We Just Put $1,000 Into This Stock For The Income Builder Portfolio

Merriam Webster’s online dictionary defines DOMINION as “supreme authority; sovereignty,” and here is the example presented:

having dominion over the natural world

Well, I can’t speak for the natural world, but Dominion Energy (D) now has dominion over the Income Builder Portfolio “dividendverse.”

Many Dividend Growth Investing proponents like utilities because they pay attractive, reliable dividends that increase over time. So perhaps it’s appropriate that one of the world’s largest energy providers has become the IBP’s leading income producer.

On Tuesday, June 4, I executed a purchase order on Daily Trade Alert’s behalf to add 13 shares of Dominion at $74.50 each.

Having bought 15 shares of Dominion on March 27, 2018, and having added several fractional shares over the last year via dividend reinvestment, our D position is now 28.7253 shares.

With Dominion paying an annual dividend of $3.67, the IBP’s projected yearly income from D has risen to $105.42 — and that’s No. 1 of the 25 positions in the portfolio.

Working The Plan

The original IBP Business Plan stated:

After the IBP has been in place for at least a year, no company will be allowed to produce more than 10% of the portfolio’s income. Similarly, no more than 10% of the portfolio’s value will be held in any single stock.

After I selected Altria (MO) a second time for the portfolio last August, that position became “responsible” for about 20% of the IBP’s income … and I realized I needed to tweak the plan to give myself more flexibility.

So in my end-of-2018 update of the Business Plan, I said:

It is strongly preferred that no company produces more than 10% of the portfolio’s income or makes up more than 10% of the IBP’s total value.

If a company does surpass 10% in either of those categories, that stock will not be considered for future purchases (except dividend reinvestments). Therefore, any company that does exceed 10% will gradually see that percentage fall as the rest of the portfolio is built up.

That is exactly what happened with the Altria position. As I built up the portfolio via $1,000 twice-monthly investments in other companies (as well as dividend reinvestments across the board), MO’s share of the IBP’s income produced fell from more than 20% to less than 10% … and it took only about 9 months for that to happen.

And now, with this Dominion purchase, Altria isn’t even leading the portfolio in annual dividend production, as D has surpassed MO by a whopping 65 cents!

D = Dividends

That gap between D and MO actually will grow a little bit in a couple of weeks.

Because we bought Dominion Energy before this quarter’s ex-dividend date (June 6), the IBP will receive 91.75 cents for each of its 28.7253 shares — $26.36 — on June 20.

Portfolio rules mandate divided reinvestment, so the $26.36 will buy about .35 of a share of D — meaning that the new position size of 29.0753 shares will be projected to receive about $106.71 in annual income.

Dominion increased its dividend 10% each of the last two years and averaged about 8% growth over the last decade.

As I pointed out in my previous article, however, raises will be much smaller the next few years as the company works to reduce its payout ratio to a more comfortable 70% level.

Management is forecasting a 2.5% hike for 2020, which probably means about 94 cents per quarter, or $3.76 for the year.

Being the greedy DGI guy that I am, I always want more “Divvy Dollars,” but I’m practical enough to know that the most important thing is for each company we own to be fundamentally sound and financially healthy. I also know that it is unusual for utilities to grow dividends as rapidly as Dominion had been.

Valuation Station

In his thorough May 8 article, my DTA colleague Dave Van Knapp said he was “seriously considering” adding D to his Dividend Growth Portfolio.

Dave used sources such as FAST Graphs, Morningstar and Simply Safe Dividends to determine that Dominion Energy was no worse than “fairly valued,” as the following table indicates.

Dave ended up buying some D at $74.21/share, and wrote about it HERE.

No fair … he paid a few cents less for the DGP than we just did for the IBP!

But hey, we bought our first batch of D shares under $70 back on March 27, 2018, meaning our stake has an average price of $72.17. Take that, Dave!

(funnyjunk.com)

I’m just having some fun here. Even though Dave and I both enjoy playing poker, we don’t compete as investors — we are good friends and we root for each other to “win.”

Besides, as the guy I call “The Godfather of DGI,” Dave knows more about this stuff than I ever will. If you have not yet read his DGI primer, what are you waiting for? An offer you can’t refuse?

Anyway, here are some updated valuation figures …

CFRA analyst Christopher Muir says D is fairly valued and has about 10% upside over the next 12 months.

ValuEngine says fair value for Dominion is $77.46, and its analysts believe price will appreciate from 5% to 12%.

Most analysts that follow Dominion put it in the “Hold” category. For example, of the 16 surveyed by Thomson Reuters, 12 are making that recommendation.

Dave’s article looked at FAST Graphs, but I thought I’d offer an updated view using the post-recession period. The following illustration shows D to be fairly valued relative to its own history these last 10 years.

Wrapping Things Up

Dominion Energy is a well-run company that operates in southeastern states with generally “friendly” regulations toward utilities.

I own hundreds of shares in my personal portfolio, and I have confidence that D will be a fine performer over the years for the IBP. I like that it is a “defensive” stock — one that should hold up reasonably well during a recession while also doing A-OK during bull markets.

I certainly am comfortable with its status (for now, at least) as the IBP’s No. 1 income producer.

As always, investors are strongly urged to conduct their own due diligence before buying any stock.

— Mike Nadel

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