What Is the Dividend Growth Portfolio?
My Dividend Growth Portfolio (DGP) is a real portfolio with real money invested in it. The portfolio is at E-Trade.
The idea behind the DGP is to illustrate actual investing for an income goal. It’s maintained in real time based on information available when decisions are made to buy, sell, or reinvest dividends.
My hope is that the DGP presents educational situations and examples that other investors may relate to and benefit from thinking about.
The DGP’s starting value was $46,783 in 2008. No new money has been added since inception.
That simplifies the calculation of returns.
Original Objective: 10-by-10
I have often expressed the DGP’s numerical goal as to deliver income that would rise to 10% yield on cost (YOC) within 10 years of inception. I call that goal “10-by-10.”
The 10-by-10 target translates easily to dollars. Since the DGP’s initial value was $46,783, the 10-by-10 goal stated in dollars is to have the portfolio generating $4678 per year by June 1, 2018. That’s 10% of the starting amount, coming in annually in income, 10 years after the portfolio began.
Note that this objective is an income goal, not a wealth goal. The portfolio’s primary purpose is to build a reliable, growing income stream rather than simply become as large as possible.
That income-wealth distinction is important, because it:
• Leads to a smoother ride. Dividends rarely go down, whereas prices go up and down all the time.
• Aligns with the idea of eventually using the income to fund retirement.
• Influences the securities that I select. Obviously, I look for stocks of excellent companies with good dividend track records.
• Impacts how the portfolio is managed.
Ten years will be up in June. It is now apparent that I will fall short of the 10-by-10 objective in 2018. The 10% YOC target will be hit later than that.
I could “game” the outcome by purchasing a bunch of high-yield securities in May. But I will not do that. The portfolio is part of my wife’s and my retirement funding plan, so I won’t mess with its essential character in order to score a short-term win.
The portfolio has a secondary goal, which is to be competitive with the S&P 500 in total returns. That goal has been achieved throughout its life.
We won’t stop in June. In cooperation with Daily Trade Alert, I have decided to keep the DGP going beyond its original 10-year plan. For that reason, I will be revising the portfolio’s objectives and keep it going as a teaching and learning tool. More about that later.
The DGP has 22 positions. Here they are as of the end of 2017.
What Happened in 2017?
Here is a big-picture summary of what happened last year (2017).
• The portfolio received $3613 in dividends, an increase of 7.4% over 2016 and a new annual high.
• The year-end YOC hit 8.2%, a new all-time high.
• At the end of the year, the portfolio’s current yield was 3.5%, down from 3.8% at the beginning of the year. That’s because capital growth outstripped the rate of dividend increases in 2017.
• I reinvested dividends 4 times, using the reinvestments to start 2 new positions and add to 2 others.
• I trimmed one position (McDonald’s) and used the proceeds to start 1 position and add to another.
• The portfolio began 2017 with 19 stock positions and ended it with 22.
2017 Income Performance
Last year’s income growth was decent at 7.4%. It would have been even better at 8.8%, but one company’s dividend payment date slipped out of 2017 into January, 2018. That reduced the dividends received in 2017, but it will increase them in 2018.
The portfolio received 82 dividend payments in 2017. The following chart shows the dollar amounts of dividends received since inception.
The parade of increasing green bars illustrates how dividend income can increase each year by using the dividend growth strategy.
The dividends that you get from a DG portfolio rise for three reasons. All three of these reasons were illustrated in 2017 in the DGP.
• First, dividend growth companies increase their dividends annually (some more than once per year). Stocks in the DGP increased their dividends 25 times in 2017.
• Second, if the dividends are reinvested, those dollars buy more shares. More shares = more income, because dividends are declared per share. In the DGP, dividends were reinvested 4 times in 2017, buying more shares each time that added to the dividends collected in 2017 and into the future.
• Third, occasional swaps sometimes bump up the income rate. I trimmed McDonald’s in November and purchased 2 other stocks with the proceeds. Those 2 stocks were paying dividends at higher yield rates than McDonald’s, so the rate of dividend generation went up.
The portfolio’s current yield is about 3.5%, compared to about 3.8% at the end of 2016. That does not mean that income production went down. As we have already seen, income increased 7.4% in 2017.
Instead, the drop in current yield happened because the price of the stocks went up faster than the dividends increased.
Yield is a ratio: Dividends / Price. If a stock’s or portfolio’s price goes up faster than its dividends, the yield ratio will decrease even though the dividends are going up.
