Last year, Dominion Energy (D), which I owned, “pre-announced” a dividend cut several months in advance. They had decided to sell their non-regulated businesses to Berkshire Hathaway (BRK), which would both reduce the size of their company and also the size of their dividend.
While Dominion probably became a better company by divesting those assets, its stock price was no longer justified and its pending dividend cut was hanging in the air. So I decided to sell it from my Dividend Growth Portfolio.
I replaced Dominion with Pinnacle West Capital (PNW), an Arizona-based utility. I had just “discovered” PNW as my Dividend Growth Stock of the Month last July (Dividend Growth Stock of the Month for July 2020: Pinnacle West (PNW)).
The timing couldn’t have been better. Pinnacle West was a perfect replacement for Dominion: Same sector, high quality, better yield.
In my Dividend Growth Portfolio, I reinvest dividends every month using dividends that have accumulated since the previous month’s purchase. Sometimes I buy more of a stock that I already own, while other times I start an all-new position.
In the month since my February reinvestment, the dividend kitty has grown to $426. So on Monday, March 15, I went shopping.
I decided to add more shares of PNW to my portfolio. I like the stock a lot. In fact, I am adding PNW this month not only to my public portfolio, but also to my wife’s and my personal dividend-growth portfolio.
Pinnacle West’s Quality and Valuation
In my Quality Snapshot system, PNW is tied for the highest-rated utility with 22 out of a possible 25 points.
One reason that PNW scores so well is its A- credit rating from S&P, which is high for a utility. Utilities are usually debt-laden and in capital-intensive businesses, and they often sport lower (i.e., higher-risk) credit ratings.
Valuation-wise, without getting into all the details, I calculate a fair price for PNW of almost exactly its current price. So for a high-quality stock like PNW, that’s a reasonable deal. At its current price, PNW has a nice yield of 4.2%.
The source of this price graph is FASTGraphs. I placed two dots on the price line to show where I bought it last July and on Monday (March 15). Its price has moved up about $3 since my purchase last year, but as noted earlier, it is still fairly valued.
I had enough money to buy five shares. Here is the order summary from E-Trade.
The total amount spent was $398 for the five shares. That leaves $28 unspent, which will roll over for reinvestment next month.
Impact on My Portfolio
The additional five shares of PNW gives me a total of 42 shares. The number of positions in the portfolio stays the same at 28.
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 $16 per year, or about 0.3%.
I say the following with every reinvestment: I know that increase 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 thing other than reinvesting the dividends.
In other words, if every company in the portfolio froze 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. Eleven companies in the portfolio have already raised their payouts for 2021, and most of the remainder will also declare increases.
The increase in your income from reinvesting is on top of the increases the companies themselves make.
If PNW follows its usual schedule, it will declare 2021’s increase later in the year, in time for the payment to be made in December. Last year’s increase was over 6%, and that is now being paid with distributions this year.
One last impact to highlight is the diversification of the portfolio. The purchase of more PNW increases my proportion of utilities a little. Many DG portfolios have quite a bit more utility exposure (and less tech) than mine.
I don’t try to replicate the S&P 500’s weights or anything, I just like my portfolio to be “well rounded,” which is deliberately vague. I diversify across sectors, yields, and growth rates. One thing I don’t diversify across is quality: I go for high quality whenever I can get it.
This addition to Pinnacle West continues my heightened emphasis on company quality over the past several years.
PNW is a high-quality company, and its high dividend safety score increases by a little the dividend safety of the whole portfolio. This graphic from Simply Safe Dividends underscores the portfolio’s overall dividend safety:
The purchase is also an example of opportunistically investing in excellent companies at attractive prices when they are available. As the entire market is widely considered overvalued, it’s great to find a high-quality company available for a fair price. The market being the market, attractive prices come and go all the time.
That’s generally how I invest. I keep surveying the landscape for companies that fit my needs and grab them when their prices are fair or on sale. I don’t care what order I buy stocks in; I just need them to meet my requirements when I buy them.
Other Reading on Pinnacle West Capital
Undervalued Dividend Growth Stock of the Week: Pinnacle West (PNW) (Jason Fieber, September 2020)
I Just Sold Dominion Energy (D) and Bought Pinnacle West Capital (PNW) (Dave Van Knapp, July 2020)
We Just Sold Dominion Energy (D) and Bought Pinnacle West Capital (PNW) and Avista (AVA) (Mike Nadel, July 2020)
Dividend Growth Stock of the Month for July 2020: Pinnacle West (PNW) (Dave Van Knapp, July 2020)
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This article first appeared on Dividends & IncomeWe’re Putting $2,000 / Month into These Stocks
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