In my illustrative Dividend Growth Portfolio, I reinvest dividends when they accumulate to $1000. I do not “drip” them. Instead, I let them flow into my account in cash, and then I reinvest them into a stock of my choosing. (For a discussion of the difference between selective reinvestment and dripping, see Dividend Growth Investing Lesson 10, Parts I and II.)
I love to go shopping!
But I try to be a good shopper.
Dividend growth investing is largely about buying and holding high quality companies, so I exercise great care in deciding what to buy.
Whatever I choose is likely to be part of my portfolio for years to come.
In Dividend Growth Investing, Lesson 14: Buying, I outlined the steps that I follow in making purchase decisions. When I buy a company, I want:
• A great dividend record. I want to own companies with a good yield (2.7% or more), a long record of increasing their dividend payout each year, and a consistent record of strong dividend growth rates.
• High quality. I want companies with great business models, excellent economics, and sustainable competitive advantages. So I look for companies that have not only proven themselves over time, but also look like they will be able to continue to flourish.
• Good valuation. I want stocks that I can buy at favorable prices or at most fair value. I never want to pay more than fair value.
So earlier this month, with my $1000 to invest, I went through the drills. What I decided to buy is Coca-Cola (KO). Here is what my KO holdings look like now, after this most recent purchase:
As you can see, I first bought Coke shares in January, 2014. Since then I have added more shares twice, most recently on May 11, using the $1000 in dividends that I wanted to reinvest.
In a little over a year, I have gone from owning no Coca-Cola at all to where it now comprises about 5.5% of my portfolio.
There is no need here to go into great detail about Coca-Cola the company. I just did that a couple of months ago, in Dividend Growth Stock of the Month for April, 2015: Coca-Cola (KO). I said at the end of that article that I would strongly consider buying more Coke when I had dividends to reinvest. Now I have done just that.
One interesting thing to consider is why have I been adding Coke shares over the past 16 months, considering that I had not purchased shares in the 6 previous years of the portfolio’s existence? After all, KO is a classic dividend growth company. Many investors starting a dividend growth portfolio would make KO one of the first 5-10 stocks that they would buy.
The answer is valuation and yield. For most of my portfolio’s life, Coke has been too expensive. Because it was too expensive, its yield was too low. Here is KO’s yield history for the past 10 years.
As you can see, when I bought shares in January and April, 2014, I was able to get KO at yields right around 3%. That turns out to be a key number for this company: Its yield rarely creeps above 3%. Whenever it does, historically, the market prices the shares upwards, driving the yield back down.
That results from the basic equation for yield: Yield = 12 Months’ Dividends / Price. When price goes up (all else equal), yield goes down in direct proportion.
Since I am focused on income from my stocks, I want to “buy as much income” as I can when I spend my investment dollars.
You might ask why I did not buy KO when its yield spiked at the beginning of 2010. Fair question.
The answer is that in early 2010, I had an even better opportunity: Alliant Energy (LNT).
Alliant’s yield was over 4.5% in early 2010, much higher than Coke’s yield. So I bought LNT instead.
I still own those shares of LNT, and they have performed spectacularly. Besides the higher yield ever since, those shares have increased 91% in price. So I have no regrets about my decision to buy LNT in 2010.
I made another purchase of Alliant in August, 2010, and as a result, LNT comprises about 8% of my portfolio. Since my maximum target position size is 10%, I really have no room to add more LNT.
Meanwhile, as you can see, KO’s yield has significantly closed the gap over the past 5 years. KO is probably a higher-quality company than LNT, so starting to accumulate Coke shares in 2014 at a yield of 3%+, and adding to the position with this most recent purchase, have been relatively easy decisions.
Coca-Cola has already increased its dividend for 2015, with an 8% raise in March. By making this purchase, I have added about $32 to my income stream over the next 12 months.
I know that does not sound like much, but now I look forward to consistent annual raises, starting from a decent yield of 3.2%, that will likely exceed inflation for many years to come. Dividend growth investing is a long-term enterprise, and that is why a purchase like this makes sense.
Here is Coke’s history of raising its dividend. I see no reason why this will not continue.
1. Dividend growth investors think long-term. A purchase that might not make sense under another strategy (such as momentum investing) may make worlds’ of sense for a dividend growth investor.
2. Keep your eye on dividends and dividend growth. Those are your main goals.
3. Wait for stock valuations and yields to come to you. Be willing to wait month or even years to acquire a stock that you want. Sooner or later, prices of even the best companies dip down to where purchase makes sense. Don’t feel like you have to rush things. By waiting, you will get a better yield too.
4. Have a plan and follow it. Here is the Business Plan for my Dividend Growth Portfolio.
– Dave Van Knapp
10%-Plus Yields from Stocks Like Microsoft, General Mills, Pepsi, Etc. [sponsor]
Not only have I been personally making these "10% Trades" with my own money, but I've been encouraging my close friends and family to do the same with theirs. I'll be pulling the trigger on my next "10% Trade" in the coming days. Details here.