My Dividend Growth Portfolio (DGP) is a public, real-money, real-time portfolio. I launched it more than 7 years ago to demonstrate dividend growth investing. It resides in an account at E-Trade.
Any time that you want to see it, you can click on the Dividend Growth Investing link at the top of any page on Daily Trade Alert. Run your cursor down to “Dave Van Knapp’s Dividend Growth Portfolio” to see the most recent update.
What Is the Goal?
The DGP’s primary goal is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies.
I have a specific numerical target: By the time of its 10-year anniversary in 2018, I want the DGP to be sending me 10% of its original cost every year in dividends.
How is that possible? No stock in the portfolio yields 10%. That doesn’t matter. I will get to the goal by owning companies that raise their dividends every year and reinvesting the dividends to buy more shares.
That is how a portfolio that originally had a yield of, say, 3.5% can, in in 10 years, yield 10% on my original cost. It is a dual-fuel portfolio: rising dividends and reinvesting them.
Here are the numbers that define the goal:
- Portfolio’s inception date: June 1, 2008
- Portfolio’s original cost: $46,783
- 10-year goal: Send me $4,678 per year by June 1, 2018.
That $4,678 is the 10% yield on cost that I want to attain. 10% in 10 years. I call that 10-by-10.
Let’s Talk about Portfolio Reviews
In the title of this article, I say that my Dividend Growth Portfolio already has a yield on cost of more than 7%.
How do I know that? I run the portfolio according to a business plan, and one of my practices is to give the DGP a checkup twice per year. I call these checkups Portfolio Reviews.
They are a formal part of how I manage the portfolio, and I take them seriously. Like a doctor talking to a patient, I ask the DGP some very basic questions:
- How are you doing?
- Are you making progress toward your goal?
- Do we need to make some changes?
My Portfolio Review starts by gathering general information. At the DGP’s review a week ago, here is the important general information that I gathered:
- The portfolio’s value is $80,555, down 1% from the last checkup 6 months ago, but up 72% since the day that I started it.
- Its annual dividend payout rate is $3,325, up 6% from 6 months ago.
- Its yield on cost is the annual rate ($3,325) divided by the original cost of the portfolio ($46,783). That equals 7.1%, which is the yield on cost of the portfolio referred to in the headline.
You recall that the goal of the portfolio is a 10% yield on cost by 10 years. 10% of the original cost is $4,678. I am at $3,325 now. The 10-year goal line is $1,353 away.
Will the DGP make it? I will do my part by reinvesting dividends as well as I can. The rest is up to the companies. They must raise their dividends.
Putting the Stethoscope on Each Stock
In a Portfolio Review, I do not perform a complete clinical investigation like I do when I am considering whether to buy a new stock. A deep clinical review would be like what you see in my Dividend Growth Stock of the Month articles.
Rather, my goal on the Review is to decide whether each one is generally healthy and helping me toward my goal. Each one has to do its part.
To illustrate, here are a few examples of what I found out about some of my holdings.
BHP Billiton (BBL)
This mining, oil, and gas company’s condition has not changed much since the Review 6 months ago.
It continues to be a pain to own. It pays dividends twice per year instead of following the standard American practice of quarterly payments.
And BBL’s price is volatile.
The big news since last time is that BBL froze its dividend.
No increase this year.
It had been on a 12-year streak of increases.
BBL’s price has also been coming down, which I don’t really care about, except if I decide to sell it, the income will be hard to replace.
The price drop has driven its yield up to 6.8%. Not many problem-free dividend growth stocks have yields that high.
Fortunately, BBL is less than 2% of the portfolio, so overall its income is not a high percentage of the total. Nevertheless, over the coming weeks, I will do a deeper clinical analysis of BBL and decide whether I want to keep it.
Because of the oil price crash over the last year, the great oil companies have all been negatively affected. They are pulling in their horns on capital expenses, closing wells, canceling exploration projects, laying off employees, and so on.
Chevron also froze its dividend. No increase this year.
Chevron is on a 27-year streak of increases. Many investors are betting that that Chevron will find a way to increase its dividend before the end of 2016. There have been times in the past that the company has seemingly skipped a dividend increase, then raised it and kept its streak intact. It all really depends on the price of oil, which the company cannot control. Unless something really drastic happens, the stock is a keeper.
I first started buying KO in early 2014, and I purchased more shares as recently as this past May. Each purchase has been made when KO’s yield was above 3%.
I am happy with Coke’s performance so far. Its price is up a little, but more important, it increased its dividend 8.2% in March. That marks the 53rd straight increase. Where were you in 1961? That’s the last year that Coke failed to increase its dividend. KO is a keeper.
I first purchased HAS in 2012. Since then its price has appreciated 95%. Better still, it has increased its dividend every year; its streak is up to 12 years. Its increase this year was 7%. Another keeper.
Alliant Energy (LNT)
LNT is a Midwest utility, serving about 1 million electric plus a half-million gas customers in Iowa and Wisconsin. You don’t hear much about the company, but it has been one of the best performers in my portfolio.
I bought LNT shares twice in 2010. Since then its price is up about 75% if you combine the two purchases. It yields 3.8% currently, and it raised its dividend almost 8% in January. That makes 12 straight years of increases. The decision here is easy: Keep it.
This stock – a long-time dividend growth stalwart – is no longer a no-brainer, but I will most likely keep it.
MCD has had several years of deteriorating performance, caused by everything from dirty stores and complex menus to clueless employees and foreign exchange problems.
In order to sell MCD, I would need to believe that its business model is irretrievably broken, and I do not think that. The company replaced its CEO late last year, and I am inclined to give the new executive team a year or two to turn the ship in the right direction.
The company is on a 39-year streak of increasing dividends. Normally it announces an increase in September, but this year it has delayed its announcement until November while it assesses how some of its new initiatives are working. I do expect a dividend increase, although it may be small. The past two were 5% each.
I looked at each stock in the same way as the examples just given. My conclusion in every case, except BHP Billiton, was to hold onto every stock.
My Portfolio Review leaves me with one specific task: Look deeper into BHP Billiton and decide whether to keep it or trade it in.
I conduct these Reviews each April and October. I recommend at least one per year; some investors prefer quarterly. Whatever the frequency, the goal is always to rise above daily details to get a more strategic and tactical perspective on your portfolio.
By far, the majority of decisions in all of the Portfolio Reviews that I have conducted have been to continue to hold each stock.
Building a long-term stream of increasing income is a low-transaction enterprise. Dividend growth investing is largely a story of buying well researched high-quality companies, with a history and promise of increasing their dividends, collecting them, and then leaving them alone.
Always remember to treat your investing like a business rather than emotionally. Keep fear and greed out of your process – you will make better decisions that way.
– 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.