Confessions Of A 'DGI Lite' Investor - Part 2: Creating The DGI Lite Portfolio

by: Miz Magic DiviDogs


I am a retired, self-directed investor with a modest pension that covers my basics, and a small IRA that I'm investing in individual stocks using the U.S. Dividend Champions list kept by Seeking Alpha author David Fish, better known as the Dividend Champions, Contenders & Challengers (CCC lists). This is my version of an old method known as the "Dogs of the Dow" combined with Dividend Growth Investing (DGI), a sort of "DGI Lite" method started in November 2011. How this strategy came about is detailed in my previous article, Confessions of a 'DGI Lite' Investor.

All Dogs Need Rules, Boundaries & Limitations

In November 2011, I bought 5 of the highest-yielding stocks (aka Dogs) over 6% yield from the October 2011 combined CCC lists, excluding Master Limited Partnerships (MLPs). Those Dogs were CenturyLink (NYSE:CTL), Telefonica (NYSE:TEF), National Presto (NYSE:NPK), Omega Health (NYSE:OHI) and Vector Group (NYSE:VGR). Within 2 months, 3 of them (CTL, TEF and NPK) failed to raise their dividends, and I held on to them longer than I should have. Once I started figuring out how many dividends I'd be missing out on by holding onto stocks that cut or froze their dividends instead of replacing them with the next highest-yielding Dog, it became glaringly obvious I needed some rules. Well guidelines, really, but let's call them rules for short. Since this was supposed to be a dividend growth portfolio, the first rule was pretty easy-peasy: Kick any Dog out of the kennel that wasn't pulling its weight.

Easy Rule #1 - Sell and replace any CCC stock that doesn't raise the dividend, the sooner the better.

Evaluating the Pack

There had to be a way to refine this method. I started poring over the back copies of the CCC lists, and discovered that there was one very consistent indicator that a dividend was going to be cut or frozen. It turns out Mr. Fish conveniently highlights in RED dates any stock that is overdue for raising its dividend. Out of my selection of 34 highest-yielding stocks from the October 2011 list, CTL was already in the red. So was United Community Bancorp (NASDAQ:UCBA), Corporate Office Properties (NYSE:OFC), Universal Health Realty Trust (NYSE:UHT), and one MLP, Inergy LP (NRGY). So how did that play out? As of the latest CCC list of August 2012, only Universal Health has gone on to raise the dividend and come in out of the red. United Community Bancorp is still in the red. The other 3 have been removed for failure to raise the dividend. In November 2011, the next month, Washington REIT (NYSE:WRE) went into the red out of the top high-yielders. Sure enough, dividend cut and removal in July 2012.

Into The Big Red Doghouse

I looked back over all of the CCC lists from the first one in December 2007 to the most current August 2012 version, and out of 168 stocks that have been removed and not reinstated, only 47 didn't go into the red. Out of those 47 stocks, 14 were noted as being acquired or splitting, so that was a pretty good indicator that the dividend was going away along with the stock. Leaving 33 stocks that didn't go into the red, 2 were on the early 2008 Contenders version and had no payout dates listed, and 3 weren't on the list at all that I could find. (Is this a test, Mr. Fish?) Down to 28 companies out of 168 that gave no warning of a dividend cut or freeze, a whole 16%. That means that if a company is not going to raise the dividend, there's an 84% chance it's going into the red first. The absolute worst group for cutting the dividend right before the raise is due without any warning were bank stocks. No, not all of the companies that go into the red end up failing to raise the dividend, there are a few that just drag it out for a while and then come through with a raise. But overall that makes a pretty easy-peasy second rule: Stay away from any Dog that's in the Big Red Doghouse!

Easy Rule #2 - Don't buy any CCC stock while it's in the red.

Waiting, Waiting, Waiting On That Dog to Deliver

Now, what about stocks that only pay annually or semi-annually? That makes a really long wait in between dividends to see if a stock will raise the dividend, lots of things that could go wrong, and several quarters missed while waiting. I wanted Dogs that delivered those dividend puppies on time, so I decided I would only deal with quarterly or monthly payers. If something went wrong, I could sell out and pick up another stock within the same quarter. That eliminated most of the foreign stocks too, as most of them pay semi-annually. They also tend to drop their dividend without going into the red, and there are the foreign taxes to deal with as well. Easy next rule: Only buy good ole homebred Dogs that delivered puppies as frequently as possible.

Easy Rule #3 - Only buy American CCC stocks that pay dividends at least quarterly.

