It’s time for the highly-anticipated annual review of my Dividend Growth Portfolio (DGP). Please remain calm.

While I report monthly on the DGP (here), the idea in this article is to view the enterprise through a wide-angle lens, including a forward look into 2020.

I don’t want to bury the lead of this story, so here are the most important DGP achievements in 2019:

• Dividend income grew +10.7% to $4287. That is a new record high for a full year’s dividends.
• Yield on cost grew to 9.7%, also a new record high and just short of my long-standing goal of hitting 10% yield on cost.
• Total value grew +26% to $138,984. That is also a record high for the end of any month since the portfolio began in 2008.

The DGP’s Plan and Objectives

The DGP is not a back-test, model, or hypothetical portfolio. It’s real.

The DGP is a real-time, real-money demonstration of dividend growth investing. My hope is that it presents educational situations and examples that investors can relate to and benefit from.

I started the DGP in 2008. Its income-centric vision has changed little over the years. The current business plan can be found here.

Every good plan starts with a goal.

The primary goal of the DGP is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement.

Obviously, this is an income goal, not a wealth goal.

That means that the primary objective is not for the portfolio to become as large as possible, although it certainly has grown. Rather, the primary goal is to develop an optimal income stream: One that is large enough for retirement needs, reliable, and grows every year.

The DGP has been successful.

• Dividends received in its first full year – 2009 – were $1568. By 2019, that figure became $4287, or 2.7 times 2009’s amount.
• The DGP’s starting value was $46,783 in 2008. Its value at the end of 2019 is $138,984 – nearly 3 times the starting amount.

These results have been achieved without any new contributions since the portfolio kicked off in 2008. No monthly or quarterly deposits have ever been made into the DGP.

Therefore, the results have come solely from:

• the original stocks picked;
• receipt and reinvestment of dividends over the years; and
• management of the portfolio – including the addition of more stocks – over the past 11+ years.

The dividends are all generated from within the portfolio itself. I call that “organic” income. I don’t have to sell shares to receive cash. The companies themselves send cash to me.

The distinction between income and wealth objectives is important for several reasons:

1. The income objective leads to a smoother ride. Dividends rarely go down, whereas prices go up and down all the time. If you remember the market skid in late 2018, it had no impact on my income, even though it brought the DGP’s value down.
2. The income objective influences the securities that I select. Obviously, I look for stocks of excellent companies with good dividend track records, because they are likely not only to pay me enough but also to continue raising their dividends. This focus invariably leads to high-quality companies with solid businesses.
3. Portfolio management is simplified. With dividends being far more reliable than prices, there are fewer temptations to sell when prices are falling. In fact, weak prices become a reason to buy. There has been far less turnover in the DGP than in most portfolios.

The secondary goal of the DGP is to be competitive with the S&P 500 in total returns. That goal has been achieved throughout the DGP’s life, as we will see later.

The Portfolio as 2020 Begins

These were the most important changes to the portfolio in 2019:

1. The number of positions grew from 24 to 26.
2. The portfolio’s income grew 10.7% to $4287.
3. The portfolio’s total value grew 26% to $138,984.

There were four dividend reinvestments and a couple of trims and sales. That said, dividend growth investing is not a high-turnover operation. If you are looking for day-trading tips or the excitement of constant change, this is not the kind of investing for you.

As we enter 2020, the DGP is 11 years, 7 months old. Here is where it stands as we enter the new year.

2019 Income Performance

Let’s look at income first, since that’s the primary goal of the portfolio.

• The portfolio received $4287 in dividends, an increase of 10.7% over 2018 and a new annual high in dollars received.
• There were 109 dividend payments, 29 dividend increases, and no cuts.

The 2019 income of $4287 represents a 3.9% yield on the portfolio’s value at the beginning of the year.

The following chart shows the annual growth of dividends each year since inception of the portfolio. Note that 2008 was a partial year.

This is my favorite chart, because it illustrates so well the possibilities of dividend growth investing.

The CAGR (compound annual growth rate) of the dividend stream from the beginning of 2009 through the end of 2019 was 10.6% per year. For comparison, think about the raises you got over the last 10 years in your job. Did you get 10% a year?

Organic Income Growth

One of the traits of dividend growth investing is that you select companies that usually raise their dividends. That way, once you own them, you can expect organic income increases each year without doing anything.

This table shows the increases declared by each DGP company in 2019.

The companies in the portfolio declared 29 increases during the year. There were no cuts.

