Over the past few months, you may have noticed that better valuations have appeared for some of the highest quality dividend growth companies.
For example, this year I have identified decent valuations for such well-regarded companies as…
In February, I added Amgen as a new holding to my Dividend Growth Portfolio (DGP). In that portfolio, I collect dividends in cash and reinvest them when the kitty reaches $1000.
In a way, this feels long overdue, as Altria is among the world’s legendary dividend growth stocks.
But early in the DGP’s life, I did not invest in tobacco stocks.
It was a personal decision: Both my parents died from smoking.
However, a few years ago, I decided to drop that prohibition. I added Phillip Morris International (PM) to the portfolio in 2013.
But Altria always seemed overvalued. I kept watching it, and finally this year its price fell back to a point where the stock presents an attractive valuation.
I analyzed Altria as my Dividend Growth Stock of the Month for April, and now I am adding it to the DGP.
This order summary from E-Trade shows the purchase on May 16.
The total cost of the purchase was $1053 including commission.
The cash in the portfolio dropped back to $67 after the transaction. That starts the next kitty. I will accumulate incoming dividends back up to the $1000 trigger for my next reinvestment, which should occur in about 3 months.
Why I Chose Altria
At the end of my article on Altria cited above, I listed Altria’s positives as a dividend growth stock. They included:
• High yield at 5.1%
• 49 straight years of dividend increases; most recent increase = 6.1% in April
• Proven corporate commitment to its dividend
• Strong dividend safety
• Stock is around 14% undervalued
• High quality company with wide moat, high profitability, many years of positive earnings and cash flows, and moderate debt
• Good credit rating
My assessment is that those positives outweigh the fact that smoking is slowly but steadily declining in the USA (where Altria does all of its business). There is always the threat of more government regulation or significant new litigation when it comes to tobacco companies. However, Altria has overcome such hurdles in the past.
Besides my own analysis, I couldn’t help but notice the consensus among a variety of analytical information providers when I went to E-Trade to make this purchase.
The only negative report, the last one, is based on technical (price) analysis. That’s no surprise, because Altria has fallen in price recently. That’s why it has a good valuation now. Dividend growth investing is not about trading to collect short-term price jumps. It’s about building an income stream over many years.
I got my shares at a little less than when I wrote up Altria last month. That means its valuation is a little better now than when I wrote that article. At the price I paid, I got it at 5.1% yield.
Impact on the Portfolio of Adding Altria
The following images are from Simply Safe Dividends’ Portfolio Analyzer, which I use to keep track of several metrics pertaining to the portfolio.
Here was the Analyzer’s dashboard before the purchase. Note the annual portfolio income of $3795 in the yellow box.
This is the Analyzer after I added the 19 new shares of Altria:
The addition of Altria increases the portfolio’s annual income by $53 to $3848.
Here’s how that works. Altria is paying $0.70 per share per quarter, or $2.80 per share per year. Multiply by the 19 shares I bought, and you get $53.20 more in dividends flowing into the portfolio.
$53 per year sounds small, but it’s a 1.4% increase in annual income. It’s another brick in the wall.
Other boxes in the Analyzer dashboard indicate that:
• The current yield of the DGP jumped up about half a percent, but when rounded, it’s still 3.7%. The jump in yield is the result of exchanging cash (which earns nothing) for Altria shares, which are yielding 5.1%.
• Dividend safety of the whole portfolio stays the same at 79 out of 100 points, indicating a safe dividend stream.
• The beta (price variability) of the portfolio stays the same at 0.69, or 31% less variable than the market as a whole.
Yield on cost (YOC) is not shown on the dashboard, because I have not input the purchase prices for my holdings.
I don’t add new outside money to this portfolio, so YOC is easy to calculate: It’s current income divided by the portfolio’s original value when it was begun in 2008. That was $46,783.
So the portfolio’s new YOC is $3848 / $46,783 = 8.2%. YOC goes up each time new shares are added to the portfolio.
Note: Altria raised its dividend 6.1% payable in April. There is some speculation that Altria will make a second dividend increase in 2018 as a result of the new Federal tax code. Such has not been formally declared as of this writing.
Here is the tale of the tape for this purchase:
Furthering the Goals of the Portfolio
The purchase of Altria advances the objectives of my Dividend Growth Portfolio. The main goal is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement. (See the DGP’s Business Plan.)
This purchase is an example of the impact of reinvesting dividends. The $53 per year is new money flowing into the portfolio that wasn’t there before the purchase. For more information on how reinvesting compounds dividends, see Dividend Growth Investing Lesson 5: The Power of Reinvesting Dividends.
Please note that I did not have to add outside money to the portfolio to buy Altria. The money needed for the purchase came from within the portfolio itself, from the dividends of other companies that I already owned that have been collecting since my last reinvestment in February.
Compounding means making money on money already made.
• The money already made was the $1000 accumulated in dividends since the last reinvestment.
• The new money made is the increase in the dividend stream, not to mention capital gains that may also come from owning these shares.
As shown earlier, this purchase of 19 Altria shares increases the portfolio’s annual dividend stream by about 1.4%. If you do that 4 times per year, you’re getting an annual income increase of ~4%, even if not a single company were to raise its dividend.
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 Altria or its suitability for any particular portfolio. My goal in this article is to explain what I did and why I did it.
— Dave Van KnappThe #1 stock to turn $25k into tens of thousands of dollars for life [sponsor]
I've identified a stock that will be your cash register for the next 30 years. But don't just buy shares to claim your income. Do this one thing with this one stock. Click here for the details.