DTA’s Income Builder Portfolio: Double-Digit Income Growth and Market-Crushing Total Return

Dividend Growth Investing sometimes gets a bad rap.

Many detractors say that although the income is nice, they want the kind of competitive total return that only growth stocks can provide.

Others, citing the “widow-and-orphan stocks” often included in DGI portfolios, say the strategy is about as exciting as Ben Stein teaching high school economics. (No wonder Ferris Bueller played hooky.)

(GIF from giphy.com)

Well, DTA’s Income Builder Portfolio has seen 12% growth in income year-over-year … even as it has crushed the overall market in total return.

Boring retailer Home Depot (HD) recently raised its dividend 32%.

Boring health-care conglomerate Johnson & Johnson (JNJ) is generating twice as much income for the portfolio as it did a year ago.

And 16 IBP components have outperformed the S&P 500 Index since we bought them — led by the 12-fold domination turned in by boring burger maker McDonald’s (MCD).

You read that right: McDonald’s stock has done 12 times as well as the overall market since we bought it for the IBP!

Not so boring after all, eh?

I have been selecting stocks twice a month for the IBP since January 2018, using approximately $1,000 of Daily Trade Alert’s money for each purchase.

So far, we have bought shares of 26 companies, investing nearly $36,000 into what we expect will be a long-term endeavor.

The goal, as stated in the IBP Business Plan:

Build a reliable, growing income stream by making regular investments in high-quality, dividend-paying companies.

The secondary goal is to build a portfolio that will experience good total return, something we believe will occur organically because of the excellent companies owned.

In keeping with that theme, let’s talk about dividends first.

During the second quarter of 2019, our portfolio generated $272.52 in income — which is more than 4 times as much as the $62.52 received in Q2 2018.

That’s deceptive, though, because the IBP is not a passive portfolio, with new money getting invested every couple of weeks.

So the best thing I can do is present a table showing some meaningful (and impressive) income-related data, both for Q2, the year and the future.

*AVGO normally pays its Q2 dividend by June 30, but this was delayed until July 1; I have included it in this report for ease of comparisons, both past and future. *BLK had two dividend raises in the last year, totaling 14.58%.

Notes & Observations

  • The IBP’s 12% year-over-year growth mirrors that of Q1 2019.
  • Still, there are signs that dividend growth might slow down some. Pepsi (PEP), Apple (AAPL), 3M (MMM), Constellation (STZ) and JNJ have been more conservative with their most recent raises, and Dominion Energy (D) executives have told investors to expect low-single-digit hikes the next few years.
  • We have doubled-down on 10 companies. Unsurprisingly, 8 of those are ranked among the top 10 in projected annual income. AT&T (T) and Broadcom (AVGO) are the “party crashers” there; the latter thanks to its explosive dividend growth, the former due to its high yield.
  • Our two other double positions, Apple and Disney (DIS), are further down on the list because their yields are low. Disney, which pays dividends only twice per year, had no distribution in Q2.
  • Altria’s (MO) nearly 7% yield is its highest since the Great Recession. That’s due partly to its aggressive dividend growth but mostly to a price that has fallen because of concerns about its business model in the face of legislation, litigation and smoking trends.

  • MO is expected to announce its next dividend raise in August, and it will be interesting to see where the company goes from here.
  • Other IBP components due to reveal dividend increases in the next quarter include Microsoft (MSFT) and Lockheed Martin (LMT).
  • For years, Starbucks (SBUX) announced raises in early November, but it jumped the gun in 2018 with a late-June hike … so the next increase could come very soon, or months from now. Whenever the raise happens, I expect it to be yet another one to smile about.

(SBUX dividend growth graphic from schwab.com)

  • 2019 has been a good year for the stock market, and as prices have gone up, yields have gone down. The overall yield of the Income Builder Portfolio is 2.74%, and it now has more components yielding under 2% (10) than it does yielding more than 3% (9).

What About Total Return?

The IBP’s value was $40,158 at market close June 28, 2019, compared to $32,523 at the end of Q1, and $11,396 a year earlier.

Again, those comparisons aren’t especially meaningful because so much new money has come into the portfolio and so many additional investments have been made.

The best way to quantify total return, in my estimation, is to compare the growth of each position to what the return would have been had the money been invested in a universally accepted proxy for the overall market — such as the SPDR S&P 500 Trust ETF (SPY).

As the table above shows, the IBP has had a total return of 13.1% since its inception on Jan. 16, 2018. Had we bought shares of SPY on the exact same date that we bought each equity, the return (with dividends reinvested) would have been 8%.

That’s not merely outperformance, my friends, that is domination.

The SPY data was acquired through the calculator at DividendChannel.com. The following example shows how I plugged in our McDonald’s investment date (June 25, 2018) to arrive at a total return for SPY.

Sharp-eyed readers might have noticed a slight discrepancy between what the Dividend Channel shows for MCD’s total return (27.09%) and what MCD’s actual gain was within the IBP (27.8%).

That’s because Dividend Channel uses data from each day’s close of trading, while I bought MCD (and every other IBP position) during the trading day.

Obviously, the same would have been true for each buy of SPY, but I still think this method does a very good job of approximating the results.

A few other notes regarding the total return table:

  • We bought Medtronic (MDT) on Jan. 15, 2019, and sold it on March 1, 2019, netting $45.77 after commissions and fees. I included that gain when figuring the portfolio’s total cost. (Had we bought and sold SPY on the exact same dates, the profit would have been $80.40, so I accounted for that in SPY’s totals.)
  • McCormick (MKC) continues to defy gravity. With a price/earnings ratio of 31.5, the maker of spices and condiments is obviously overvalued. I have considered selling it, but I have decided to ride the momentum for now.

(Graphic from Morningstar)

  • Starbucks gained 13.3% in the Q2 to surge past Broadcom (which actually dipped about 4%) into second place in the IBP total return “competition.” Like McCormick, SBUX is trading at 28.5 times forward earnings; and like MKC, Starbucks is on my potential-sell list.
  • 16 of the 26 IBP components beat SPY’s total return from date of purchase through the end of Q2 2019.
  • As previously mentioned, McDonald’s had 12 times the total return of the overall market since we bought it for the IBP. Other major outperformers included Broadcom (7.7x), Starbucks (6.6x), McCormick (4.5x), Microsoft (3.8x) and Disney (3.7x).

(This graphic shows gains over the last 12 months, and therefore does not correspond with the dates we purchased the stocks for the IBP.)

  • All three of our utilities — NextEra (NEE), American Electric Power (AEP) and Dominion — excelled. So did AT&T (T), which had been a laggard but which used a strong quarter (8.6% total return) to pull ahead of what a same-date purchase of SPY would have done.

Yep, even our “boring” telecom and utilities have outperformed the market.

Wrapping Things Up

Here, from Simply Safe Dividends, is a good snapshot about where the Income Builder Portfolio stands at the end of Q2:

The income is flowing in strongly, the dividends are “safe” and growing well, the collective volatility is low, and the portfolio is nicely diversified.

All in all, it was a great quarter, and it’s been a fine first 18 months for the IBP.

Do remember that this is not a recommendation that these stocks be bought or that this portfolio be replicated by any investor. The whole idea of this endeavor is to present portfolio-building concepts and interesting candidates for further research.

An article with my next IBP stock selection is scheduled to be published on Wednesday, July 10.

— Mike Nadel

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