Projected 2020 Income

The following projection comes from Simply Safe Dividends:

The 12-month projection is based on information known now. Therefore, it assumes:

• all dividends will be paid on their normal schedules;
• no dividend cuts;
• no dividend increases later in the year.

The projection already knows about four dividend increases that have been declared for 2020. However, many more dividend raises will come that aren’t known yet. For that reason, 2020’s income will be higher than the projection.

To illustrate how the annual total dividends are higher than early projections, we need to look no further than the year just passed. The initial estimate for 2019’s dividends was $4019, whereas we actually received $4287 – almost 7% more than the initial estimate made last January.

Portfolio Yield(s)

“Yield” is a simple word, but it has nuances that can produce confusion if they are not understood. People mix up different definitions of yield, but you don’t have to – just read the following.

The simple equation for yield is this:

Yield = One year’s dividends / Price

Confusion comes into play because different values can be selected for the numerator and denominator in that equation.

The differences depend on the timeframes covered. You choose values based upon what you want to measure.

This table compares three flavors of yield. All of them are valid, but you do have to know which one you are talking about.

(1) Last Year’s Yield:

The first flavor is last year’s yield: How much did the portfolio yield in 2019?

To get that answer, divide 2019’s income by the DGP’s value at the beginning of 2019.

$4287 / $109,968 = 3.9%

The DGP yielded 3.9% last year. In other words, if you had bought the portfolio at the beginning of 2019, that’s what your yield would have been for the year.

Speaking personally, since I owned the portfolio at the beginning of 2019, that’s what it yielded to me. I received 3.9% of $109,968 = $4287 in 2019.

(2) Current Yield:

Current yield tells you what the portfolio is yielding right now, based on information that we know now. If you were buying a certificate of deposit, this would be called APY: annual percentage yield.

To calculate current yield, divide the current dividend run-rate (the current 12-month estimate) by the portfolio’s current value.

$4543 / $138,984 = 3.3%

The current yield is lower than last year’s actual yield, because the numerator – estimated income for the year – is lower than it will end up being, as explained earlier. However, it is based on the best information we have at the moment.

By the end of the year, I expect that the actual yield for the DGP will turn out to have been above 3.5% for 2020. Some of the “additional” income will come from shares purchased with reinvested dividends, and more will come from dividends that will be increased during 2020. We won’t be sure of the final values until the end of the year.

(3) Yield on Cost:

Yield on cost (YOC) measures how much income the portfolio is generating compared to its original cost back in 2008.

$4543 / $46,783 = 9.7%

The DGP’s YOC hit 9.7% at the end of 2019, which is a new all-time high. What it means is that the DGP is now generating dividends at the rate of 9.7% of the original amount invested per year.

That is the kind of income power that was the original inspiration for the portfolio. It also underscores why I believe that the DGP has proved the concepts of dividend growth investing in real life over its 11-year lifespan.

Let’s say that someone said in 2008, “Here’s $47,000. Create a portfolio that generates more than $4500 cash per year in 2020 without adding any more money along the way.” The DGP has done that.

2019 Dividend Reinvestments

Unlike many dividend growth investors, I do not drip dividends. Instead, I let them accumulate to $1000 and then select a stock to invest in.

My main reason for doing that is always to invest in well-valued stocks.

It also helps me start new positions.

Remember, there is no new money coming in from outside to fund new positions.

They need to be funded internally.

Each dividend is small compared to the value of the portfolio, so sometimes it is easy to forget how much they add up and the significant impact that reinvesting them has on returns over the long haul.

So far in this portfolio, more than $32,000 worth of dividends has been reinvested. That’s 69% of the original starting amount.

I made 4 reinvestments in 2019:

February: Bought Verizon (VZ) to add to existing position (see article).
May: Added to Verizon position (see article).
August: Bought 3m (MMM) as new position (see article).
October: Added to 3M position (see article).

2019 Sales and Turnover

As I practice it, dividend growth investing is mostly about collecting stocks, without much trading or turnover. Most transactions are simple dividend reinvestments.

However, I make occasional trims or outright sales. When I do, I use the money to purchase other shares (i.e., I don’t hang onto it in cash). Here were the DGP’s sells and buys in 2019.

• The 4 blue dots denote the 4 dividend reinvestments discussed earlier.
• The 4 red dots show that I trimmed 3 positions in May (see article) and sold another in December (see article).
• The 4 green dots are the stocks that I bought with the proceeds from the sales. They are described in the articles linked above.