Meet The Top Dogs

I didn't have this method in place when I started, so my actual portfolio isn't an exact match to this one. But what would it look like if I had those rules in place when I started back in November 2011? Seven Dogs on the October 2011 lists would have come up over 6% yield that weren't in the red:

Stock Symbol Price Yield%
PennantPark Invest PNNT $10.72 10.07
Orrstown Financial ORRF $9.16 10.04
Vector Group VGR $17.57 9.11
Omega Healthcare OHI $17.56 9.01
Old Republic Intl ORI $8.84 7.92
Pitney Bowes Inc PBI $20.38 7.26
Senior Housing Prop SNH $22.44 6.77

To see how this method really worked, let's say I overlooked my aversion to bank stocks and put $5000 in each stock, bought at the closing price listed on the 10/31/11 CCC list. Whoops, Orrstown Financial was deleted the very next month -- true to form, it cut its dividend right before the next raise was due. Faithless Dog, I should have known. So I would sell that and replace it with the highest-yielding one from the November 2011 list, and that would be Triangle Capital (NYSE:TCAP) at $18.11 with a 10.38% yield. Here's what my lineup would look like (sorted by symbol):

Stock Price Qtr Div Yield% Shares Amount
OHI $17.56 .4000 9.01 284 $4987.04
ORI $8.84 .1750 7.92 565 $4994.60
PBI $20.38 .3700 7.26 245 $4993.10
PNNT $10.72 .2800 10.07 466 $4995.52
SNH $22.44 .3800 6.77 222 $4981.68
TCAP $18.11 .4700 10.38 276 $4989.88
VGR $17.57 .4000 9.11 284 $4989.88
Avg Yield: 8.71 Total: $34,940.18

Is That a Working Dog or a Lap Dog?

How has that worked out so far? Making use of Seeking Alpha's excellent Portfolio feature, I put those 7 top Dogs into a tracking portfolio. While that won't give me the dividends, that will track the price for total return, plus the percentage gain and a whole suite of other terrific features. I then entered those Dogs into my handy-dandy Excel spreadsheet to track the dividends. Starting in the middle of a quarter meant I would have missed out on dividends on 3 out of the 7 stocks, but let's see how things stack up since October 2011.

Stock Q4 2011 Q1 2012 Q2 2012 Q3 2012
OHI 0 116.44+ 119.28+ 119.28
ORI 98.88 100.29+ 100.29 100.29 (due)
PBI 90.65 91.88+ 91.88 91.88 (due)
PNNT 0 130.48 130.48 130.48
SNH 0 84.36 84.36 84.36
TCAP 129.72 $129.72 138.00+ 143.52+ (due)
VGR 113.60 $113.60 $113.60 113.60 (due + 5% stock)
Totals: 432.85 766.76 777.88 783.40 (includes still due)

Those amounts with the plus sign are the new amounts after the dividend has been raised. The third quarter for 2012 isn't over yet as this is written, there are still 4 stocks due to pay out their dividends and two at least with a 3rd quarter raise. Triangle Capital has already declared a raise, and Vector Group pays out their raise with an annual 5% stock share in the third quarter in addition to the dividend. By the end of the month, 14 more VGR shares (5% of 284) will appear in the account like Magic. Shazam! Instant dividend reinvestment! But wait, there's more! Why, I do believe the dividend amounts received are increasing each quarter. That means if I were to draw those out as income, I'd be getting a raise every quarter. Way to grow income, Magic Dividend Dogs!

What About The Whole Pack?

Well, let's see how the capital gains part is working. According to the nifty SA portfolio, at the end of the week of 9/7/12, here's where it stands:


Orig Price

Current Price Current Value

$ Chg Since Pur

% Chg Since Pur
OHI 17.56 24.50 6958.00 1970.96 +39.52%
ORI 8.84 9.21 5203.65 209.05 +4.19%
PBI 20.38 13.97 3422.65 -1570.45 -31.45%
PNNT 10.72 10.96 5107.36 111.84 +2.24%
SNH 22.44 22.38 4968.36 -13.32 -2.27%
TCAP 18.11 25.72 7098.72 2100.36 +42.02%
VGR 17.57 17.36 4930.24 -59.64 -1.20%
$37,688.98 $2748.80 7.87%

Stock gains: $2748.80 + Dividends Paid So Far: $2328.05 = Total portfolio gain: $5076.85 = Total Portfolio Value: $40,017.03 = 14.5% Total Return as of 9/8/12.

Mostly up, some down, but not bad for 10 months' worth of easy-peasy care and feeding for a bunch of Dogs! Of course, the market is up quite a bit as this is written, so the stock values are mostly up, and might be up or down depending on the day. Some Dogs just run harder than others on any given day. But those dividend puppies are warm and fuzzy dollars in the brokerage account, and aren't subject to Mr. Market's bipolar whims.

Now, what to do with those dividends? Yes, more Adventures in Investing! On to Part 3 - Care & Feeding of The DGI Lite Dogs

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, PBI, PNNT, 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.