This Portfolio Generates Dividend Income That Rises 15% Per Year

For about a year now, Daily Trade Alert has been providing my Dividend Growth Portfolio (DGP) as a service to readers. I have also been contributing articles when something important happens with the portfolio.

The DGP is a real-money portfolio that is an illustration or example of dividend growth investing. It is always available using the drop-down menu at the top of every page:

DGI menu

If you hover your cursor over “Dividend Growth Investing” in the black bar at the top of any page, it turns green and the menu slides down. Then select “Dave Van Knapp’s Dividend Growth Portfolio” (outlined in yellow above) to go directly to the portfolio page.

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I update it every month.

The goal of the DGP is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies.

The numerical target is to achieve 10 percent yield on cost within 10 years of inception.

Capital growth is secondary to building the income stream.

Thus I am more interested in seeing this portfolio produce growing income than in its sheer size.

The portfolio was created on June 1, 2008, in the midst of the market crash. Its initial stake was $46,783. No new money has been added since then. All returns have come from the original amount invested.

Stating the goal in dollars instead of yield on cost, the 10-year goal is to have the portfolio generating income at the rate of $4,678 per year by its 10th anniversary in 2018.

A portfolio like this must be managed. This is not a buy-and-forget proposition. Dividends flow in. Company fortunes change. Decisions need to be made. To help me manage the portfolio, I have a business plan. The last three DGI Lessons have been about planning:

In Lesson 12 (Part II), I described periodic portfolio reviews:

Periodic strategic portfolio reviews. You are the CEO. Take yourself “off site” once in a while. Get your head out of the details for a day or a week and think about large, strategic subjects. I perform strategic portfolio reviews twice per year.

I do my portfolio reviews in the Spring and Fall. They are like checkups at your doctor’s office. The basic questions are: How is the portfolio doing? Is it heading in the right direction? Should changes be made to keep it on track?

What follows is a peek at the Fall, 2014 portfolio review that I just conducted on my own DGP.

Overall Summary

The first thing I do is prepare a capsule summary of what happened since the last review. So I list very basic stuff:

  • The dates then and now
  • The portfolio’s value then and now, along with its percentage change. During this 6-month review period, the DGP’s value went up 6% from $72,849 to $77,267.
  • The annual dividend run-rate then and now along with the percentage change. The dividend run-rate increased from $2848 per year to $3070, a jump of almost 8%. Remember, that ever-increasing income stream is the main goal of this portfolio.
  • The total return of the portfolio since its inception. I compare this to SPY (an ETF that tracks the S&P 500) for my own interest. Since I reinvest my dividends, I use SPY’s performance with dividends reinvested so that the comparison is apples-to-apples. (I get that from My portfolio has never trailed SPY on this measure. At the time of the review, the DGP’s value had increased 65% compared to SPY’s 62% over the same time period.

From the latter comparison, I know that I am giving up nothing in total return to the S&P 500, and my portfolio generates dividends twice as fast.

Changes Since Last Review

Next, I list any transactions I have made since last time.

For this period from April to October, I made two dividend reinvestments. I purchased Ventas (VTR) as discussed in this article, and Procter & Gamble (PG) discussed here.

I also sold Lorillard (LO), because it is being acquired by Reynolds American (RAI). The latter company has never been one of my Top 40 Dividend Growth Stocks, and I did not like the uncertainty about conditions after the acquisition. So I sold LO and purchased HCP (HCP), a senior-care REIT. The sale of LO and purchase of HCP are discussed in this article.

So, in the past 6 months there were 4 transactions. Two of them were dividend reinvestments of about $1000 each. The other two involved a swap. This level of activity is about average for the DGP. Sometimes months go by with the only transactions being dividend reinvestments.

Stock-by-Stock Examination

After reviewing the transactions since last time, I take a look at each individual holding. I update information from last time. What do I update?

