In my Dividend Growth Portfolio, I reinvest dividends every month.
I let dividends accumulate for 4-5 weeks, then pick out a nice addition for my portfolio. Sometimes I buy more of a stock that I already own, while other times I start an all-new position.
In the last month, incoming dividends have accumulated to $396. So on Monday, April 12, I went shopping.
After holding my monthly “derby” among a few stocks to decide what to buy, I decided to add more shares of Verizon (VZ) to my portfolio.
Why I Selected Verizon
Verizon has been our cell-phone provider forever, and I first bought the stock in 2018. It is a high-quality company with a nice 4%+ yield.
Here is a quick summary of the stock.
Among the attractive qualities of Verizon are its yield (4.4%), Quality Snapshot score (22 out of 25 points), and decent valuation.
Verizon is a high-yield, slow-growth DG stock. It increases its dividend at only about 2% per year. Some investors would find that unacceptable, but it’s OK with me for a stock yielding >4%. I wouldn’t accept it for, say, a 1%-yielder.
Verizon currently occupies 4% of my portfolio, so there is room to add more. I allow a position to be up to 8% of the whole portfolio.
I think Verizon is 7% undervalued right now, meaning that its price is, at worst, a fair deal. I use four valuation methods and average them out (see DGI Lesson 11: Valuation). Here’s what I come up with for Verizon’s pricing:
The source of the following price graph is FASTGraphs. I placed maroon dots on the price line to show where I bought Verizon in 2018, 2019, and 2020, and I placed a green dot to show where I bought it on Monday. There hasn’t been much price movement in three years.
The magenta and blue lines are fair-value references based on two of my four models. As you can see, Verizon’s price is below both of them. That’s what I like to see.
I placed the order mid-day on Monday, April 12. Here is the summary from E-Trade.
I had enough money to buy 6 shares (I don’t buy fractional shares). The total amount spent was $345. That leaves $51 cash left over, which I will simply retain for investment next month.
Impact on My Portfolio
The addition of six shares of Verizon gives me a total of 114 shares. Since I already owned 108 shares of Verizon, 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.
The additional shares of Verizon will add $15 to the portfolio’s annual dividend flow, or about 0.3%.
Here’s my little lecture with every reinvestment: I know that $15 increase sounds small, but here’s the deal: 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, I would still get 3% more income over the coming 12 months.
But of course, all the rest will not freeze their dividends. In fact, so far this year, 12 companies have already announced increased payouts for 2021, and most of the remainder will also declare increases through the end of the year.
The increase in your income from reinvesting is on top of the increases the companies themselves make.
Verizon has not yet declared its increase for this year. That will come later in the year for the payout to be made in November.
One last impact to mention is the DGP’s diversification. The purchase of more Verizon increases my proportion in Communication Services by a tiny bit.
I don’t try to replicate the S&P 500’s weights nor follow any other rules, I just like my portfolio to be “well rounded.” I diversify across sectors, industries, yields, and growth rates.
One thing I don’t diversify across is quality: I go for high quality whenever I can get it. Verizon scores 22 out of 25 points on my Quality Snapshot, which is above average.
As shown below, Communications Services makes up about 9% of my portfolio. Four other sectors rank higher and four rank lower. Health Care is equally weighted with Communications.
This addition to Verizon seems ideal for my DG portfolio. I get a high-quality company with a high yield and a very safe dividend.
Verizon’s dividend grows slowly, but that is offset somewhat by the fact that I reinvest all dividends, which gives my portfolio a 3% annual DGR before any raises are even considered.
This purchase is 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.
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 started this morning with a list of 11 possible companies for this purchase, narrowed the list down based on quality, yields, valuations and other characteristics, and Verizon emerged as the best company to add this time around.
I don’t care what order I buy stocks in; I just need them to meet my requirements when I buy them. Verizon does that nicely.
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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.