I have run the real-money Dividend Growth Portfolio (DGP) since 2008. While the DGP is generally a buy-and-hold enterprise with little turnover, it is not a passive buy-and-ignore portfolio. Indeed, one of the things I try to demonstrate through the DGP is thoughtful portfolio management.
The DGP’s business plan designates specific circumstances that call for possibly selling or trimming a position. One such guideline kicks in if a position exceeds the maximum size that I allow.
I recently changed the business plan to reduce the maximum position size of any holding from 10% down to 8%. That caught two positions above the new max-size limit:
• Johnson & Johnson (JNJ) at 8.3% of the account
• Microsoft (MSFT) at 9.2%
To get them back into line, I decided to trim each one back to about 7%. That will give them a little headroom if they continue to go up in price.
A second portfolio-management guideline often comes into play when a position becomes oversized: Overvaluation. While both JNJ and MSFT are of the utmost high quality, they are both overvalued.
Johnson & Johnson has crept just a little above fair value. But Microsoft is massively overvalued, as shown by its price compared to the two fair-value reference lines on FASTGraphs:
You probably know that yield and price are inversely related: As price goes up, yield goes down. That’s what has happened to Microsoft’s yield over the past five years. It has slid to just 1.05%:
Over the life of this portfolio, most sales have been triggered by that combination of events: The position is oversized, and the stock is overvalued.
To sell here is to fly in the face of a lot of conventional wisdom.
Many investors will say, “Let your winners run.”
I understand why they say that, but that is mostly a price-centric concept.
This portfolio is income-centric.
Without overtrading, I manage it to increase its income flow within the strategic framework that guides everything that I do, as laid out in the business plan.
To get each of the two oversized stocks down to about 7% of the portfolio (or about $10k each), I did the math, and I need to sell 12 shares of JNJ and 14 shares of MSFT. I did that shortly after the market opened on Tuesday, January 19.
Those two sales brought $4946 cash into my account to be invested elsewhere.
As you may know, I recently changed my business plan to reinvest dividends each month, rather than wait until they accumulate to $1000. For January, I decided to add the reinvestment in with the other transactions and get everything done at once.
Adding the portfolio’s accumulated dividends to the proceeds of the sales above gave me a total of $5867 to invest.
My “shopping list” consists of (1) stocks already in the portfolio, (2) stocks I have written favorably about over the past 12 months, and (3) stocks in my Top 30 Dividend Growth Stocks for 2021 eBook.
After reviewing the shopping list, I decided to split the money into three purchases. This table summarizes the stocks that I chose.
I split the money about equally among the three purchases. I made all of the transactions within the first 15 minutes after the market opened. When I was done, I had made these additions to the portfolio.
The total amount spent was $5731. That left $146 in cash behind, which gets the kitty for February reinvestment off to a good start.
Portfolio Before and After
Here, from Simply Safe Dividends’ Portfolio function, is a snapshot of the portfolio prior to the transactions:
And here is the summary after making the trades:
What did the transactions accomplish?
1. The DGP’s annual dividend income went up $125 per year, or about 0.3%. That doesn’t sound like much, but it is these incremental increases that, over time, build your “wall of income” for retirement.
2. The portfolio’s current yield went up 0.7%.
3. The portfolio’s diversification shifted a little toward Utilities, which edged slightly ahead of Health Care. Information Technology shrank a little, but it is still the second-largest sector holding.
4. Overall dividend safety and organic dividend growth rate stayed the same.
5. The DGP becomes a little more balanced, with no position exceeding 8% of the portfolio.
6. The portfolio now has 28 companies, up from 27.
How Did I Find UGI?
UGI is one of the stocks featured in Top 30 Dividend Growth Stocks for 2021. This is how the introduction to the 8-page analysis of UGI looks in the book:
UGI has a very good dividend record:
In the book, I assessed UGI’s fair value at $43 and its “maximum buy” price at $48. I got it for about $37.50, which is a very good deal.
Utilities in general have only recovered about half of their price drops from the Covid-19 pandemic crash last February. That has been a gift for dividend growth investors.
I always say to invest like you’re the CEO of your own business. Perhaps the most important decisions a business owner makes are about how to allocate capital.
That’s what I am doing here: Allocating capital. I am moving capital from two stocks that are overvalued and oversized for my portfolio, plus targeting the reinvestment of dividends that accumulated over the past couple months.
I moved the capital into three stocks. Two of them (Lockheed Martin and Verizon) are smaller positions that I want to build up. The third (UGI) is an attractive utility with a strong dividend record. It becomes the 28th stock in the portfolio.
For more insight into running your investing like a business, see DGI Lesson 12: Run Your Investing Like a Business.
For more insight into the three stocks that I bought, see these articles:
Dividend Growth Stock of the Month for December, 2020: Lockheed Martin (LMT) – Dave Van Knapp, October 2020
Tara’s Breakout Stock Alert: Verizon Communications – Tara Young, September 2020
This Dividend Growth Stock Appears 30%-plus Undervalued: UGI Corporation (UGI) – Dave Van Knapp, April 2020
All of the changes in the DGP will be reflected in the next monthly portfolio update at the beginning of February.
Get More Great Stock Ideas for 2021 from My Dividend Growth eBook
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— Dave Van Knapp
This article first appeared on Dividends & IncomeWe’re Putting $2,000 / Month into These Stocks
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