In my Dividend Growth Portfolio (DGP), I reinvest dividends when they reach $1000 in cash. Then I select a stock to purchase. At current payout rates, that happens four times per year.
Sometimes I buy more of a stock I already own.
In order for a new stock to be selected, it must be a high-quality company, selling at a fair price or a discount.
It must yield “enough” to fill the role I want it to have in the overall portfolio.
Its dividend must be safe. It must have a strong dividend record, because I expect to hold it for a long time.
On August 1, my cash kitty topped $1000.
I considered several companies already in the portfolio. Among those, I came closest to selecting Amgen (AMGN), which is selling at about a 15% discount.
But another compelling opportunity beckoned from outside the portfolio. 3M (MMM) is a stock I have waited on for years, but it has always been overvalued.
The Sting (1973)
The trade wars with China have spooked the market on 3M. Its price has dropped significantly this summer, and that presents a buying opportunity for investors like me.
It’s more than the market being spooked. 3M had become far overvalued at the beginning of 2018, and its price has been dropping in fits and starts since then. On top of that, analysts expect 3M’s earnings per share (EPS) to drop in 2019 for the first time in years.
So the market has been re-valuing 3M’s shares, bringing the price down to a more fairly valued range.
Price and yield are inversely related, so the price drop has also brought 3M’s dividend yield up to a value rarely seen. Normally, 3M’s yield “never” gets above 3%. But right now, it’s up to 3.3-3.4%.
3M’s Quality and Dividend Resume
As I said earlier, in order to bring a new company into my portfolio, it has to be a special company.
Here is 3M’s Quality Snapshot. I derive this from the following sources, which I have come to trust and respect over the years:
On a 5-point scale for each category, 3M garners 24 out of a possible 25 points. It’s an extremely high-quality company.
3M’s dividend record is also impressive.
After reviewing this, along with other information, I concluded that 3M would be a great addition to my Dividend Growth Portfolio.
The sting is easy: The cash is already in my portfolio account, having been flowing in from dividends all along. All I needed to do was enter a purchase order online.
This order summary from E-Trade shows the purchase on August 2. I got 5 shares of 3M at $170.95 per share.
The total cost of the purchase was $862 including commission.
The cash in the DGP dropped back to $155 after the purchase. That starts the kitty over again, collecting dividends for the next reinvestment. That will be in about three months (November), when the cash from dividends builds back up to $1000.
I use Simply Safe Dividends’ Portfolio Analyzer to track basic statistics for the DGP. Among other things, this allows me to see the increase in portfolio income from this purchase.
The addition of the 5 shares of 3M increases the portfolio’s annual income by $29 to $4378.
Here’s the math behind that: 3M is paying $1.44 per share per quarter. That’s $5.76 per year.
Multiply by the 5 shares I got, and the total rounds to $29 per year in new dividends.
I know this sounds small. But I have now made three dividend reinvestments in 2019.
Altogether, they have added $113/year to the DGP’s income stream.
That amounts to a nearly 3% income gain – from dividend reinvestments alone.
Another way of looking at portfolio income is yield on cost (YOC). It’s easy to calculate.
Formula for Yield on Cost
Projected 12-months dividends / Original cost of portfolio
$4378 / $46,783 = 9.4%
The DGP’s 9.4% YOC is a new record high. It goes up each time the income stream increases. What it means is that this portfolio is now sending me 9.4% of its original cost per year in cash dividends.
Finally, here is a complete summary of the purchase.
Note how the addition of 3M contributes to 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 $29 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.
This is my third dividend reinvestment this year. In February and May, I purchased shares in Verizon. Since 3M is a new stock for the portfolio, the DGP now owns 26 stocks.
Note that the money for these purchases 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 add these shares.
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 3M 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.
3M has been the subject of several informative discussions on Daily Trade Alert.
• Undervalued Dividend Growth Stock of the Week: 3M Company (Jason Fieber, June 2019)
• Dividend Growth Stock of the Month: 3M (Dave Van Knapp, May, 2019)
• High Yield Trade of the Week: 3M (Greg Patrick, March 2019)
Also, 3M is a component of Mike Nadel’s Income Builder Portfolio.
— Dave Van KnappHow in the World Did the CEO of a $3 Stock Do This?? [sponsor]
He made a $450 million deal with Nokia... a $395 million deal with Microsoft... an $828 million deal with Cisco... and a $29.26 BILLION deal with Apple. How did the CEO of a stock trading for just $3 do it? And just how high will the stock go as a result? The incredible story here.