Earlier this month, Daily Trade Alert added my Dividend Growth Portfolio (DGP) to its permanent features. You can find the portfolio under the “Dividend Growth Investing” tab at the top of every page. Simultaneously when the feature was introduced, I wrote an article to describe the portfolio and tell you about its history: “The 17 Stocks I Own in My Real-Money Dividend Growth Portfolio.”
The purpose of this article is to tell you what has happened with the DGP during 2014 so far. From now on, I will write articles whenever I make a significant change to the portfolio, as when I buy or sell something. The idea is that, through these articles, you can gain some insight into what it is like actually to be a dividend growth investor and to manage this kind of portfolio.
My central goal with the DGP is to build a stream of reliable growing income. Here is how I state my objective in the Constitution that I created to guide the portfolio:
The goal of my Dividend Growth Portfolio is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies. The numerical target is for the portfolio to deliver 10 percent yield on cost within 10 years of inception [that is, by 2018]. I am more interested in the ability of this portfolio to produce income than its sheer size.
Every decision that I make regarding the DGP is to try to achieve that objective.
At the beginning of 2014, one of the stocks in the DGP was Intel (INTC). This created a problem: Intel froze its dividend last August. I want stocks that grow their dividends, not freeze them.
Here is how you know that a company has frozen its dividend: In the USA, most dividend-paying companies pay quarterly, and they increase their payments once each year, usually around the same time as the year before. That’s what I expected Intel to do, otherwise I would not have bought it.
The problem was that this was the fifth consecutive quarter that Intel would be paying the same dividend. Thus it was frozen.
I like Intel as a company, but by freezing its dividend, it disqualified itself from being a stock for this portfolio.
I gave it a while – six months – to announce a dividend increase.
But when it announced in January that its February payment would stay the same for the seventh consecutive quarter, I decided to let it go. (Intel has since announced another quarterly dividend, and it will still remain the same.)
So on January 29, I sold all of my Intel – about $4000 worth. I had a tiny profit on the sale.
The question became, what to do with the money? My approach is to generally remain fully invested. That is, I do not hold large amounts of cash. Reasonable minds can differ, but my thinking is that I want to get into every company’s dividend program as soon as I can. The requirements are (1) that it be a very good dividend growth company and (2) that it be fairly valued or undervalued at the time I have money to spend.
I decided to split the proceeds from the sale of Intel between two stocks: Coca-Cola (KO) and Philip Morris (PM).
I wrote about the KO purchase in this article: “A Top Dividend Growth Stock for 2014.” I won’t repeat all of that information here. Suffice it to say that KO is a classic dividend growth stock, and I was happy to be able to bring it in as a new position in my portfolio. I got it at a decent valuation and attractive yield of 3.2%. I bought it prior to its new increased payment rate in March, which was a 9% increase from last year. KO is the kind of stock that I may own for the rest of my life.
The PM purchase, on the other hand, increased a position I already started last year. I bought about $2000 worth (25 shares), which tripled my ownership of the stock. It currently yields about 4.6%, and it will probably increase its dividend in September on its usual schedule. Last year’s increase was 11%. I’ll be happy with anything in the range of 7-8% this year. PM’s 3-year DGR (dividend growth rate) stands right now at 14%, but that has been slowing down, and I don’t expect them to maintain that sort of pace.
I would still consider PM to be a viable candidate today. Not much has changed since I bought it at the end of January. It is still decently valued. Morningstar has it at 4 Stars (meaning undervalued), and FASTGraphs suggests that it is fairly valued. Its 4.6% yield is really attractive.
In my Dividend Growth Portfolio, I reinvest dividends. I do not “drip” them (see Lesson 10, Part Two on automatic reinvestment), but rather I let them accumulate in my account and then select a single stock to invest them in all at once (see Lesson 10, Part One on selective reinvestments).
The amount that I let dividends accumulate to in this small portfolio is $1000. At the current rate that they are coming in, that will give me three opportunities in 2014 to go shopping, which I just love to do.
My first chance was in January of this year. I took my $1000 and started a new position in Microsoft (MSFT). I bought 27 shares at $36.81 per share. The stock has since appreciated almost 8% to about $40 per share.
More important to me is its dividend outlook. When I bought it, MSFT was yielding about 3%. With the recent price increase, its current yield has dropped to about 2.8%. That does not impact me, because my yield on cost (see Lesson 6) is still the 3% that I received when I bought it. That is locked in.
The yield will go up later this year. MSFT typically raises its dividend in November. Last year’s increase was 17%. That is a hard pace for a company to maintain. I expect something closer to 10% this year.
My Dividend Growth Portfolio account currently has $718 in cash. That’s how much I have accumulated since I bought Microsoft. In a couple of months, the total will be up to $1000 again, and I will go shopping again. When I do, I will write and tell you about the stock I select and why I bought it.
Dividend Payment Schedule
I created the table below to show you what my dividend payment schedule is and when my stocks typically increase their dividends. Even in a smallish portfolio such as the DGP, there are many payments made each year, and hopefully at least one increase per stock. That is one of the great pleasures of dividend growth investing: Getting all that income flowing into your account
I expect every one of these stocks to increase its dividend at least once per year. That’s why I kicked Intel out of the porfolio, because it failed to increase its dividend on time last year. The nerve!
It happens. As you can see below, Darden Restaurants (DRI) has frozen its dividend as of its upcoming payment in April. I will have to investigate that situation and figure out what to do.
As you can see, the portfolio contains a variety of payment schedules, increase dates, and increase rates. I pay no attention to payment schedules in selecting stocks. For example, I make no effort to have a payment every month. I am always looking for the best addition to the portfolio; I can cope with different payment schedules.
Author of Top 40 Dividend Growth Stocks