This article first appeared on Dividends & Income
In my public Dividend Growth Portfolio (DGP), I reinvest dividends when they accumulate in cash to $1000 or more.
That happened after the close of trading on Monday, August 17. So on Tuesday, August 18, I went shopping. I love to shop for stocks with a pocketful of dividends to reinvest.
Last week, I published a review of the DGP. I focused on its diversification, dividend safety, and the nebulous concept of “defensiveness.”
One of those stocks was General Dynamics (GD), the industrial/defense behemoth, and that’s what I decided to buy.
The decision was not hard.
General Dynamics was my Dividend Growth Stock of the Month for June.
It’s a high-quality company that got hit hard by the Covid crash earlier this year, and its price hasn’t fully recovered yet.
That presents a great situation for an opportunist like me.
General Dynamics scores nearly perfectly on my Quality Snapshot system. On a 25-point system (5 points for each category), GD scores 24 points. It is an elite company when it comes to quality ratings.
The following graphics show that GD is undervalued. The first graph, from FASTGraphs, shows GD’s price is beneath both their basic “default” valuation (orange line) and a custom valuation based on GD’s past-5-year market pricing (blue line).
The next graphic, from Morningstar, shows that they too think GD is undervalued.
Finally, as to valuation, Simply Safe Dividends reports that GD’s current dividend yield (2.9%) is 41% higher than its 5-year average.
I indicated in last week’s article that since my portfolio now might be called “mature,” I can relax my valuation requirements a little as I go around picking up stocks that I simply want to add in order to enhance the portfolio’s quality, defensiveness, and safety.
In General Dynamics’ case, I don’t have to compromise anything. It’s a high-quality company, with a great dividend-growth record, available at a discounted price.
That’s everything a dividend-growth investor can ask for.
I executed the purchase on Tuesday morning, August 18. Here is the confirmation from E-Trade.
I got 7 shares of GD for $153.41 each. Total cost = $1074. There was no commission.
While GD’s price has risen 11% over the past three months, it is still undervalued.
These are the kinds of situations that an investor dreams about, when a stock you want stays undervalued while you collect more cash to buy more.
Impact on My Portfolio
These graphics from Simply Safe Dividends show my portfolio’s annual rate of dividend income before and after the addition of the 7 new shares of General Dynamics.
As you can see, the DGP’s income increased by $31 per year, or about 0.7%. The number of positions in the portfolio stays the same at 26. The proportion of GD in the portfolio doubles to 1.5%.
Whenever I reinvest dividends, I like to point out that although the size of the addition sounds small, repeated purchases like these help a dividend growth portfolio to expand organically.
Since the portfolio began in 2008, I have reinvested more than $35,000, and every transaction looked much like this one: Small. Dividend growth investing can appear slow, but it turbocharges the portfolio’s cashflow growth:
• From 2009 to 2019, the dividend flow from the portfolio grew at a CAGR (compound annual growth rate) of 10.6% per year. That is way more than inflation, and if you owned bonds instead, their annual income growth rate would be zero.
• The portfolio is now paying me 10.2% per year of the original amount I invested to start the portfolio.
• I currently estimate that I will receive about 11% more income in 2020 than I got in 2019.
This addition of General Dynamics shares continues the heightened emphasis on company quality that I have been pursuing for several years. GD’s quality is stellar.
That’s generally how I invest. I don’t focus on a few companies that I “gotta have” and then pay any price to get them.
Rather, I keep surveying the landscape for companies that I want to own, and try to pick them up when their prices are discounted.
That happens a lot more often than some investors understand. I don’t care what order I buy things in; I just need them to meet my requirements when I buy them.
To be honest, I would be willing to pay full price for a company like General Dynamics. To find it at a 15%-or-so discount just makes it better: Lower price combined with higher yield.
Other Reading Resources
A Few Words About My Upcoming E-Book
In December, I will publish Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing.
This will be my 8th e-book on dividend growth investing, and my first since 2014. The book will contain lots of new material, plus of course complete analyses of 30 of the best dividend growth stocks.
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