2017 Dividend Reinvestments
Unlike many dividend growth investors, I do not drip dividends. Instead, I let them accumulate to $1000 and then select a stock to invest in. My reason for doing that is to always invest in well-valued stocks. It also helps me add new positions to the portfolio, whereas dripping simply builds positions already in the portfolio.
Each dividend is small, so sometimes it is easy to overlook the significant impact that reinvesting has. So far in this portfolio, more than $24,000 has been reinvested. That’s more than half of the original starting amount. I don’t want any of those dollars to go into overvalued stocks if I can help it.
I made 4 reinvestments in 2017:
• February: Bought Qualcomm as a new position (see article).
• May: Added more Qualcomm (see article).
• August: Bought Lowe’s as a new position. (see article).
• December: Added more Cisco (see article).
2017 Transactions and Turnover
Dividend growth investing is a strategy of collecting stocks, without much trading or turnover. Through this long-term process of collecting dividend raisers, your income rises as described earlier, and total return generally bounces along like a dog on a leash.
Occasionally, I do sell stocks. In 2017, I made one sale. Here’s the complete record of buys and sells in 2017.
I sold McDonald’s in November, because it had become an oversize position. The sale took it back from more than 12% of the portfolio to about 9%. Keeping individual positions size-controlled is a risk management technique that is written into the DGP’s business plan.
The single sale means there was turnover of only 3% in 2016. As I said, dividend growth investing is a low-churn strategy.
2017 Total Return Performance
While total return is not a primary focus of this portfolio, I do track it and compare it to SPY, an ETF that tracks the S&P 500.
In 2017, my portfolio increased 18% in total value, while SPY increased 21% with dividends reinvested (source).
Over the life of the portfolio, the DGP’s total return is +137% compared to SPY’s +133%, both with dividends reinvested.
If I had invested the original amount ($46,783) into SPY at the end of May, 2008 and reinvested its dividends since then, its total value would now be $109,004. My portfolio’s actual value is $110,946.
That competitive performance is gratifying, because the DGP holds many “defensive” stocks. Nevertheless, it has kept up with SPY throughout the bull market now approaching its 9th anniversary.
The DGP’s current yield is 3.5% compared to SPY’s 1.8% (source). That 2-to-1 relationship has remained pretty consistent for the life of the portfolio.
Looking Ahead to 2018
The DGP 10-year portfolio experiment was originally scheduled to end on June 1 of this year.
But it has turned out to be a very interesting and instructive enterprise. Therefore, in cooperation with Daily Trade Alert, we have decided to keep it going for a few more years.
Sometime between now and June 1, I will rewrite the goal statement and adjust the business plan to reflect the DGP’s continuation beyond June 1. I am toying with the idea of making the goal a little “growthier” than it is now. In any event, the fundamental way that the portfolio is managed will remain the same.
I won’t hit the original 10-by-10 goal in June. The portfolio’s current YOC is 8.2%. A reasonable estimate for June would be an 8.5% YOC. So the outcome of the original 10-year project will be around 8.5-by-10 instead of 10-by-10.
I don’t make predictions about what the market or prices will do. Here’s why.
The above shows USA Today’s predictions for the NFL season that just ended. Let’s see:
• They predicted the Cowboys would win the NFC East. The Cowboys didn’t even make the playoffs. Neither did the Giants, who were predicted to get a wild card spot.
• They predicted the Bills would win 4 games and miss the playoffs. Instead, the Bills won 9 games and are in the playoffs.
• They predicted the Packers would win the NFC North. The Packers missed the playoffs. So did the Seahawks, who were predicted to win the NFC West.
• Out of 8 Divisions, they predicted only 2 winners correctly. Out of 12 playoff teams, they predicted only 4 correctly.
Predicting is hard. So I try to confine my prognostications to things I have a lot of confidence in.
I won’t even try predict what the DGP will be worth at the end of 2018. But I do expect to make 4 dividend reinvestments. I will update the business plan. And I may do a little trimming of oversized positions.
As to the rest, we’ll find out together as the year unfolds.
Thanks for reading. Please continue to follow the DGP’s progress. It is updated each month here. I’ll write an article every time I buy or sell anything; you’ll see those articles in the daily newsletter. And finally, I’ll let you know when I update the business plan.
Have a safe, happy, and healthy 2018!
— Dave Van Knapp[ad#IPM-article]