My Dividend Growth Portfolio is usually a placid, buy-and-collect affair that experiences little turnover. Its goal – to build a reliable, increasing stream of income from high-quality companies – doesn’t require much trading.
What do I mean by “buy-and-collect”? It means that I buy stocks, they send me dividends, I collect the dividends, and I reinvest them. Reinvesting lets me buy more shares, which I add to my collection.
I am a dividend growth investor, and that’s my investing life.
I collect ever-increasing sums of money from companies that send it to me.
When I get enough cash in hand, I reinvest it.
Wash, rinse, repeat.
Some investors would consider that a boring way to go through life.
I think it’s exciting as hell, because it leads to this:
Occasionally, the excitement comes in bunches. So far this year:
• In February, I added to my small stake in Verizon (VZ) by reinvesting dividends I accumulated over the preceding three months (see this article).
• Two weeks ago, I made five changes to the portfolio when I trimmed three overvalued positions and used the money to buy two other stocks (see this article). One purchase increased a stake I already had in Altria (MO), and the other purchase became a new position in Dominion (D).
Finally, to round out May, I made my second dividend reinvestment of the year. On May 17, I added another tranche of shares to my stake in Verizon.
Verizon’s Quality and Dividend
Verizon, the ubiquitous wireless provider, is a high-quality company. That’s the only kind of company that I like to hold in the DGP.
Below is its Quality Snapshot. I built this from the following sources, which I have come to trust and respect over the years:
Verizon gets all green ratings, except for its credit rating, which is acceptable at the lower end of the “investment grade” scale as defined by S&P.
Overall, Verizon is a fine dividend growth stock. Here’s a dashboard summary of Verizon, courtesy of Simply Safe Dividends.
In a nutshell, Verizon is a high-yield, slow-growth stock with a very safe dividend.
I purchase stocks in the DGP when the cash from incoming dividends builds up to $1000. There’s no new outside money going into the portfolio, so the only incoming money I have to work with is dividends from current holdings.
Dividends are flowing into the DGP at a rate of more than $4000 per year, so I am able to make four $1000 reinvestments per year.
This order summary from E-Trade shows the purchase on May 17. I got 17 shares of VZ at $58.07 per share.
The total cost of the purchase was $994 including commission.
Combined with 18 shares that I purchased in February, Verizon has moved from a small position up to 3.6% of the DGP. It now contributes 4.3% of the DGP’s income.
The cash in the DGP dropped back to $110 after the purchase. That starts the kitty over again, collecting dividends for the next reinvestment. That will be in about three months, when the cash from dividends builds back up to $1000.
The Purchase Raises the Portfolio’s Income
The following images are from Simply Safe Dividends’ Portfolio Analyzer.
Here was the Analyzer’s dashboard before the purchase. Note the annual portfolio income of $4302 in the upper left.
And this is the Analyzer after I added the 17 shares of Verizon:
The addition of the 17 shares of Verizon increases the portfolio’s annual income by $41 to $4343.
Here’s the math behind the increase.
[Image source: Simply Safe Dividends]
Verizon is paying $0.60 per quarter, or $2.41 per share per year. Multiply by the 17 shares that I added, and you get $40.97 more in dividends per year flowing into the portfolio.
These $1000 dividend reinvestments always sound small, but in fact the new $41 per year amounts to nearly a 1% increase to the portfolio’s annual income.
Four purchases like that in a year would add about 4% to the portfolio’s income, even if none of the stocks in the portfolio raise their dividend at all.
Reinvesting dividends leads to portfolio dividend growth even if the companies don’t provide dividend growth. That’s an essential difference between investor returns and the returns from the assets themselves.
Of course, the companies in the DGP will raise their dividends over the next 12 months. That’s why I own them.
If we estimate the average annual company-declared dividend increase across the portfolio conservatively at 5% per year, four purchases like this one mean that total portfolio income would rise 5% + 4% = 9% in a year.
DGI Lesson 5: The Power of Reinvesting Dividends can provide more insight into the sneaky-good cashflow increases you can get if you reinvest your dividends.
Other areas of the Analyzer dashboard show that:
• The current yield of the DGP stayed the same at 3.41%.
• Dividend safety of the whole portfolio stayed the same (very safe overall).
• The backwards-looking dividend growth rate dropped slightly. That’s because Verizon, while being a high-yield stock, grows its dividend slowly.
Yield on cost (YOC) of the portfolio is easy to calculate.
Formula for Yield on Cost
Projected 12-months dividends / Original cost of portfolio
$4343 / $46,783 = 9.3%
YOC goes up each time the income stream increases. A year ago, at the end of May, 2018, the portfolio’s yield on cost was 8.2%. It has increased 13% since then, as has the income stream itself.
Yield on cost is like a scoreboard: It shows where you are in the game. This portfolio is now sending me 9.3% of its original cost per year in cash dividends.
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 for more detail.)
This purchase is an example of the impact of reinvesting dividends. The $41 per year in additional income is new cash flowing into the portfolio that wasn’t there before the purchase. The accumulated cash was generating nothing. Now that it’s been converted to stock, it becomes a productive asset that pays me money.
This is my second dividend reinvestment this year. Both times I purchased more Verizon shares.
Part of the reason for choosing Verizon twice this year is based on my desire to increase the yield of the portfolio a little. Verizon’s yield is above the portfolio average, so adding VZ shares brings the yield up.
Also note that the money for the purchase came from within the portfolio itself… mostly 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 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 August, 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.
Verizon has been discussed a lot on Daily Trade Alert since the beginning of the year.
• This Stock [Verizon] Seems Likely to Continue its Streak of Paying Uninterrupted Dividends for 30-Plus Consecutive Years (January, 2019)
• Valuation Zone for February 2019: Verizon Communications (VZ)
• I Just Bought More Shares of Verizon for my Dividend Growth Portfolio (February, 2019; this is my earlier reinvestment in Verizon)
• 10 Best Stocks to Own for Retirement (May, 2019; includes Verizon)
• Buffett’s Latest Trades: 5 Buys, 5 Sells (May, 2019; includes Verizon – he sold it out)
• 10 Great Stocks to Buy on Dips (May, 2019; includes Verizon)
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