We Just Put $1,000 Into This Stock For The Income Builder Portfolio

Every investor cheers for the market to go up, up, up, right?

Well, here’s one wacky fact about those of us who buy stocks regularly: We often root for prices to go down!

Meme from Arts Health Network Canada

As an example, take what I am doing with DTA’s Income Builder Portfolio.

Every month, the fine folks at Daily Trade Alert make $2,000 available; I divide it to make two buys, two weeks apart.

The idea is to simulate the way a new Dividend Growth Investing practitioner might allocate the money coming into his 401(k) account or her Roth IRA.

Last week, I committed to purchase Dominion Energy (D) for the IBP on Tuesday, March 27.

So in the interim, I actually was hoping the price of the regulated electric utility would go down.

Instead, D went up, doggone it … but I still managed to get it only about 3% above its 52-week low.

I executed the Dominion market order for 15 shares at $69.49 apiece. Including the $4.95 brokerage commission, the total paid was $1,047.30. (Because we spent about $932 on this month’s previous buy, fellow utility NextEra Energy (NEE), we were able to go a little over $1K for the D purchase.)

Dividend Doings

A reliable dividend ranks high on any list of reasons to buy utilities, and Dominion does not disappoint. It has paid dividends without interruption or reduction for decades, and it currently has a 15-year streak of growing its payout annually.

Dominion also is yielding 4.8%, near its high mark since the Great Recession ended.

The company raised its quarterly dividend twice in 2017 — for a total increase of 10.6% — to $0.835 per share. So come June 20, D will pay the IBP $12.53.

As mandated by the portfolio’s Business Plan, all dividends get reinvested right back into the companies from whence they come – a no-cost process informally called “dripping.” After buying Dominion, I instructed the brokerage to “turn on the drip.”

If in mid-June Dominion is still trading at the price we paid, the $12.53 dividend will buy 0.18 new shares. Three months later, the Income Builder Portfolio would get divvies based upon the new share total of 15.18 – making the September payment $12.68. In turn, that will buy another fraction of a share.

It gets better: The company expects to grow its dividend by 10% in 2019 and again in 2020, so some serious income building will be taking place.

Hence the name of our portfolio!

Valuation Station

One reason Dominion’s price went down last week was that three analysts downgraded it from Buy to Neutral.

Nevertheless, all three still have targets for D quite a bit higher than the price we paid: Bank of America Merrill Lynch, $72; JPMorgan, $74; UBS, $77.

Morningstar has been bullish about Dominion for some time. Their analysts consider it a 4-star buy due to a 16.8 forward P/E (red circle) and a “Fair Value Estimate” of $84 (blue circle).

While CFRA assigns Dominion a “fair value calculation” of $67.65, their 12-month target price is $79 – 14% higher than the price we paid.

Value Line’s Relative P/E (red circle) for Dominion is well under 1.00, meaning the company’s P/E ratio is lower than the average of the 1,700 stocks VL analyzes. Additionally, they forecast price appreciation of 20% to 65% (blue circle) over the next 3-5 years.

(It would be nice if the folks at VL would realize that the company hasn’t been called Dominion Resources for quite some time, though!)

On the FAST Graph illustration below, the end of the black price line has intersected with the blue Normal P/E ratio line, indicating that Dominion is trading at fair value. The red-circled “blended P/E” numbers also show that.

Wrapping Things Up

Had Mr. Market listened to my cheers for Dominion’s price to go down, we would have gotten a better deal.

Still, we’re happy the Income Builder Portfolio was able to add such a high-quality, dividend-growing utility at an attractive value point.

Three months in, the IBP owns six companies: Dominion, NextEra, Pepsi (PEP), Altria (MO), 3M (MMM) and Amgen (AMGN). My next article, in early April, will offer a quarterly update of where everything stands.

— Mike Nadel

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