My Dividend Growth Investment Income

Aug. 02, 2022 6:34 AM ETADI, AFG, ALLY, AMT, AMZN, AVGO, BBY, BOC, CARR, CAT, CMCSA, CVS, DELL, DLR, FNF, FRG, GLW, GPK, GPN, HD, LMT, MPW, MSFT, O, SBUX, STOR, TROW, UNH, UNP, V, VICI, VOO, WSO13 Comments

Summary

  • My overall investment strategy is targeted towards dividend growth investing.
  • By starting from a young age I can set myself up to achieve early retirement more easily.
  • Forward dividend projected income currently stands at $3,730.
Young woman and man climbing red bar graph

Klaus Vedfelt

The core of my overall investment thesis is dividend growth investing. This time-tested, alpha-producing approach allows me to clearly visualize the gains in my stock positions and blocks out the day-to-day noise that induces investor emotions. Currently at the age of 28, I hope to compound the returns from my DGI (dividend growth investing) positions and retire early. My long-term goal is to obtain annual dividend income of $100,000, at which point I may be able to begin considering a major change in my career and rely less on income from typical employment.

Background

My dividend income is tracked across all of my portfolios (taxable accounts, IRA's, and 401k). A large portion of the target $100,000 will be produced within retirement accounts and thus not easily accessible during early retirement; however, I will aim to maintain a 33% proportion of dividend income in my taxable account. With this level of dividend income and adhering to the 4% rule on the overall taxable account size, I will be able to reasonably consider a change in career into a more part-time role or pursue other methods of income until I am able to access retirement funds. Meanwhile, my retirement accounts will continue to build and grow until I'm ready to begin taking distributions to fund my retirement.

Dividend Growth Positions

Overall I have 31 positions, 29 dividend growth positions with 28 of these positions coming in the form of individual stocks and one in the form of a standard S&P 500 index fund, and 2 positions are non-dividend paying stocks that I hold with high conviction. I choose my positions based on the company industry, free cash flow metrics, gross margins, payout ratios, and dividend growth rates. By choosing companies that maintain strong metrics listed above, I can sleep more easily knowing that unforeseen changes in company growth rates and overall macro environment will be more easily absorbed.

I maintain a pretty evenly balanced portfolio with no positions currently holding a disproportionate weight. However, I do plan to let my winners run and expect to see a growing concentration towards my top positions as time goes on.

My current highest conviction positions are Analog Devices (ADI), American Tower (AMT), Visa (V), and CVS Health (CVS).

  • Analog devices has an extended history of high profitability, strong dividend growth, extraordinary growth prospects, and an excellent balance sheet. Through several major acquisitions in recent years, ADI has now become diversified across nearly every major industry with products that are absolutely critical. With a dominant position in analog-digital conversion and power management chips, they produce products that are not able to be made easily obsolete like standard computing chips. This is evidenced by the fact that their catalog is 50%+ made up of products that are greater than 10 years old. The exponential increase in need for their products in a rapidly digitizing world will allow them to benefit from either further synergies produced by the scale of operations.
  • American Tower is a dream dividend growth stock. They sport a long history of strong dividend growth with the added attraction that the dividends are actually raised quarterly. The business model is rock solid, producing income by receiving lease payments from all of the largest telecom companies across the world to use AMT's cell towers. The rapid increase in demand for data usage and equipment required by telecoms has suited AMT well, significantly outperforming the overall market since its inception. Recently, American Tower made a major acquisition of CoreSite, one of the largest global players player in data center real estate. I believe this is a genius acquisition as the Internet of Things and 5G has integrated the need for communication between data centers and cell towers. Combining this with the ongoing establishment of AMT's own edge data centers located on the same land as the towers, the synergies from vertical integration and latency advantages will accelerate growth and profitability for many years to come.
  • Visa needs no introduction. The business model allows for them to achieve some of the highest profit margins of any company in the world and this will only continue to expand with further scale. The company produces massive cash flows and a low payout ratio with ample room to grow, this is evidenced by the 5-year dividend CAGR of 18%. The world is still in the early stage of credit card and digital transaction adoption, giving Visa a long runway of growth into the future.
  • CVS was an interesting position brought up to me by a friend in the healthcare insurance industry that I had not considered. For years, the stock has been stuck in the doldrums as it processed the massive acquisition of Aetna. The large debt load incurred from this transaction froze the dividend and weighed on the stock price for years. However, now that they have finally achieved a very manageable debt level there is massive opportunity. CVS has now successfully achieved a nearly fully vertically integrated health care company, the only of its kind. CVS is now able to provide all services from physician care, health insurance offerings, and pharmacy all under one roof. The increase in profitability that is able to be achieved across this process is significant and has already begun paying dividends, literally. The company produces free cash flows of $12 billion dollars per year and has significant room to grow the dividend as significant portions of cash flow are no longer needed to pay down debt. The 10% increase announced last year is the first in what will be a long streak of high dividend growth.