As I said, the DGP is not much of a trading operation. In 2019, I made transactions on only 6 dates.

The 4 sales (red dots) resulted in a portfolio turnover rate of about 6%. For comparison, here are the turnover rates reported by Morningstar for two common ETFs:

• The largest S&P 500 tracking ETF – SPDR S&P 500 ETF Trust (SPY) – 3% reported turnover.
• The largest dividend ETF – Vanguard Dividend Appreciation (VIG) – 16% reported turnover.

Total Return

While total return is not a primary focus of this portfolio, I do record it at the end of each month. Here are its values at the end of the past two years.

Over the life of the portfolio, the DGP’s total return is +197% compared to SPY’s +192% (source), both with dividends reinvested.

If I had invested the original amount into SPY at the end of May, 2008 and reinvested its dividends since then, its total value would now be $136,606. My portfolio’s actual value is $138,984.

The comparative performance is gratifying, because the DGP holds many “defensive” stocks and not many “growth” stocks. Nevertheless, the DGP has kept up with SPY since its inception in 2008.

Most of the DGP’s life has existed in a general bull market. Conventional wisdom would be that defensive stocks would not keep up with the S&P 500 when the market is going up almost continually. Nevertheless, the DGP has done it.

I attribute the DGP’s success on total return to two factors:

• Buying at good valuations.
• The power of reinvesting dividends – the DGP churns out dividends far faster than the S&P 500, so there’s more money to reinvest.

The DGP’s current yield is 3.3% compared to SPY’s 1.8% (source).

Predictions for 2020

I don’t make predictions about what the market or prices will do.

I use this illustration each year to show the futility of predicting the future. It shows USA Today’s predictions for the NFL season that just ended. These predictions were made in July, 2019, so they only needed to hold up for 5 months.

As usual, USA Today’s predictions are littered with things that did not pan out.

Prediction: The Los Angeles Chargers would win the AFC West and win the Super Bowl. Fact: The Chargers missed the playoffs.

Prediction: The Steelers would win the AFC North. Fact: The Steelers did not get into the playoffs either.

Prediction: The Chicago Bears would get into the playoffs as a wild card selection. Fact: The Bears also did not make the playoffs.

Of the eight teams that USA Today predicted would win their divisions, four did not even qualify for the playoffs. Out of the 12 actual playoff teams, USA Today predicted only 6 correctly.

Predicting is hard. So I confine my prognostications to things that I have a lot of confidence in or total control over. I have no control over the market.

Last year, here’s what I said that I expected for the DGP in 2019:

Prediction: I’ll make 4 dividend reinvestments, with 1-2 new positions likely. Fact: That’s what happened.
Prediction: I will try to raise the portfolio’s yield a little, by buying high-quality stocks with higher current yields than the portfolio’s yield. Fact: I did buy higher-yielding stocks, which contributed to the growth of the DGP’s income stream.
Prediction: I will review and update the business plan. I may add a possibility of using CEFs (closed-end funds). Fact: I did amend the business plan to allow CEFs. That said, the DGP still contains no funds, just individual stocks.
• Prediction: No prediction about total return. Fact: The portfolio’s 26% rise is beyond anything I might have reasonably predicted.

Looking ahead to 2020, here’s what I think will happen:

• Prediction: The portfolio’s yield on cost will exceed 10%. That’s been a target for several years, and this year it will happen. It will be a major milestone.
• Prediction: I will make 4 dividend reinvestments, again focusing on high-quality companies with decent yields and dividend growth rates. It’s possible I may make more than 4 reinvestments, because zero-commission trading means that there is no frictional cost any more to making smaller purchases.
• Prediction: As usual, I make no prediction about total return. I hope that it stays competitive with the S&P 500, as it has for more than 11 years. My primary focus will remain on optimizing the income stream.

As a conservative dividend growth investor, I intend to maintain my focus on running a well-rounded stock portfolio that generates reliable, growing income at a faster rate than most common income sources. I expect that the portfolio will also remain competitive with the broader stock market’s total return as measured by the S&P 500 with dividends reinvested.

Thanks for reading. Please continue to follow the DGP’s progress via my monthly updates. In addition to those, I’ll write an article every time I buy or sell anything; you’ll see those articles in the daily newsletter and on DTA’s front page.

To all my fellow investors: Have a happy, healthy, and prosperous 2020!

— Dave Van Knapp

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