Note from Daily Trade Alert: As long-time readers are aware, Dave Van Knapp is a highly-respected authority in the dividend growth investing (DGI) space. He even put together a series of lessons to help guide our readers through the rewarding world of DGI. What you may not be aware of is that since 2008 Dave has maintained and made public a real-money Dividend Growth Portfolio. He created it to demonstrate the results that can be achieved by following sound dividend growth investing principles. With this in mind, we’re pleased to announce that starting today we are making Dave’s portfolio easily available to Daily Trade Alert readers. You can access it via the Dividend Growth Investing tab at the top of every page. In addition, Dave has agreed to alert us whenever he makes a significant change to the portfolio, such as the following article…
My Dividend Growth Portfolio is a real-money, real-time portfolio. I use it to demonstrate the methods and practices of dividend growth investing.
Part of my game plan is to reinvest the dividends that I get from the stocks in this portfolio. Unlike many, I don’t DRIP the dividends, which means that I don’t reinvest them automatically. Instead, I let them accumulate to $1000, then I make a single targeted investment. (See Dividend Growth Investing Lessons, Lesson 10: Reinvest Your Dividends Selectively to Enhance Your Returns.)[ad#Google Adsense 336×280-IA]This year, I had already made one reinvestment in January, purchasing shares of Coca-Cola (KO).
Incoming dividends hit the $1000 threshold again in May.
After due consideration, I decided to purchase shares in Ventas (VTR), a company that I had just written about in my series on stocks in this year’s Top 40 Dividend Growth Stocks for 2014.
This article describes how I arrived at the conclusion to purchase VTR.
My first step in considering every purchase is to investigate the company’s quality. I only purchase high-quality companies for this portfolio.
Since I just wrote about Ventas, I won’t repeat all the details why I think the company is a good dividend growth investment. These are the highlights:
• Ventas is a Real Estate Investment Trust (REIT) that acquires, owns, operates, and collects rent on properties whose values are tied to two of the biggest trends today: The aging of the population and healthcare.
• It holds a portfolio of more than 1400 seniors’ housing and healthcare properties in the United States, Canada, and the U.K. Many of its properties are rented under triple-net leases, while Ventas operates others itself. Its properties are sufficiently diversified and becoming more diversified as it makes new acquisitions.
• The company is pursuing a “roll-up” strategy, acquiring businesses in the fragmented $1 Trillion seniors housing and healthcare real estate market.
• Aging Baby Boomers and the 85+ population are expected to grow at three times the rate of the overall population, leading to a projected increase in healthcare spending from 18% to 20% of GDP by 2022.
Ventas’ Dividend Resume
I only purchase stocks that are currently in my Top 40, which serves as my shopping list each year. Ventas has been in the Top 40 in 2008, 2009, and 2014.
Here is Ventas’ dividend record for the past 5 years. (Ignore the apparent drop in 2011; that is a data anomaly.) As you can see, Ventas has increased its dividend each year from 2010-13, and this coming December, I expect it to tack on another increase.
Ventas’ yield is about 4.4%. Here is a snapshot from Morningstar:
I use the “Projected Yield” number, which is calculated by projecting the current dividend forward, assuming both that it will not be cut nor increased. I believe this more accurately represents what I am actually getting in terms of yield. It is better than plain “Yield,” which is based on the last 12 months’ of payments looking backward.
As you can see, the company increased its dividend with last year’s December payment, and that is what I expect to happen this year too. Last year’s increase was 8.2%, and I would be happy with something in that range this year.
Also notice that I made my purchase well before the ex-dividend date for the next payment. That means that I will receive the payment scheduled for June 4.
Last week’s lesson on valuation explained that I value stocks using two tools: Morningstar and FASTGraphs.
Morningstar rates Ventas as undervalued right now. That means that they think it is a good buy compared to what they think is its fair price.
On Morningstar’s five-star system, four stars indicates undervaluation. In other words, they think that the company is actually worth more over the long term than it is selling for.
Let’s see what FASTGraphs says.
The black price line is just about at the orange fair-value line, meaning by this method, VTR is fairly valued now. A couple of notes:
(1) For a REIT, I use “Funds from Operations” (FFO) for drawing the orange line. It is universally accepted that FFO is a better depiction of a REIT’s profitability than regular earnings, which are distorted by the capital-intensive nature of the REIT business model. The F’s marking the data points indicate FFO. (The choice of using FFO is an option for users of FASTGraphs.)
(2) I checked the main graph for VTR, and its “normal” Price / FFO ratio is 14.4, which is practically the same as the 15.0 used to draw the orange line. So the orange line is a good depiction of VTR’s long-term valuation range.
Combining the two valuation methods suggests that VTR is fairly valued or a little undervalued at the moment. It gets a Fair valuation from FASTGraphs and a Good valuation from Morningstar. Its 4.4% yield is satisfactory and supports the idea that it is fairly valued right now.
So VTR passes my tests for a potential purchase:
- • It is in this year’s Top 40.
- • It has a sound business model with a favorable yield and dividend growth history.
- • It is decently valued.
When I am contemplating where to reinvest dividends, I think broadly about my portfolio and consider various possibilities. I always want to want to improve the portfolio in some fashion.
Here are some of the other stocks that I considered for this purchase:
- Coca-Cola (KO) | 3.0% yield | OK valuation
- Chevron (CVX) | 3.5% yield | Good valuation
- Procter & Gamble (PG) | 3.2% yield | OK valuation
There were also a couple of others. I could have purchased any of them and been satisfied. I selected VTR because of its higher yield (4.4%), great business model with respect to two megatrends (the aging of the population and healthcare), and because it is a new stock in the portfolio.
I am on a slow mission to diversify my Dividend Growth Portfolio from 10 stocks a couple of years ago to a goal of 20-25 stocks. Ventas becomes the 18th holding. KO, CVX, and PG are already in the portfolio.
Each month, the portfolio is profiled here on Daily Trade Alert. When I update the profile at the end of May, Ventas will be listed proudly as a new holding.
Ignoring the likely dividend increase in December, Ventas’ payouts will add about 1.5% to my probable income over the next 12 months. That is another step on the road to meeting the portfolio’s goal of achieving 10% yield on cost within 10 years from when I began the portfolio in 2008.
Every reinvestment of dividends, along with every dividend increase, brings me closer to that goal.
Dave Van Knapp
Author of Top 40 Dividend Growth Stocks