Below is a summary of all positions across my portfolios, including the non-dividend payers.

Position Percentage of All Investments Projected Annual Dividend Income
VOO 25.90% $580.86
ADI 4.57% $122.41
VICI 4.09% $253.59
AMT 4.06% $128.80
STOR 3.78% $297.42
MSFT 3.66% $49.31
O 3.51% $214.24
UNP 3.40% $116.69
HD 3.31% $120.46
V 3.21% $32.29
DLR 2.88% $157.48
CVS 2.85% $93.96
UNH 2.71% $47.92
CMCSA 2.49% $90.54
LMT 2.43% $97.97
AMZN 2.32% --
MPW 2.26% $230.52
WSO 2.04% $104.67
GLW 2.01% $87.21
GPK 1.98% $38.02
ALLY 1.83% $98.72
BOC 1.83% --
BBY 1.81% $127.83
FNF 1.69% $111.28
GPN 1.62% $19.31
FRG 1.54% $180.23
AVGO 1.48% $67.96
TROW 1.46% $85.21
AFG 1.13% $120.00
SBUX 1.05% $36.56
CARR 0.96% $21.46

Recent Transactions and Future Prospects

During the month of July, I put $2,025 of capital to work. I purchased shares of ALLY, STORE, FRG, and MPW. My projected annual dividend income now sits at $3,730. My plan for the near future is to invest $150 per week into my taxable account and IRA's as well as roughly $1,000 per month into my 401k.

For the next few months I will use weekly $150 to continue accumulating shares of ALLY, STORE, and MPW along with initiating a recurring investment in Corning (GLW). The $1,000 monthly 401k contributions will be largely concentrated in S&P 500 and large cap funds.

In the future I am eyeing several stocks to either add on to my current position or to initiate a new position. I will likely look to add to Comcast in the near future as I believe it is undervalued and have the opportunity to reduce my average cost. For the possible initiation of new positions, I am currently looking at a couple of companies including Dell Technologies (DELL) and Caterpillar (CAT). The attraction of the Dell position is due to the dividend recently being initiated for the first time and has room for strong growth in the years ahead. Caterpillar is enticing as a historical long-term dividend grower with new tailwinds as the US and Europe are accelerating investments in infrastructure for the foreseeable future.

Conclusion

Dividend growth investing is proven to be the best way to accumulate wealth and to achieve financial freedom. While I am far away from achieving my ultimate goal, I am happy to see the dividend income I've been able to build to this point and I am excited to see how quickly it grows over time. With recurring injections of new capital and investing in stocks that grow their dividends annually, I will be able to grow forward dividend income on almost a daily basis.

This article was written by

I am an electromechanical engineer who has worked in the automotive, IT infrastructure, and medical device industries. My goal is to produce technical breakdowns on company products and share my industry experiences to provide insight on current engineering trends. Providing real world product knowledge on new trends or relatively unknown engineering developments gives readers a unique advantage when conducting research on a potential investment.I am a long term buy-and-hold investor who seeks investments with strong cash flows that produce a growing passive income stream or heavily invest into R&D.

Disclosure: I/we have a beneficial long position in the shares of VOO ADI VICI AMT STOR MSFT O UNP HD V DLR CVS UNH CMCSA LMT AMZN MPW WSO GLW GPK ALLY BOC BBY FNF GPN FRG AVGO TROW AFG SBUX CARR either through stock ownership, options, or other derivatives. 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.

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