In February, I opened a new position in my Dividend Growth Portfolio when I purchased 18 shares of Qualcomm (QCOM). It became the 20th position in the portfolio.[ad#Google Adsense 336×280-IA]I collect dividends, and when they reach $1000 in cash, I reinvest them into a hand-chosen stock.
It could be a new stock for the portfolio, or it could be an addition.
Earlier this week, the accumulating dividends surpassed the $1000 mark.
After considering several candidates, I decided to add to the QCOM position.
That will increase it to about 2% of the portfolio.
Here is how E-Trade displayed the execution of the order.
The total cost came to $1008.11 including commission. After the purchase, there is about $61 in cash left in the portfolio. That stays put and becomes the start of the next accumulation to $1000, which should occur in August.
Here is the tale of the tape for the 2 purchases:
This table illustrates a lot of things about dividend growth investing, and I want to highlight some of them.
Reinvestment of dividends. The $1000 was accumulated from all the stocks in the portfolio. By using those dividends from other companies, I was able to double my stake in Qualcomm in just 3 months.
Price variability. The price of Qualcomm actually went down from my first purchase in February until my second purchase this week. Some might consider that a bad sign or even alarming, but in my case it meant an easier path toward my main goal, which is increasing the portfolio’s dividend stream over the long term. I was able to double the number of shares and more than double my income from QCOM.
Yield variability. Stocks’ yields vary constantly. Yield is calculated as 1 Year’s Dividend / Price. Since Qualcomm’s price declined slightly since February, and they raised the dividend in the meantime, QCOM’s yield rose from 3.7% in February to 4.1% now.
Income streams increase 2 ways. Not only did my income stream go up because I now own more shares, but also because Qualcomm increased its dividend since February. The increase was from $0.53 per share per quarter to $0.57 per share per quarter. That’s a 7.5% increase. That makes 15 years in a row that QCOM has increased its dividend.
Total income more than doubled. Three combined effects – (1) QCOM’s price declining slightly + (2) buying more shares through reinvesting dividends from other companies + (3) QCOM raising its dividend – resulted in more than a doubling of income from Qualcomm: From $38.16 per year to $82.08 per year from this single position in the portfolio.
The significance of the ex-dividend date. The ex-dividend date is the date by which you must have purchased a stock in order to receive its upcoming dividend. QCOM’s next ex-dividend date is May 26, so my purchase easily qualifies. I will receive the next dividend when it is paid in June.
The Choice of Qualcomm
I have analyzed QCOM 4 times over the past 10 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.
In February, I updated QCOM’s valuation, finding that it was significantly undervalued. And earlier this month, I updated QCOM’s quality, business viability, and valuation again in anticipation of my upcoming reinvestment this month. Again I found it to be significantly undervalued.
Qualcomm does face a general headwind in that mobile device 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 QCOM’s revenue.
In response, Qualcomm is challenging the regulatory changes and lawsuits, and it has also instituted a significant cost-cutting program. My assessment is the same as it was in February: While nobody knows the future, Qualcomm’s business should continue to prosper with the global growth of mobile devices.
Furthering the Goals of the Portfolio
In the next monthly report for the Dividend Growth Portfolio, the new larger Qualcomm position will be displayed. The stock will jump up to about a 2% position from not existing at the beginning of the year. That’s how you grow a dividend growth portfolio.
When I first bough QCOM in February, I said, “Who knows, some day Qualcomm may become a major position in the portfolio.” This purchase doubles the size of the position.[ad#Google Adsense 336×280-IA]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 both sources in action.
I added $41.04 to my annual dividend stream by purchasing shares with dividends that I had already received from other holdings, and the company increased its dividend to boot.
Please note that the portfolio’s income 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.
The increase of $41.04 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. Right off the bat, it increases the portfolio’s annual dividend stream by about 1%.
If you do something like that 4 times per year, you’re getting an annual income increase without adding any new money to the portfolio. The purchases are made with dividends that you received from other companies. Without those accumulated dividends, you could not make new purchases at all unless you injected new money or sold something to raise cash. Here, the money for the purchase was generated organically by the portfolio itself.
As always, do not take what I do as a recommendation for yourself. Always conduct your own due diligence before buying anything. Specifically, nothing in this article should be taken as a recommendation about Qualcomm.
— Dave Van Knapp[ad#agora]