When we launched the Income Builder Portfolio back in January 2018, we expected to:

  • Present interesting, high-quality candidates for our readers to research.
  • Demonstrate the portfolio-construction process, buying stocks twice a month using real money provided by Daily Trade Alert.
  • Build a reliable, growing income stream.

More than three years in, those expectations haven’t just been met; they’ve been exceeded.

On Monday, Feb. 22, I executed a purchase order on DTA’s behalf for about $1,000 worth of weapons and defense-systems manufacturer Northrop Grumman (NOC).

There were two separate buys — the first using a limit order for 3 shares at $298.76 each, the second using Schwab Stock Slices to purchase about $103 worth of fractional shares.

With that buy, the IBP now owns 39 companies, representing a variety of industries within all 11 sectors.

And we keep reaching milestone after milestone, all well ahead of schedule.

On the way to the target we established as part of the IBP Business Plan — $5,000 in projected annual income after 7 years — we actually have hit our End of 2021 number just two months into the year.

Our $5,000 target assumed 5% annual dividend growth and a 2.5% overall yield; as the red-circled area in the above table shows, we needed to be at $2,683.75 by the end of 2021 to be on pace to reach it.

Well, the addition of Northrop Grumman has pushed the IBP annual projected income total past $2,695 (as can be seen on the portfolio’s home page HERE) — and we’re not even done with February yet.

So far, 2021 has been a wonderful year for the portfolio’s income growth, as 10 of our companies have announced dividend raises ranging from less than 1% to more than 23%.

OLD DIV is the previous year’s quarterly dividend … NEW DIV is the most recently announced quarterly payout … ** Pepsi has “pre-announced” its June dividend; PEP first will pay its March dividend at the old rate; the June dates in the table for PEP are estimates based on previous years.

Paint-maker Sherwin-Williams (SHW) announced a huge hike on Feb. 17 — only about a week after we added it to the portfolio.

Chevron (CVX) was the lone IBP component that was expected to increase its dividend but instead chose to keep its payout at last year’s amount.

Even counting that disappointing announcement, those 11 companies combined to give the portfolio an 8% raise in the income stream.

NOC = Nice On Cash

Our Northrop Grumman buy came in just ahead of the Feb. 26 ex-dividend date, so on March 17 we will receive $1.45 for each of our 3.3447 shares.

That $4.85 dividend will be reinvested back into NOC, bringing .016 of an additional share into the portfolio — an automatic process known as “dripping.”

Then things will get even better, as Northrop usually raises its payout each spring.

Its average increase has been 13% the last 10 years, but with COVID-19 going on and with earnings expected to be flattish for 2021, I’ll go conservative and predict less than half of that — 6% — to $1.54/quarter.

Multiply that times the new share total of about 3.36, and the mid-June dividend will be about $5.17 — which again will “drip” into another fraction of a share.

And on and on it grows, not only NOC but all of our positions — month after month, quarter after quarter, year after year. Helps explain this project’s name, no?

Analyze This!

Analysts are bullish on Northrop Grumman’s prospects. Fifteen of the 20 surveyed by Reuters rate the stock as Buy or Outperform.

Reuters, via schwab.com

Similarly, 6 of the 7 analysts polled by TipRanks call NOC a Buy, and their average 12-month target price represents a 22% upside. Even the lowest target ($331) is significantly higher than the price we paid to initiate our position.


Other target prices include $353 from Credit Suisse, $350 from Argus, $342 from Value Line and $308 from Zacks.

The most bullish call I’ve seen was from CFRA’s Colin Scarola, who assigns a $450 target — about 50% higher than we just paid.

Scarola’s thesis:

Our Strong Buy reflects NOC’s steady growth regardless of economic or political conditions, and an attractive valuation. We estimate 95% of sales come from government contracts lacking cyclical and default risk seen in the private sector. Further, we expect bipartisan support for funding NOC’s advanced military technology to grow in the coming years, as politicians will increasingly support air, space, and intelligence superiority over non-democratic rival nations.

Valuation Station

As I said in my previous article, one of the many things that motivated me to select Northrop Grumman was that I considered it a good value.

Morningstar Investment Research Center’s analysts agree, saying NOC is trading at about a 10% discount to their $331 fair value estimate.

According to the following Morningstar chart, just about every current metric (red-circled area) makes NOC look attractively valued compared to its 5-year average (green).

The FAST Graphs image below indicates that Northrop’s “blended price/earnings ratio” is well below its 10-year norm (red-circled areas).

The yellow highlight illustrates that while the company’s earnings are expected to be flat in 2021, nice growth is anticipated for the following two years.

Wrapping Things Up

Northrop Grumman’s dividend yield is about 1.9% — exemplifying one aspect I really like about the milestones that the Income Builder Portfolio keeps hitting:

When choosing companies, I have not reached for yield in an attempt to meet the target of $5,000 in projected annual income by the end of 2024.

Fully one-third of the IBP’s holdings have yields of 2% or less, a list that includes five sub-1% yielders.

I figure that if I take care of quality first — selecting outstanding, dividend-growing companies like Northrop Grumman — everything else will fall nicely into place. And so far, it has.

NOTE: The IBP is one of two real-money portfolios I manage for this site. The other is my “growth and income” Grand-Twins College Fund, which includes the likes of Amazon (AMZN), DraftKings (DKNG), Texas Instruments (TXN) and Costco (COST). My next update is scheduled to be published on March 2; in the meantime, be sure to check out the GTCF home page HERE.

— Mike Nadel

This article first appeared on Dividends & Income

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