Dave Van Knapp’s Dividend Growth Portfolio – 2018 Review and 2019 Preview

Each month, I report on my Dividend Growth Portfolio (DGP). The monthly updates are always available at this link.

In this article, I want to review the portfolio through a wider-angle lens. Instead of looking at just a month, let’s look back on the year just ended and look forward into 2019.

What Is the Dividend Growth Portfolio?

My Dividend Growth Portfolio is a real portfolio with real money invested in it. The portfolio is maintained at E-Trade. The DGP was started in June, 2008.

The idea behind the DGP is to illustrate actual stock investing for an income, or growth-and-income, goal.

When you say “income,” most investors think of bonds, CDs, or maybe annuities. But reliable, growing income is available from stocks, too. Bonds and annuities don’t grow their payouts. They are “fixed income.” Equity income is different.

The DGP is, and always has been, maintained in real time.

All decisions over the years have been based on information available at the time to decide what to buy, whether to sell, and how to reinvest dividends.

The DGP is not a back-test or hypothetical portfolio.

For want of a better term, it’s a forward-test, or a real-life demonstration.

It began with concepts and some money, and the concepts have been put into action.

The result of the demonstration is the portfolio and its results over more than 10 years.

I believe that the concepts have been verified as usable in real life. They have worked.

Good investing starts with a plan, and a good plan starts with a goal. The formal goal of the DGP is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement.

Note that this objective is an income goal, not a wealth goal. The primary purpose is not for the portfolio to become as large as possible. Rather, it is to develop an optimal income stream: One that is large enough for retirement needs, reliable, and growing.

As a real-time, real-money illustration, my hope is that the DGP presents educational situations and examples that other investors can relate to and benefit from thinking about.

The DGP’s starting value was $46,783 in 2008. Its value now is well over twice that starting amount. Dividends received in its first full year (2009) were $1568. Total dividends in 2018 were almost 2.5 times that amount.

These results have been achieved without any new infusions of money since 2008. The results have come solely from the original purchases, the receipt and reinvestment of dividends, and management of the portfolio.

While the dividends flowing in are “new” in a sense, they are not “new outside” money in the sense of making a monthly contribution. The dividends are all generated from within the portfolio itself. I call that “organic income.”

The distinction in objectives between income and wealth is important, because:

  • The income objective leads to a smoother ride. Dividends rarely go down, whereas prices go up and down all the time. You’re probably aware that the market essentially crashed between October and December, 2018. That had zero impact on my income.
  • The income objective aligns perfectly with the idea of eventually using the income to fund retirement.
  • The income objective influences the securities that I select. Obviously, I look for stocks of excellent companies with good dividend track records, that are likely to continue raising their dividends regularly.
  • The income objective impacts how the portfolio is managed. With dividends being far more reliable than prices, fewer reasons to sell arise. Thus there has been far less turnover in the DGP than in most portfolios, even less than in many “passive” indexes.

The DGP has a secondary goal, which is to be competitive with the S&P 500 in total returns. That goal has been achieved throughout its life.

The Portfolio at the Beginning of 2019

Here is where the portfolio stands as we enter the new year.

  • The portfolio celebrated its 10th anniversary in 2018.
  • During the year, the number of positions grew from 22 to 24. That’s the result of (1) buying 3 new stocks with dividends, (2) selling out 2 positions, and (3) buying a new stock with part of the proceeds from the sales.

2018 Income Performance

  • The portfolio received $3871 in dividends, an increase of 7.1% over 2017 and a new annual high in dollars received.
  • There were 98 dividend payments, 28 dividend increases, and no cuts.

The $3871 represents a 3.5% yield for 2018 on the portfolio’s value at the beginning of the year. (Currently, the portfolio’s yield is up to 3.7%.)

The following chart shows how 2018’s income performance continues the annual growth of dividends each year since inception of the portfolio.

This is my favorite chart. It directly illustrates the main goal of the portfolio. The rising green bars show how the portfolio’s income has risen every year by using the dividend growth strategy.

Projected 2019 Income

The following projection comes from Simply Safe Dividends:

This 12-month projection is based on information known now. So it assumes that all dividends will be paid on their normal schedules, and it incorporates 5 dividend increases that have already been announced by stocks in the portfolio for 2019.

What it doesn’t include are:

  • Dividend increases still to be announced by the other 19 stocks in the portfolio.
  • The impact of “new” dividends that will come from stocks that I will buy during 2019 with accumulated dividends.
  • Any changes to the income stream that result from changes that I might make to the portfolio’s holdings.

This chart shows that most of the dividends in the portfolio are considered to be safe, meaning that they are unlikely to be cut.

The 12% “borderline safe” represents AT&T, which just went deeply into debt to buy Time-Warner assets for the content side of their business. AT&T has announced that they intend to focus on cutting their debt back for the next couple of years, and they’ve already declared their usual small dividend increase for 2019. I’mnot very worried about a dividend cut from AT&T.

The year-end yield on cost (YOC) hit 8.6% in 2018, also a new all-time high. YOC shows the yield based on the original amount invested (rather than the current value of the portfolio). Here’s the calculation:

YOC = $4019 / $46,783 = 8.6%

What this means is that the DGP is now generating dividends at the rate of 8.6% of the original amount invested per year.

That’s the kind of income power that was an original goal of the portfolio, and it underscores why I say that the DGP has proved the concepts of dividend growth investing in real life over its 10-year lifespan.

2018 Dividend Reinvestments

Unlike many dividend growth investors, I do not drip dividends. Instead, I let them accumulate to $1000 and then select a stock to invest in.

My main reason for doing that is to always invest in well-valued stocks. It also helps me add new positions to the portfolio, since there is no new money coming into the portfolio from outside to fund new positions.

