Ever since I’ve owned an iPhone (since 2011), I’ve been with Verizon as my carrier.
Remember the old ads touting Verizon’s greater coverage and better network? “Can you hear me now?” I found those ads convincing, so I went to a Verizon store to buy my first iPhone.
Fun fact: That actor in the old Verizon ads defected to Sprint a couple of years ago.
But I digress. Despite using Verizon myself, I never owned its stock until last year. I owned (and still own) AT&T.
I don’t know why I waited on Verizon, because it’s been a fine dividend growth stock for 14 years. Anyway, I started a position in Verizon in my Dividend Growth Portfolio (DGP) last year, and this week I added to it.
Here’s a dashboard summary of Verizon as a dividend growth stock.
[Source: Simply Safe Dividends]
Verizon’s yield of 4.4% is higher than the DGP’s yield of 3.5%, so adding shares of Verizon will increase the portfolio’s yield by a little bit.
There’s no new outside money going into the portfolio, so the only time I can add stocks is when incoming dividends build up to that trigger amount for a new purchase.
That happened over the weekend, when dividends from 4 other stocks that had been paid on Friday were credited to my account.
That brought the cash level in the account up over the $1000 trigger point.
The markets were closed on Monday.
So on Tuesday, I added shares of Verizon to my portfolio.
This order summary from E-Trade shows the purchase on February 19. I got 18 shares of VZ at $55.08 per share.
The total cost of the purchase was $998 including commission.
The cash in the portfolio dropped back to $33 after the transaction. That starts the next kitty. Dividends flow into the account all the time, and I will let them accumulate back up to $1000 for my next reinvestment, which should occur in about 3 months (May, 2019).
The Purchase Raises the Portfolio’s Income
This purchase is an addition to an existing position in Verizon. It raises the portfolio’s number of shares in VZ to 61.
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 $4077 in the upper left.
And this is the Analyzer after I added the 18 shares of Verizon:
The addition of the 18 shares of Verizon increases the portfolio’s annual income by $43 to $4120.
Here’s the math behind how that happens. The next image shows Verizon’s dividend payout amount and schedule.
[Image source: Simply Safe Dividends]
Verizon is paying $0.60 per share per quarter, or $2.41 per share per year. Multiply by the 18 shares that I added, and you get $43.38 more in dividends per year flowing into the portfolio.
These little purchases always sound small, but the fact of the matter is that the $43 “new money” per year amounts to a 1.05% increase to the portfolio’s annual income. Four purchases like that in a year would add more than 4% to the portfolio’s income, even if none of the stocks in the portfolio raised their dividend at all.
Of course, the likely scenario is that the other companies in the DGP will raise their dividends over the next 12 months. That’s why I own them, so they will do exactly that.
If we estimate the average annual increase conservatively at 5% per year, four purchases like this one would add 4% on top of that. Total income would rise 4% + 5% = 9% in a year. See DGI Lesson 5: The Power of Reinvesting Dividends for more insight into the sneaky-good portfolio-wide cashflow increases you can get if you reinvest your dividends.
Other areas of the Analyzer dashboard show that:
- The total value of the portfolio dropped by $7 (the amount of the commission). The rest of the $998 was converted from a cash asset into a stock asset.
- The current yield of the DGP stayed moved up a bit, from 3.45% to 3.49%. Mighty oaks from little acorns grow (somebody said that).
- Dividend safety of the whole portfolio stayed the same (very safe overall).
Yield on cost (YOC) of the portfolio is not shown on the dashboard, but it’s easy to calculate manually.
Formula for Yield on Cost
Projected 12-months dividends / Original cost of portfolio
$4120 / $46,783 = 8.8%
YOC goes up each time new shares are added to the portfolio and each time a stock raises its dividend. A year ago, at the end of February, 2018, the portfolio’s yield on cost was 8.4%. It has increased 0.4 percentage points since then, reflecting the rising income stream.
Yield on cost shows what yield you are receiving per year based on your original investment. This portfolio is now generating 8.8% of its original cost per year in cash dividends.
I really like the sound of that; it’s why I started the portfolio back in 2008.
Tale of the Tape
Advancing the Goals of the Portfolio
The addition of more shares of Verizon to the DGP helps meet the objectives of the 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, where the portfolio’s goals and strategies are laid out.)
This purchase is an example of the impact of reinvesting dividends. The $43 per year in additional income is new cash flowing into the portfolio that wasn’t there before the purchase. The cash was generating nothing. Now that it’s been converted to stock, it becomes a productive asset that pays me money.
Also note that the money for the purchase came from within the portfolio itself… from the dividends of other companies. I did not need to add new outside money to the portfolio to make this purchase.
The purchase also illustrates compounding. 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. It may also generate more capital gains over time.
At the rate dividends are coming into the portfolio, I expect that the cash kitty will build up to $1000 in May, enabling another purchase then. When that rolls around, I’ll tell you all about it.
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 Verizon or its suitability for any particular portfolio. My goal in this article is to explain what I did, why I did it, and how it advances my investment objectives.
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