In my Dividend Growth Portfolio, I collect dividends as they come in and reinvest them when they accumulate to $1,000.
That trigger point was unexpectedly reached on November 2. I had thought that I would not make my next reinvestment until I got home from vacation in December.
The reason I moved up the investment is that HCP (HCP), a healthcare REIT that I own, completed its spinoff of Quality Care Properties (QCP) on November 1, and the new shares hit my portfolio just after I wrote the portfolio update for this month.
I sold the shares and realized about $100 from the sale.
About $111 of dividends from AT&T also hit my account on the same day, so suddenly I had more than $1,000 cash.
So rather than wait until December, I was able to make my 4th dividend reinvestment of the year right away.
My first inclination was to buy more of Southern (SO), a utility that I added to the portfolio in May. But a quick check revealed that Southern has become overvalued since I purchased it. I usually avoid buying any overvalued stock. (See DGI Lesson 11 on Valuation for a complete discussion of how I value stocks.)
So I moved to my next choice, Cisco (CSCO), which is another company that I added to the portfolio in 2016 via dividend reinvestments.
Cisco designs, manufactures, and sells networking products and services for the communications and information technology industry. Its products include electronic switches, storage solutions, workstations, routers, video devices and software, and data center products, along with technical support services.
Nothing has changed my positive appraisal of the company since June.
• Its current yield of 3.4% is far above its 5-year average yield of 2.4%.
• Its dividend safety is rated 96/100 by Simply Safe Dividends and “A” by Safety Net Pro. (See DGI Lesson 17 on Dividend Safety.)
• Cisco increased its dividend 24% earlier this year and has a 3-year DGR (dividend growth rate) of 32% per year. These are not sustainable numbers, but they do suggest that Cisco has a strong commitment to its dividend. It has increased its dividend for 6 straight years after initiating it in 2011.
• I expect Cisco’s next increase will be announced in February, payable in April, 2017.
• Analysts project 9% earnings growth rate over the next 3-5 years.
• Cisco is favorably valued:
Impact on my dividend income
I purchased 32 shares of Cisco, bringing my total position to 92 shares.
At its dividend rate of $0.26 per share per quarter, or $1.04 per year, that works out to about $33 more per year in dividends that will be flowing into my portfolio as a result of this purchase.
However, that is offset by an HCP dividend cut related to the spinoff of QCP. On November 1, HCP announced that its next dividend (payable in November) will be $0.37 per share compared to its previous rate of $0.575 per share. That represents a decrease of 36%.
Whether or not that is an actual “cut” will depend on a final reckoning of the proportion of assets that were spun off. HCP’s Dividend Champion status may be in jeopardy if it turns out to be a real cut.
In my portfolio, I hold 39 shares of the slimmed-down HCP. At its former payout rate, it was sending me $2.30 per share annually, for a total of $89.70. At the new rate, it will send me $1.48 per share annually, for a total of $57.72.
The difference is about $32 per year. So with the new purchase of Cisco (+$33), the net impact on my annual dividend income is almost zero.
However, it is effectively a “loss” of probable income for me, since I could have purchased a similar number of Cisco shares in December anyway. So I lost the opportunity to increase my annual income by about $30 per year as a result of the spinoff.
Hopefully, Cisco will announce another hefty increase in February, making up some of the difference. And HCP may resume its longstanding practice of increasing dividends annually. Its streak stands at 31 years, and its past increases have been payable in February each year.
When I update my Dividend Growth Portfolio in December, it will reflect the larger position in Cisco plus new estimates for the income expected in 2016.
— Dave Van Knapp