. I acquired PSX from the ConocoPhillips (COP) spin-off, and it is one of my two energy holdings. The other is Enterprise Products Partners (EPD). I am not enthusiastic about the entire energy sector but will continue to hold these two positions.
Purchases in March
Last year, I decided to remain fully invested in my taxable account. I am comfortable staying all in with this account as it has been closed to new capital since 2016, and I have other accounts that maintain cash reserves. Besides, there are always high-quality companies that I can buy at a fair price if no bargains appear.
Lockheed Martin
Source (fastgraphs.com)
Early in March, I was reinvesting in Lockheed Martin, adding two shares at about $340 per share. I have been adding LMT regularly since the beginning of the year. While still appealing, the run-up throughout March has caused me to put a pause on new purchases. I believe better prices will be available over the next couple of years, if not months. 3% is a historically fantastic yield for LMT, but I think it's conceivable to see sentiment stay against the defense companies given the current political climate. At present, LMT makes up 3.3% of my portfolio, which is an average size position.
LMT has an 18-year dividend growth streak. Which meets my preferred minimum of 15 years that I consider safe. While the company has consistently grown dividends in the high single digits over the past ten years, more importantly, is the ability to continue doing so. With a relatively low payout ratio of around 40% and expected growth in the mid-single digits, I believe the company should be able to meet my 7% dividend growth goals. Additionally, the payout ratio has been falling in recent years, which is a positive sign.
Prudential Financial
By the end of March, bargains were getting slim to non-existent. Prudential (PRU) is a company that I had taken a cursory look at back in September for its eye-popping yield at the time and massive dividend growth rates. However, I didn't spend much time on it, as I was adding Automatic Data Processing as fast as I could at the time.
Source (fastgraphs.com)
The biggest concern I have with Prudential is its short dividend growth history at only 13 years. Quality is of primary concern in this portfolio. The other challenge I had with investing in this company is that I already hold Cincinnati Financial (CINF) and Aflac (AFL). I typically try not to keep more than two companies from the same industry.
As I investigated the company, several pieces of information swayed my opinion. The first was the fact that it has a significant investment branch. As I researched here, insurance companies and asset managers are some of the safest dividend champions and contenders. Of course, Prudential is neither with only a 13-year dividend growth history, so I consider it a bit riskier.
The 5-year and 10-year dividend growth rates are both above 10%, although this year was smaller. The A rating from S&P is a big plus as well. However, one of the things that was most encouraging is the buyback program. The company was buying back shares at a discount. Smart buybacks are refreshing to see, as so many companies seem to prefer to buy back at record valuations.
Probably the biggest concern I had was the payout ratio. While the current ratio, at around 40%, isn't exceptionally high on an absolute basis, it is high compared to many of its high-quality peers. While the percentage increased slowly in recent years, it accelerated in 2020, primarily due to the pandemic. I expect to see this come down as earnings rebound.
The plan for April
I didn't take the decision to start a position in Prudential lightly. The company doesn't meet my years of growth requirement and becomes a third insurance company in my portfolio. Additionally, I'm not convinced that it will meet my 7% growth target in the future, but I think above 5% is reasonable. As this was a new position, I will continue to add to it to build up to about 1% of my portfolio. I am comfortable with only a minor position in this company, and it will take all of quarter two to accomplish.
As PRU is a higher-yielding company, I will have hit my 10% income growth goal for the year once I have established the position. This is by design. I could have accomplished the same thing with an existing company in my portfolio, AbbVie (ABBV), but AbbVie already makes up 6% of my total income. As I consider AbbVie a higher risk position, I am uncomfortable adding to it. By hitting my goal by the end of quarter two, I will have more flexibility for the remainder of the year.
As things look now, after hitting my goal, I will consider starting a position in Home Depot, expanding my ADP position, or starting a position in a high dividend growth company. I will even consider adding to my Microsoft (MSFT) position for the first time since 2011, depending on what the market offers.
Of course, planning in these terms is often folly. Any number of variables could change over the next couple of months. However, I will keep marching forward, confident that my income will keep growing no matter what happens!
