Confessions Of A 'DGI Lite' Investor

by: Miz Magic DiviDogs

The Confession

Okay, I confess. I haunt the halls of the Dividends & Income section of Seeking Alpha, and I hang out with all the Cool Kids of the Dividend Growth Investing (DGI) crowd. I love the thought of investing in the Bluest of the Big Blue Chip stocks to become a true-blue DG investor, but here's the thing -- I don't have the timeline, the initial capital or the patience to be one. I'm only a pretender.

The Magic of Dividends

I retired in 2007 on a modest pension that covers my basic needs, so my fixed income is set. I had a small amount in a 457 deferred compensation plan (local government version of a 401k) and a teeny, tiny little Roth IRA already in a brokerage. I had a brief fling with stocks back in the late 1990s in my Roth and it ended badly. However, time heals all wounds and makes you forget your foolish, dot-com-broken heart, so after doing other things for a while, I was ready to try again. Over the passing decade, my Roth had crept back up to almost the original value by virtue of a handful of dividend stocks I'd kept. In September 2011, it was time to put the money in the Roth back to work, and I knew I wanted to concentrate only on dividend stocks. I was raised by parents who never discussed financial issues, so earning money (dividends) simply by owning something (stocks) was just like magic! I've always been a fan of magic, so I sold what remained of the original stocks and started anew with some high-yield stocks I happened across. In November 2011, I converted my 457 deferred comp into an IRA and rolled it into the same brokerage as my Roth IRA. These were both closed portfolios, no new money coming in, so I needed a way to grow the wealth. I went looking for A Plan.

Enter Seeking Alpha and DGI

In short order I found Seeking Alpha and Dividend Growth Investing. Yes, that's it! I want to invest my small IRAs into dividend growth stocks for a "predictable, reliable and increasing" dividend income stream! I want to become a full-fledged member of the DGI Club! But I still had no real clue how to evaluate stocks or make sense out of reading financial reports until my eyes crossed yet, very important to a true value investor. After plugging dividend and yield numbers into my trusty Excel spreadsheet and running out the numbers, I found that the long timeline required to grow a proper portfolio with Big Blues would be great for my heirs, but didn't give me much to spend right away. I was already retired, and I wasn't getting any younger. I decided I'd be happy with a quick and easy way to pick moderately decent, dividend growth stocks with higher yields to start with, at least until I learned more. Even if it meant my portfolio would be a mite less stellar playing in the Tier 2 seats instead of the Tier 1 seats for now. I went looking for a "DGI Lite" version, as it were. Adventures in Investing, here I come!

The CCC Lists

Fortunately, the DGI tree is a big one with many branches. I'd been climbing around in this tree for a bit and I thought perhaps I'd found the perfect combination of DG investing using the U.S. Dividend Champions list kept by Seeking Alpha author David Fish, better known as the Dividend Champions, Contenders & Challengers (CCC lists) and a 1990's method of stock-picking called the Dogs of the Dow. According to Investopedia:

The Dogs of the Dow is a simple and effective strategy based on the results of the last 50 years. Pick the 10 highest-yielding stocks of the 30 Dow stocks, and weight your portfolio equally among them, adjusting the portfolio annually, and you can expect about a 3% outperformance of the Dow...

The other benefit to any "Dogs" (aka underdog) method is that when the yield is higher, the price is lower, so the stocks are comparatively undervalued (okay, cheap). The theory is that they will provide capital gains along with decent dividends as they come back up to their fair value over the coming year. The results on how this has worked over the years with the Dow stocks can be found here.