  • Each stock’s current price and its total price return.
  • Each stock’s current yield and yield on cost. (If you need to brush up on what those are, see DGI Lesson 6: Yield and Yield on Cost.)
  • A 1- or 2-sentence commentary about each stock. I want to state in plain English whether each one is doing what I bought it for.

Finally, for each stock I note whether there is any action to take. Far and away, the most common action for each stock is to continue to hold it. Perhaps that sounds like inaction, but it is the result of a deliberate decision process. It is a conscious conclusion that I should not sell it, trim it, or do anything else with it. If it’s working fine, let it run. The point is that a decision to hold is an active decision.

Most of the 18 stocks in this portfolio are doing more or less what I want. Several stocks delivered excellent annual dividend increases this year. These include Alliant Energy (LNT) with 9% in January, Coca-Cola (KO) 9% in March, Hasbro (HAS) 8% in April, and PepsiCo (PEP) 15% in June. Most of the others have delivered acceptable dividend raises too.

A couple of stocks are a bit disappointing.

  • BHP Billiton’s (BBL) 5% and 4% dividend increases the past two years were less than I would like, but I am sticking with it largely because of its healthy 4.4% yield.
  • McDonald’s (MCD) has come up with 5% increases two years in a row, which is also disappointing. They are going through a rough patch. This has happened before, and they have come through OK, and I believe that will happen again. They will tinker with their food offerings and service models to align with changing customer tastes and competitive challenges. They usually get it right.
  • Shaw Communications (SJR) is displaying a declining DGR (dividend growth rate) pattern that I don’t like: 1-yr DGR < 3-yr DGR < 5-yr DGR < 10-yr DGR. Its 2013 increase was 3%. Its 2014 increase will be known in about a month. I would like to see it break the declining pattern with a 4%+ increase.
  • AT&T (T) keeps raising its dividend $0.04 per year, which means its DGR has fallen below 2% per year. But I like its 5.2% yield. That generates dollars to reinvest, so growth comes that way.

So for each of these stocks, my decision is to hold. All of these hold decisions are typical of a dividend growth portfolio. This type of investing is a low-turnover operation. Mostly what happens is accumulation – of dividends and stocks.

Final Summary

After I have examined each stock, I write a few sentences about the overall portfolio. Here is what I wrote at the end of this review:

With 3 dividend reinvestments this year, anticipate no more. Next one should be in January, 2015.

Next 12 months’ dividends are now estimated at $3070, which equals a current yield of 4.0% on portfolio’s market value. That is up from 3.9% last time and 3.7% in the middle of summer, reflecting the blended effects of price stagnation, dividend increases, reinvestments, and portfolio changes.

The current yield of this portfolio is usually in the 3.8% – 4.1% range, as it is now. Portfolio-wide YOC is 6.6%, compared with 6.1% last time and 5.7% a year ago. The portfolio is on track to hit 10% YOC on the 10th anniversary in 2018.

The projected 12-month dividends equal an increase of $3070 / 2745 = +12% from a year ago. Depending on when in the year these comparisons are done, annual increases are usually in the 6% to 15% range. Annual portfolio-wide increases are result of dividend increases, portfolio changes, and dividend reinvestments.

There have been three reinvestments in 2014. As the dividends continue to escalate, there may be four reinvestments in 2015.


The following table shows how the dividends have marched upwards every year that this portfolio has existed, with projections for 2014 and for the next 12 months.

CaptureIt is exciting to see the portfolio continue to operate successfully and to march towards its ultimate goal in 2018. Those dividends are cash flows that I will eventually use as income in retirement. Until then, I reinvest them.

I am on a long-term mission to increase the DGP’s diversification, so 2015’s dividend reinvestments will probably include one or two new positions to bring the total number to 20.

Again, any time that you wish to see the latest monthly summary, click on “Dividend Growth Investing” in the black bar at the top of any page.

Dave Van Knapp
Author of Top 40 Dividend Growth Stocks