I created my public Dividend Growth Portfolio (DGP) to demonstrate the dividend growth strategy. I do not hold it out as a model or “best,” but rather as a real-time demonstration of what any investor can achieve with the DG strategy.
In my opinion, all investing should start with goals. Many times, the goal of total return or maximizing wealth is taken for granted, but you should think about what your goals really are. My goal for the DGP is not to maximize wealth, but rather to optimize income.
The main goal of the DGP is to generate reliable growing dividends.
The dividend stream has increased each year since the Portfolio was created.
Annual income has more than doubled since 2008.
The dividends that I received in 2013 were up 18% over 2012, and the DGP generates twice as much cash as an investment in the S&P 500.
The Dividend Growth Portfolio is a real portfolio with real money.
Its inception date was June 1, 2008, and it has been run in real time ever since. It is not a hypothetical or “cherry-picked” portfolio selected with 20-20 hindsight. It resides at E*Trade.
The DGP is not a huge portfolio, but it is large enough to demonstrate basic dividend growth investing. At inception, its size was $46,783. Its size today (as of the end of February 2014) is $70,974. No new money has been added since creation. The DGP’s growth has come entirely from increases in stock prices, the collection and reinvestment of dividends, and occasional trades in special situations.
I stated above that my goal for the DGP is to optimize income. What does that mean?
Investment goals are personal, despite the advice industry’s blanket assumption that everyone simply wants to be as rich as possible.
My goal is more finely drawn: When I am using this portfolio to live off in retirement, I want it to generate enough income – combined with my other sources of income – that I don’t need to sell a single share of anything. Other ways to look at this goal would be to say that it is about income replacement or expense coverage in retirement.
Part of income optimization is protection from inflation. Because I expect expenses to go up from inflation, I want the income from this portfolio to go up faster than inflation.
Another part of optimization is sufficiency. As you know, it is easy to find low-yielding investments today. But a 1% or 2% return on your money – even if it is absolutely free of risk – is simply not enough for most people.
What I shoot for is approximately 4% current yield with a long-range goal: I want the portfolio to achieve a 10% yield on cost within 10 years.
As discussed in Lesson 6, yield on cost means yield based on your original cost. In other words, in the basic equation Yield = 12 Months’ Dividends / Price, instead of using current price, we use the original amount spent. The equation becomes this: Yield on Cost = 12 Months’ Dividends / Original Price.
Yield on cost can be computed for an entire portfolio as well as an individual stock. For my Dividend Growth Portfolio, I never add new money from outside. Therefore I can easily compute the yield on cost of the portfolio by dividing a year’s worth of dividends by the original value of the portfolio. The original value never changes: It was set when the portfolio was established.
So my goal of 10% yield on cost within 10 years becomes this specific target: I want the DGP to be generating dividends at a rate of $4678 annually by June 1, 2018. That means that I want to receive…
- 10% of the original value of the portfolio
- each year
- in cash
- without selling anything
- by 2018.
Please note, this is not a one-time delivery of cash, as you would receive if you sold the shares. This will be an annual delivery of cash without selling a share. I will still own all the shares after I receive the dividends each year. They will generate income again the following year.
I am on target to achieve that goal. Here is a table of the dividends produced each year by the Dividend Growth Portfolio. Years 2008-2013 have already been booked. 2014 and Next 12 Months are projections based on current information.
Look in the last column. The yield on cost rises steadily every year, on its way to my 10% goal in 2018.
I make the projections for 2014 and the next 12 months by using a tool called E-Trade’s Income Estimator. This early in 2014, the estimates are actually low for 2014. That is because the income from the portfolio goes up each year for three reasons.
- Companies increase their dividends. The Estimator accounts for dividend increases as they are announced by each company. Therefore, dividend increases yet to be announced in 2014 are not included in the Estimator’s projections.
- Additional shares to be purchased with reinvested dividends will pay dividends themselves. Until the new shares are purchased, the Estimator does not know about them. I have already made one purchase, and I expect to make two more in 2014 as dividends flow into the account.
- I may make other changes to the portfolio that will affect the dividend stream. Again, the effects of these changes are not known to the Estimator until they are made.
Here in graphical form is the history and current projection for cash dividends from the Dividend Growth Portfolio:
In this chart, I don’t attempt to project dividends beyond 2014. I just join the blue “actual” line with the red “goal” line for years beyond the current year. But the chart tells me something very important: I am on track to achieve my 10 by 10 goal. At no point has the blue line fallen below the red line.
You may be wondering why the lines curve. That is because, in dividend growth investing, dividend returns compound. Compounding was discussed in Lesson 5. One of the key teachings lines in that Lesson was this: Compounding is like a snowball rolling down a hill: The bigger it gets, the faster it gets bigger.
That is what you see in the graph. The bigger the dividend payouts get, the faster they get bigger. That’s why the line curves.
Stocks in the Portfolio
The following table will now be on permanent display on Daily Trade Alert.
I will update this table at the end of every month. You will be able to find it under the Dividend Growth Investing tab at the top of every page or you can access it directly here.
In some months, not much will change. I accumulate dividends until they reach $1000, then I make a purchase. I might buy more of a stock that I already own, or it might be a wholly new stock. Over time, I want the portfolio to contain 20-25 stocks (it has 17 now), but I am relaxed about getting there.
Every stock was, at the time of purchase, in my Top 40 Dividend Growth Stocks eBook. Some of them are not in this year’s edition. I use each year’s edition as my shopping list for the year, but I do not use it as a selling trigger. In a future article, I will explain my selling rules for the portfolio.
This is mainly a buy-and-hold portfolio. There are only a few transactions every year. I made none in February. I have made only about 30 transactions since inception in 2008, and most of those have simply been to reinvest dividends.
In a future article, I will bring you up to date on what has already happened in 2014. After that, I will write an article whenever I make a significant change to the portfolio, such as a stock purchase with accumulated dividends.
I follow what I call my Constitution in managing this portfolio. If you wish to look at the Constitution, you can see it here.
As I stated earlier, the principal goal for this portfolio is to create a dividend stream that grows to 10% yield on cost after 10 years. All of my investments and decisions are made with that goal in mind. Hitting that goal is my central benchmark.
But a secondary metric of interest is total return. My goal here is simple: I want to be competitive with a broad market index such as the S&P 500. In other words, I merely want to stay about even in total returns with the most common market index, while beating the pants off it in cash dividend income.
Here is the total performance of the Dividend Growth Portfolio compared to the S&P 500 since inception. SPY is an ETF that tracks the index. Both the DGP and SPY are shown with dividends reinvested.
As of the end of February, 2014, the DGP has gained 52% in total returns compared to
SPY’s gain of 50%. In terms of yield, the DGP yields about twice as much as SPY.