In 2016, I opened a position in Cisco Systems (CSCO), the computer networking giant, in my Dividend Growth Portfolio (DGP). Later in 2016, I added to the position via a dividend reinvestment, bringing my total shares to 92.
Earlier this week (Monday, December 4, 2017) I added to the position again. I purchased 26 more shares with accumulated dividends.
This is my 4th and final dividend reinvestment for 2017. I accumulate cash dividends from all companies in the DGP, and when the total gets up to $1000, I select a company and invest in it.
Here is the purchase order reproduced from E-Trade:
Altogether, including commission, I spent $987 on the shares.
The cash in my portfolio dropped back to $76 after the transaction. I will accumulate incoming dividends back up to the $1000 trigger for my next reinvestment, which should occur in March, 2018.
Why I Chose Cisco
Obviously, I have been happy having Cisco in my portfolio. In addition to its nice 3%+ yield, it has a Dividend Safety Score of 82 from Simply Safe Dividends, indicating a very safe dividend.
I don’t expect Cisco to continue to declare 40% annual dividend hikes.
As the company’s dividend program matures, I expect annual raises to settle down toward a range of 8%-10% per year or so.
Since then, it increased its dividend 11.5%, and its price has climbed by 30%.
My main concern about investing in Cisco at this time was its valuation: Had its 30% price increase over the past 18 months pushed its price far above fair valuation?
To answer that question, I did a valuation check using the same methods that I use in my Valuation Zone articles. My conclusion was that Cisco is still valued fairly despite that price increase. The main factors in that assessment were:
• Cisco’s dividend yield is about 11% above its 5-year average.
• Cisco’s price is close to fair value on FASTGraphs and Morningstar.
Impact on the Portfolio of Purchasing More Cisco
The following images are from Simply Safe Dividends’ Portfolio Analyzer. I have input the Dividend Growth Portfolio’s stocks into the Analyzer, which I use to keep track of several metrics pertaining to the portfolio.
Here was the Analyzer’s dashboard before the purchase:
And here it is after the purchase:
As you can see in the yellow boxes, the simple addition of 26 shares of Cisco increases the income flowing into the DGP by $30 per year. That sounds small, but it’s almost a 1% increase.
That increase, remember, comes from the reinvestment of $987 worth of dividends, most of which came from other companies. That is the very definition of compounding: Making money on money already made. (See Dividend Growth Investing, Lesson 4: The Power of Compounding.)
In this case, the money already made was the $1000 accumulated in dividends over the past 3 months since the last reinvestment. The new money “made” is the increase in the dividend stream, not to mention capital gains that may also be made from owning more shares.
Other boxes in the Analyzer dashboard indicate that:
• The current yield of the DGP will stay the same at about 3.5%.
• Dividend safety of the whole portfolio will stay the same at 82 out of 100 points, indicating a safe dividend stream.
• The beta (price variability) of the portfolio stays the same at 0.65, or 35% less variable than the market as a whole.
Here is the tale of the tape for this purchase:
And here is the expectation for the increased total position in Cisco:
When I update the DGP at the end of the month, the new larger position in Cisco will be shown. Cisco now comprises about 4% of the portfolio.
The portfolio’s total allocation to technology stocks becomes about 11%. I am comfortable with that amount of exposure. The DGP has positions in Cisco, Microsoft (MSFT), and Qualcomm (QCOM) among its 22 stocks.
Qualcomm, as you may know, is under an acquisition offer, so there may be more news about that before the end of the year.
Furthering the Goals of the Portfolio
The purchase of Cisco fits nicely with the objectives of my Dividend Growth Portfolio. The main goal is to generate an increasing stream of income from high-quality companies.
Increases come from two sources: (1) Companies increase their dividends; and (2) I reinvest the dividends to buy more shares, which generate their own dividends. It is a self-reinforcing cycle, and the portfolio is sort of like a cash-generating machine. It’s a machine that makes money.
Please note that this purchase of Cisco increased the portfolio’s income without me adding new outside money to the account. Rather, the increase is the result of reinvesting dividends that have been accumulating in the account from stocks already owned.
As shown earlier, this purchase of more Cisco shares increases the portfolio’s annual dividend stream by about 1%. If you do something like that 4 times per year, you’re getting an annual income increase of 3%-4% without adding new money to the portfolio. The purchases are made with dividends that you received from other companies. The money for the purchases is generated organically by the portfolio itself.
As always, do not take what I do as a recommendation for yourself. Always conduct your own due diligence before buying anything. Specifically, nothing in this article should be taken as a recommendation about Cisco or its suitability for any particular portfolio.
— Dave Van Knapp[ad#agora]