The Dogs of the CCC Lists

Okay, what if I used that method with the Dogs of the combined CCC lists? Would it beat the 3% return of the Big Dogs of the Dow? Clearly the Dow is a select group of elite stocks, not like the 400+ stocks on the CCC lists with the only requirement for entry as 5+ years of continually raising their dividends. Well, it's a start. I had already downloaded the Excel version of the October 2011 CCC lists, so I decided to sort by the highest yields and combine all 3 lists. First I sorted each list by yield, highest to lowest, and used 6% yield as my lowest cutoff point. I combined the results of each list into one spreadsheet. That gave me 35 companies, with PennantPark Investment Corp at the top with a 10.07% yield, all the way down to Buckeye Partners LP with a 6.0% yield. I knew just enough about Master Limited Partnerships (MLPs) to know I didn't know enough to invest in them; they were complicated and I wanted easy. So I removed them, leaving 13 companies:

October 2011 CCC Dogs
Stock Symb Industry Price Yield%
PennantPark Invest PNNT Financial 10.72 10.07
Orrstown Financial Svcs ORRF Banking 9.16 10.04
Telefonica SA TEF Telecom 21.37 10.02
Vector Group Ltd VGR Tobacco 17.57 9.11
Omega Healthcare OHI REIT-Healthcare 17.76 9.01
National Presto Ind NPK Consumer 95.50 8.64
CenturyLink Inc CTL Telecom 35.26 8.22
Old Republic Intl ORI Insurance 8.84 7.92
United Community Banc UCBA Banking 5.73 7.68
Pitney Bowes Inc PBI Business Equip 20.38 7.26
Corporate Office Properties OFC REIT-Office 24.25 6.80
Senior Housing Properties SNH REIT-Residential 22.44 6.77
Universal Health Realty UHT REIT-Healthcare 37.97 6.37

The First Buys

Horror stories about the financial sector meltdown kept me away from the top two, PennantPark Investment Corp and Orrstown Financial Services. That left 11 stocks. I wasn't quite sure how this whole method would work, so I bought equal weights of 4 of the top 5 to start with. That was Telefonica SA, Vector Group, Omega Healthcare, CenturyLink and a half position in National Presto because it paid an annual special dividend and I wasn't quite sure how that would work. I put in my limit orders on 11/15/11 and was the proud owner of 5 CCC Dogs by 11/16/11.

Guidelines, We Need Guidelines!

About the only guideline that I had for this portfolio to start with was to sell any stock that cut its dividend, and seriously consider selling any stock that froze it. I didn't have to wait too long for that, CenturyLink froze their dividend the day after I bought it. Well, at least it wasn't a cut, and it did pay a healthy dividend yield so I decided to hold on for a bit. Next up was Telefonica, which announced a dividend cut a month later, and once I found out how much in foreign taxes I'd lose in my tax-deferred IRA, it became a whole lot less attractive. The third strike was National Presto, which announced a cut in February to the special annual dividend payable in March, and the price started to sink. Do I hold for the dividend, or do I sell now? I held. I got the dividend, and watched the price fall off the cliff. In March I decided to clean house before the next quarter and find stocks that would actually grow their dividends, so I sold CTL for a 9.7% gain and TEF for a 10.6% loss even before I collected the dividend. I held NPK for a while, hoping that it would come up some (it did, a tiny bit) and finally sold it in August for an 18.5% loss.

How's That Workin' For Ya?

On the other hand, Omega Health and Vector Group were coming along nicely. And I noticed as the months went along that some of the other Dogs of the CCC lists were sticking around month after month and handing in some pretty nice yields. Maybe I ought to look into this method a bit more. After poring over the CCC lists, I found something that made me think this just might work! Okay, it won't exactly be a Sleep Well At Night (SWAN) portfolio, but it's not as bad as Sleep-Less And Pray! (SLAP). Maybe more of a "sleep with one eye open" kind of thing -- a Sleep Light And Monitor (SLAM) portfolio. Yeah, that's the ticket! Besides, I don't need the money to live on, and I don't mind a little risk-taking (okay, fine, a little excitement) in my life. I'm here on SA all the time anyhow and enjoying it immensely, easy enough to keep an eye on things. Why not give it a go? On to more Adventures in Investing! Part 2 - Creating The DGI Lite Portfolio.

Just don't tell the rest of the DGI gang that I'm a fraud, okay?

Please note this light-hearted look at my "Adventures in Investing" is not meant as advice for anyone else, nor in any way to demean those who take investing as serious business. I am fortunate that I have a pension and can afford to indulge my adventurous little heart with my investments.

Disclosure: I am long OHI, VGR. 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.