Each dividend is small, so sometimes it is easy to overlook how much they add up and the significant impact that reinvesting has. So far in this portfolio, more than $28,000 worth of dividends has been reinvested. That’s more than 60% of the original starting amount.

So a significant part of how the portfolio looks today is the result of reinvesting those dividends over the years.

I made 4 reinvestments in 2018:

  • February: Bought Amgen as a new position (see article).
  • May: Bought Altria as a new position (see article).
  • August: Added shares of Procter & Gamble to an existing position (see article).
  • December: Bought Texas Instruments as a new position (see article).

 2018 Transactions and Turnover

As I practice it, dividend growth investing is a strategy of collecting stocks, without much trading or turnover. Most transacations are usually dividend reinvestments.

However, there are occasional buys and sells designed to manage the portfolio and make it better. Here were the buys and sells in the DGP in 2018.

  • The 4 transactions marked in blue are the 4 dividend reinvestments discussed above.
  • The 2 transactions marked in red show that I sold 2 positions to improve the quality of the portfolio.
  • The 2 transactions marked in green are the 2 stocks that I bought with the proceeds from the 2 sales.

I decided in March to get out of 2 healthcare REITs (HCP and Omega Healthcare Investors), because I was not confident in their long-term ability to raise their dividends.

They were both high-yielding stocks, so I accepted a short-term step backward in income production to improve the portfolio for the long term.

With the money from the sales, I purchased 2 other stocks. I added to the position in Amgen that I had just started with the first dividend reinvestment of the year. And I started a new position in Verizon.

Overall, I am happier with the portfolio’s long-term dividend prospects after making the swaps. Dividend increases from other companies soon overcame the dividend back-step, and overall the DGP’s income rose 7.1% on the year.

Dividend growth investing is, for most people, a low-transaction proposition. It does not generate high churn rates.

In 2018, the 2 sales resulted in a turnover rate for the DGP of under 4%. For comparison, the turnover rate listed by Morningstar for SPY (an ETF that tracks the S&P 500) is 3%. The largest dividend ETF in the world – Vanguard Dividend Appreciation (VIG) – registered a turnover rate of 14%.

 2018 Total Return Performance

While total return is not a primary focus of this portfolio, I do track it and compare it to SPY, an ETF that tracks the S&P 500.

In 2018, my portfolio’s total value fell by 1%. For comparison, SPY (with dividends reinvested) fell by 4.9% (source).

Over the life of the portfolio, the DGP’s total return is +135% compared to SPY’s +123%, both with dividends reinvested.

If I had invested the original amount ($46,783) into SPY at the end of May, 2008 and reinvested its dividends since then, its total value would now be $104,326.  My portfolio’s actual value is $109,968.

The comparative performance is gratifying, because the DGP holds many “defensive” stocks and not many “growth” stocks. Nevertheless, the DGP has kept up with (and usually surpassed) SPY since its inception in 2008. Most of the DGP’s life has existed in a general bull market. Conventional wisdom would be that defensive stocks would not be able to keep up that way.

I attribute the DGP’s success on total return to two factors:

  • Buying at good valuations.
  • The power of reinvesting dividends – the DGP churns out dividends far faster than the S&P 500.

The DGP’s current yield is 3.7% compared to SPY’s 2.1% (source) on a lower total value. If we just project the annual income based on what we know now, it would be $4019 in a year for the DGP compared to $2191 for SPY. That’s a lot more reinvestment power.

Looking Ahead to 2019

I don’t make predictions about what the market or prices will do.

Here’s why. The following are USA Today’s predictions for the NFL season that just ended. These predictions were made in September, 2018, and they only needed to hold up for 3 months.

  • USA Today predicted the Atlanta Falcons would win the NFC South and win the Super Bowl. Fact: The Falcons missed the playoffs. They just fired all 3 of their coordinators on offense, defense, and special teams.
  • They predicted the Steelers would win the AFC North. Fact: The Steelers did not get into the playoffs.
  • They predicted the Chicago Bears would have a losing record and not make the playoffs. Fact: The Bears won their division with a 12-4 record.

Out of 12 actual playoff teams, USA Today predicted only 6 correctly. That’s better than last year, when they had just 4 right.

Predicting is hard. So I confine my prognostications to things I have a lot of confidence in or total control over.

Last year, here’s what I said that I expected for the DGP in 2018:

  • No prediction on total return.
  • I expected to make 4 dividend reinvestments. That’s what happened.
  • I would update the business plan. I did that in June.
  • I thought I might do a little trimming of oversized positions. Instead, I eliminated 2 weaker stocks and replaced them with 2 stronger ones.

For 2019, here’s what I expect:

  • I’ll make 4 dividend reinvestments, with 1-2 new positions likely.
  • I will try to raise the portfolio’s yield a little, by buying high-quality stocks with higher current yields than the portfolio’s own yield. I don’t know whether I will be able to find stocks that fit the bill, although I do note that a couple of stocks already in the portfolio (such as Verizon) could help.
  • I will review and update the business plan. I may add a possibility of using CEFs (closed-end funds). The plan already allows ETFs, although there are none actually in the portfolio.
  • And as always, I make no prediction about total return. My focus is on income, not wealth.

Thanks for reading. Please continue to follow the DGP’s progress via my monthly updates. In addition to those, I’ll write an article every time I buy or sell anything; you’ll see those articles in the daily newsletter. And finally, I’ll let you know when I update the business plan.

To all my fellow investors: Have a safe, happy, and healthy 2019!


I mentioned several concepts in this article that you might want to learn more about. So here is a reading list for those who are interested.

— Dave Van Knapp