Twenty-one months into what we believe will be a long and successful endeavor, here’s what we can say about DTA’s Income Builder Portfolio:
So far, so great!
The IBP has easily exceeded our early income goals … all while thoroughly thrashing the overall stock market in total return.
In other words, saying “so far, so good” would have been selling ourselves short.
Back in January 2018, we launched this real-money experiment with high hopes, yes, but also with reasonable expectations.
We would invest about $24,000 annually, through two $1,000 stock purchases each month. And based on conservative assumptions of 5% annual dividend growth and 2.5% overall yield, the goal was to build a portfolio that would generate at least $5,000 in annual income after 7 years.
Within the IBP Business Plan, we displayed a table to help illustrate how the income would increase using the anticipated growth and yield metrics. Note how it shows $5,272.39 in projected dividends at the end of 2024.
Midway through this year’s 3rd quarter, which ended on Sept. 30, we surpassed the $1,245 we expected to reach by the end of 2019.
With 28 companies representing 9 sectors, the IBP’s projected annual income hit $1,356 by the time Q3 concluded — putting us well ahead of pace to reach our 7-year goal.
The following table shows the companies in the Income Builder Portfolio, how much income each produced from July through September, dividend yields as of Sept. 30, the annual dividend each company is expected to pay, the projected annual income of each position, and the the size of each holding’s most recent dividend raise.
Notes & Observations
The companies are listed in order of “Projected Annual Income” based on each firm’s most recently announced dividend. That is a forward-looking figure.
I multiplied that times 4 to arrive at the $3.60 annual dividend, and then I multiplied that by the 13 shares we own to get to $28.80 in projected annual income.
Because 2018 was the first year of major U.S. tax-cut legislation, and because many companies used the windfall to boost their dividends, I expected good income growth in 2019.
I haven’t been disappointed.
The IBP is an active portfolio, with new money coming in twice a month and with all dividends being reinvested, so it’s impossible to do an apples-to-apples, year-over-year comparison. However, it’s still satisfying to see the significant rise in both quarterly dividends paid and projected annual income.
We have bought two stakes each of Altria, Dominion Energy, Chevron, Pepsi, Home Depot, Amgen, Lockheed Martin, NextEra Energy, Johnson & Johnson, BlackRock and Honeywell. That fact, combined with the relatively high (or at least 2%-plus) yields of each company, explains why those 11 rank in the top 15 in projected annual income.
The others we have double-dipped — UnitedHealth, Apple and Disney — are lower yielders.
Of the 14 stocks that have only been bought once so far for the portfolio, 5 paid dividends in both Q3 2018 and Q3 2019. Here’s a look at their year-over-year income growth.
Broadcom’s Q3 2019 dividend gets an asterisk here (and in the full-portfolio table earlier in this article) because it actually was distributed Oct. 1. In past years, it had been paid in September, so I included it in this quarter for the sake of consistency.
The Starbucks increase was deceptively small; it was caught between dividend raises due to the company surprisingly hiking its payout twice the previous year. I expect a typically robust increase to be announced soon.
Let’s Talk About Total Return
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 is to compare the growth of each position to what the return would have been had the money been invested in an 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 14% 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 8.3%.
That’s the very definition of “crushing the market.”
And even though building a reliable, growing income stream is the primary goal of the IBP, I’m pretty proud of that sizable outperformance.
The SPY data was acquired using the calculator at DividendChannel.com. The following example shows how I plugged in our McCormick investment date (May 29, 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 MKC’s total return (54.82%) and what McCormick’s actual gain was within the IBP (53.8%).
That’s because Dividend Channel uses data from each day’s close of trading, while I bought MKC (and every other IBP position) during the trading day.
Obviously, the same would have been true for each buy of SPY, but I do believe this method does a good job of approximating the results.
While it’s plenty impressive that McCormick’s total-return percentage is 4 times that of the S&P 500 Index, McDonald’s wins this quarter’s SPY Crusher Award.
MCD’s 32.9% total return since it was bought on Sept. 25, 2018, was 8 times that of SPY (4.1%) over the same span.
Eight times! Now that’s an occasion for a Happy Meal!
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 the S&P 500 Index ETF on the exact same dates, the profit would have been $80.40, so I gave SPY that benefit in its totals.)
- All told, 17 of our 28 positions have outperformed the overall market.
- Utilities, sometimes mocked as the kind of boring investments preferred by grandmas and grandpas, have been big winners for the Income Builder Portfolio. NextEra’s total-return percentage is 5 times that of SPY’s, American Electric 3 times and Dominion 50% greater.
- After being a laggard for a couple of years, AT&T has had a very nice run in 2019. We added it to the IBP in July 2018, specifically citing its attractive valuation, and it has gone on to trounce the overall market over the ensuing 15 months.High-yielding T also is a top-5 income producer for the portfolio despite us only having bought it once so far.
- Our top 4 IBP positions in total return showcase the variety of high-quality companies we own from different sectors: Consumer Discretionary (Starbucks), Consumer Staples (McCormick), Information Technology (Broadcom), Utilities (NextEra).
- I strongly believe in diversification. Every sector is represented in the portfolio except Real Estate and Materials.
- Only 8 positions have experienced negative total return, and half of those were less than minus-3%.
- 3M and Altria have been by far our biggest losers. I definitely paid too much for MMM, and the problem was made worse by the U.S. trade war with China. MO has been hurt by challenges to Big Tobacco.
- Since the quarter ended, I have added to our Microsoft and AbbVie positions. Those new shares are not included in the table’s data.
- Our brokerage is Schwab, which has eliminated commissions on trades. That great news should only help the IBP’s performance going forward.
Wrapping Things Up
The following graphic from Simply Safe Dividends offers a good snapshot of where the Income Builder Portfolio stands at the end of Q3 2019:
It’s been a pleasure to watch the IBP’s income stream grow and to see our companies dominate the market.
I look forward to seeing what’s in store for the rest of the year — and, for that matter, the decade to come.
Remember: The purpose of this endeavor was never to persuade investors to replicate the IBP, but rather to present portfolio-building concepts and interesting stocks for further research.
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