On February 15, I received dividends from 5 companies all at once into my Dividend Growth Portfolio. The money pushed my accumulated dividends over my $1000 trigger for reinvesting dividends.
With the money, I decided to add a new stock, Qualcomm (QCOM), to the fold.
I have analyzed QCOM three times over the past seven months.
Last July, it was my Dividend Growth Stock of the Month, and I liked it a lot.
Then in December, it passed all of my screens to become part of the Dividend Growth “ETF” that I created at Motif Investing.
Finally, earlier this month, I updated QCOM’s valuation, finding that it was significantly undervalued.
I have been wanting to add another stock to my Dividend Growth Portfolio.
Under its business plan, the target number of positions is 20-25, while the actual number of positions has been 19 for quite a while. The target number of positions is based on the degree of diversification that I want. So I have room for a few new stocks.
I did a quick check to be sure that no significant fundamental problems with Qualcomm’s business had popped up since my analysis last July. Qualcomm does face a general headwind in that mobile makers are attempting, through regulatory changes and lawsuits, to reduce the royalties that they pay for Qualcomm’s intellectual property. Royalties account for about 32% of revenue.
In response, Qualcomm is challenging the regulatory changes and lawsuits, and it has also instituted a significant cost-cutting program. My assessment is that, while nobody knows the future, Qualcomm’s business will continue to prosper with the global growth of mobile devices.
Here are the details of the purchase.Let’s walk through the data in the table so you can see how this works, and the impact it has on my portfolio.
1. Shares purchased. I had more than enough money to buy 18 shares. In fact, because so many dividends from other companies came in on the same date, I have about $171 left over. That money remains in cash in the account. It gives me a head start on the next accumulation cycle. The next $1000 “batch” should be reached in about 3 months.
As stated earlier, Qualcomm is a new stock for this portfolio, and it brings the total number of positions to 20. In the monthly report for the portfolio, next month’s report will show the new Qualcomm position. The stock will only occupy around 1% of the total portfolio. But that’s how the portfolio grows over time. Who knows, some day Qualcomm may become a major position in the portfolio.
2. Price per share. I entered a market order and it was filled at $56.68 per share. When I wrote the recent valuation article on Qualcomm, its price was $55.48 per share. So I got a little unlucky (I paid almost $1.20 per share more), but it was still significantly undervalued.
3. Total cost. I spent a little over the $1000 threshold, which I was able to do because the money available was almost $200 extra. That was the result of receiving 5 dividends all at once ($350 worth) on February 15.
I will simply keep the unused cash in the dividend kitty. It gives me a head start on the next accumulation cycle to $1000.
4. Quarterly dividend rate per share. Qualcomm’s payment is currently $0.53 per share per quarter. They last raised the payment in June, 2016, so I anticipate that they will raise it again this coming June.
Last year’s increase was about 10%. I’d be happy if they raise it by a similar amount this year. Qualcomm’s 5-year dividend growth rate (DGR) is almost 20%, but I do not expect them to maintain that torrid pace.
5. Annual dividend rate per share. The annual rate is simply the quarterly rate x 4. In this case that is $0.53 x 4 = $2.12 per year.
Obviously, this calculation assumes that Qualcomm will continue paying on its usual quarterly schedule and that it won’t cut the dividend. Hopefully, as stated above, they will raise it next quarter.
6. Yield. Current yield (also called indicated yield) is figured by annualizing one quarter’s payment and dividing it by the current share price. We saw that the $0.53 per quarter per share annualizes to $2.12 per year. Divide by the $56.68 that I paid per share, and you get 0.037, or 3.7%.
7. Next ex-dividend date. The ex-date is the date by which you must own the stock in order to receive the next dividend, even though the dividend was declared earlier. By buying on February 16 with the ex-div date of February 27, I qualify to receive the next dividend when they pay it in March. The dividend had already been declared in January, so all these dates were known well in advance.
8. Next dividend payment date. The payment date was established in the January dividend declaration. The dividend should be credited to my account on January 22 or 23. (Sometimes E-Trade credits dividends overnight.)
9. Next quarterly dividend amount. The amount that I will receive in March is $0.53 per share times the 18 shares that I own, or $9.54.
10. Indicated annual dividend. This is the total I would expect to receive in a year if Qualcomm were to maintain its dividend rate and payment schedule. So $9.54 per quarter x 4 quarters = $38.16 per year. By making this purchase, I have added that amount to my annual income stream.
In fact, since I expect Qualcomm to increase its dividend next quarter, my expectation is that I have actually added more than that. But until the increase is announced, we use the known figures.
11. Subsequent payment schedule. Qualcomm has been increasing its dividend for 14 years in a row, and its payment schedule is well established. There is no reason to anticipate a change.
12. Next dividend increase. Qualcomm’s increases have generally come with the second payment each year, which should happen with the June payment. Last year, they declared the increase in Aril, payable in June.
Furthering the Goals of the Portfolio
The purchase of Qualcomm fits nicely with the objectives of my Dividend Growth Portfolio. The main goal is to generate an increasing stream of income. Increases come from two sources: (1) Companies increase their dividends; and (2) I reinvest the dividends to buy more shares, which generate their own dividends. It is a self-reinforcing cycle, like a snowball rolling down a hill, picking up more snow and getting bigger as it rolls.
The purchase of Qualcomm is an example of the second source (reinvestment) in action. I added $38.16 to my annual dividend stream by purchasing shares with dividends that I had already received from other holdings. If Qualcomm increases its dividend in June, as expected, it will also become an example of the first source (dividend increases).
Please note that the income from the portfolio has increased without my adding new outside money to the account. Rather, the income increase is the result of reinvesting dividends that have been accumulating in the account from stocks already owned.
Making money on money already made is the definition of compounding. Check out Dividend Growth Investing, Lesson 4: The Power of Compounding and Lesson 5: The Power of Reinvesting Dividends.
$38.16 per year may not sound like much, but this is how compounding works. You start with small amounts, keep reinvesting them, and over time they grow to large amounts.
I have now gotten this process started with Qualcomm by purchasing shares with dividends that I received from other companies. Without those accumulated dividends, I could not have started this position at all unless I sold something else to raise cash. Here, I did not have to sell anything. The money for the purchase was generated organically by the portfolio itself.
And even if I never buy another share of Qualcomm, compounding will continue as the company pays and raises its dividends, which I will use to buy whatever I want.
As always, do not take what I do as a recommendation for yourself. Always conduct your own due diligence before buying anything.
— Dave Van Knapp