In my public Dividend Growth Portfolio (DGP), I reinvest dividends every month. That is a procedural change from prior years, when I waited until they accumulated to $1000 in cash before reinvesting.
The reason for the new approach is that my dividend run-rate has increased so much that there are now enough dollars coming in to make a decent-size investment every month.
When I reinvest dividends, I like to keep faith with my readers. Therefore, my Shopping List consists of (1) stocks that I already own, and (2) stocks that I have written about during the previous 12 months. That gives me plenty of fine opportunities to choose from.
Reinvesting dividends is part of portfolio management. Because I never add new outside money to the DGP, reinvesting is the only way to grow the portfolio beyond the natural growth in the stocks themselves.
Each reinvestment seems small, but over the nearly 13 years of the portfolio’s existence, I have reinvested around $38,000. Dividends add up!
I use reinvestments to build existing positions or to start entirely new positions. The DGP has 28 stocks now, and my Business Plan allows for up to 35, so I can go either way each month.
This month, I decided to build a position that is already in the DGP. I started this position last May and added to it in August. While its price has risen since then, it is still undervalued (or at worst fairly valued).
The stock is General Dynamics (GD). GD is a high-quality defense company with a 2.7% yield, very safe dividend, and 29-year streak of raising its dividend every year.
Simply Safe Dividends just reaffirmed its near-perfect safety score of 97 on February 11, following GD’s Q4 earnings release.
I don’t know for sure, but this may be the last time I have for a while to grab GD at a decent price. Here’s how its price has gone since I bought it last year.
The source of the graph is FASTGraphs. The dark dot shows GD’s price at the end of April, 2020, just before I first bought GD. I placed green dots on the price line to show where I bought it in May and August in 2020.
My first purchase was at $138 and the second at about $153. GD’s price has risen about 6% since then, but it is still in the fair-value range. Morningstar recently raised their fair-value estimate to $182; they think it is undervalued.
I placed my order shortly after the stock market opened on Wednesday, and it was filled immediately. I bought three shares. Here is the order summary from E-Trade.
The total amount spent was $486 for the 3 new shares. That leaves $109 unspent, which will roll over for reinvestment next month.
Impact on My Portfolio
The additional 3 shares of General Dynamics gives me a total of 17 shares of GD. The number of positions in the portfolio stays the same at 28. The proportion of GD in the portfolio goes up slightly to just under 2%.
These graphics from Simply Safe Dividends show my portfolio’s annual rate of dividend income before and after the addition of the new shares.
As you can see, the portfolio’s dividend flow increased by $13 per year, or about 0.3%.
I know that sounds small, but look at it this way: If I make 12 reinvestments per year, and they each add between 0.2% and 0.3% to the DGP’s income, that amounts to a 3% increase in income without doing a damn thing other than reinvesting the dividends.
In other words, every company in the portfolio could freeze its dividend, and I would still get 3% more income over the coming 12 months. But of course, all the rest will not freeze their dividends. Most will raise them. The increase from reinvesting is on top of the increases the companies themselves make.
Speaking of which, if GD follows its usual schedule, its next dividend declaration will include its 2021 increase announcement. Last year, the declaration came in early March, just a few weeks from now. I’m keeping my fingers crossed for an increase in the 6% to 8% range. Last year’s bounce was 7.8%, when the impact of the pandemic was just becoming recognized by companies as they were committing to dividend increases.
This addition to General Dynamics continues my heightened emphasis on company quality over the past several years. GD’s quality is stellar.
The purchase is also an example of opportunistically investing in excellent companies when the market has undervalued them for some reason. As the entire market is widely considered overvalued, it’s great to find a high-quality company available for a fair or discounted price.
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 fit my needs and grab them when their prices are discounted.
That happens 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.
Finally, buying GD continues a move into defense stocks that I have been executing over the past year. I did not have a particular strategy to dive into defense stocks. I found them by looking for great quality and good valuations for a dividend-growth portfolio.
In the past 12 months, I have added 17 shares of General Dynamics and 9 shares of Lockheed Martin (LMT), another defense powerhouse. To repeat a joke I’ve made before, that makes my portfolio well-fortified. Get it?
Other Reading on General Dynamics
We Just Bought More Shares of General Dynamics (GD) and Reynolds Consumer Products (REYN) (Mike Nadel, January 2021)
I Just Added More Shares of General Dynamics (GD) to My Dividend Growth Portfolio (Dave Van Knapp, August 2020)
Undervalued Dividend Growth Stock of the Week: General Dynamics (GD) (Jason Fieber, May 2020)
Dividend Growth Stock of the Month for June, 2020: General Dynamics (GD) (Dave Van Knapp, May 2020)
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This article first appeared on Dividends & Income
The goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.