Dividends keep flowing into my Dividend Growth Portfolio (DGP). Ahem…that’s the whole idea.
In the DGP, I collect the dividends in cash as they come in. I reinvest them when the kitty reaches $1000.
That happened this week. That means that I got to go shopping. I love to go shopping for stocks.
Recently I have written about how you can make a quick snapshot of dividend growth stocks by looking up a few ratings from data providers that have their own stock ranking systems.
Here is a table that shows what I mean. Note that SSD refers to Simply Safe Dividends, a great service that ranks stocks for their dividend safety.
I decided to use this approach to help select this month’s stock purchase.
I created the following table that lists several stocks that I have recently written favorably about and applied the point system from the table above to each stock.
One stock stands out from the rest: Procter & Gamble (PG). It is the only stock with highest grades across the board. I did a quick check of its valuation, and it is still decently valued since I made it my Dividend Growth Stock of the Month for May. At 3.5%, its yield is about the same as the yield of the portfolio itself.
Therefore I decided to buy PG shares with my stash of dividends.
This order summary from E-Trade shows the purchase on August 16.
The total cost of the purchase was $1005 including commission for 12 shares of PG.
The cash in the portfolio dropped back to $28 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 probably occur in November.
Why I Chose Procter & Gamble
When I wrote about PG in May, I noted that it is one of only 8 companies that get perfect grades across the board on the scoring factors that I noted at the beginning of this article. That is a very select group of companies.
Besides those factors, PG sports qualities like these:
- Decent yield at 3.5% (compared to the S&P 500’s yield of 1.8%).
- Good dividend resume typical of a mature high-quality company: Proven commitment to its dividend with 62 straight years of increases; strong dividend safety.
- High quality company with wide moat, great brands, world-wide presence, and outstanding distribution systems.
- Good financials, including steadily positive earnings and cash flows, relatively low debt, and good credit rating.
- Steadily declining share count for the past decade.
- Low-Volatility stock.
Procter & Gamble’s price has gone up about 12% since I wrote about it in May, when I thought it was 12% undervalued. That puts its valuation in the Fair zone.
I would have loved to get it at a better price – say a few weeks ago – but one of the realities of investing is that you must make your purchases when you have money to invest.
In this case, I needed to wait until my dividend kitty climbed back above the $1000 trigger point for making a purchase. The bottom line is that I am happy to get such a high-quality stock at fair value.
Impact on the Portfolio of Adding PG
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 $3871 in the yellow box.
This is the Analyzer after I added the 12 shares of PG:
The addition of Altria increases the portfolio’s annual income by $34 to $3905.
Here’s how that will happen. Procter & Gamble is paying $0.7172 per share per quarter, or $2.87 per share per year. Multiply by the 12 shares I bought, and you get $34.43 more in dividends flowing into the portfolio in a year.
$34 per year sounds small, but it’s a 0.9% increase in annual income. Four purchases like that in a year would add almost 4% to the portfolio’s income, even if none of the stocks in the portfolio raised their dividends at all.
I’m building a “wall of income” for retirement. This is another brick in the wall.
Other boxes in the Analyzer dashboard indicate that:
- The current yield of the DGP stayed the same at 3.5%.
- Dividend safety of the whole portfolio moved up a hair.
- The beta (price variability) of the portfolio stays the same at 0.72, or 28% 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.
So the portfolio’s new YOC is $3905 / $46,783 = 8.3%. YOC goes up each time new shares are added to the portfolio.
I had already owned 36 PG shares in the portfolio.
This purchase will raise PG’s share of the portfolio from 2.6% to about 3.5% of the DGP.
Here is the tale of the tape for this purchase:
Furthering the Goals of the Portfolio
The purchase of more shares of Procter & Gamble 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 $34 per year in additional income 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 make this purchase. The money needed for the purchase came from within the portfolio itself… from the dividends of other companies (plus a few bucks from PG) that have been flowing in since my last reinvestment in May.
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 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 Procter & Gamble 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 Knapp
Click Here to Get Marc Lichtenfeld's Ultimate Dividend Package, Including Details on His #1 Dividend Stock... the Safest 8% Dividend in the World... the Top Three "Extreme Dividend" Stocks... and Much, Much More. For Free.