I have run my public real-money Dividend Growth Portfolio (DGP) since 2008. While it’s generally a buy-and-hold enterprise with little turnover, the DGP is not a passive buy-and-ignore portfolio. The best moniker for it is buy-and-monitor.
This year has been unusual. Circumstances have led me to make more adjustments in the portfolio than normal, including selling completely out of two companies.
- January: Trimmed Microsoft (MSFT) and Johnson & Johnson (JNJ)
- July: Sold out of AT&T (T)
- Trimmed Microsoft again
- Just now: Sold out of Hasbro (HAS)
Altogether in 2021, I’ve turned over $18,114 value in the portfolio, or about 12% of the average portfolio value. For an operation that sometimes goes a year without any turnover, this is highly unusual.
The final move listed above is the subject of this article. I decided to sell out of Hasbro (HAS) and replace it with two new positions for the portfolio: The insurance giant Prudential (PRU) and the high-yield ETF QYLD.
Why Sell Hasbro?
I owned Hasbro since 2012. I made a single purchase then and never added to it. That position more than doubled in value, not counting the dividends that the company paid me over the years.
But in the past few years, Hasbro’s fortunes changed, for both fundamental reasons and because of Covid.
The most noticeable change for a dividend-growth investor like me was that Hasbro froze its dividend. Its last increase was in 2019. In the following chart, you can see that Hasbro has now made 10 straight payments at the same amount, and it has announced its eleventh with no increase to be paid in November.
While the company’s dividend is rated safe (unlikely to be cut), and its yield is OK at 3.1%, its November dividend will be the its final payout of the year. Without an increase in 2021, Hasbro – which had a dividend-growth streak of 17 years – has been removed from the Dividend Champions list, because it will finish 2021 having paid the same total amount as in 2020. Its dividend-increase streak is over.
A frozen dividend by itself is reason enough for me to “seriously consider” selling a company under the portfolio’s business plan. But my default action is to hold, and I gave Hasbro 2½ years to declare an increase. But it has kept its dividend frozen, and its stock price has stagnated too, as shown here.
I finally decided that it is time to move on.
The sale itself was straightforward. On Monday, October 25, I sold my 52 shares of Hasbro, receiving $4619 for them.
By relinquishing those shares, I also forego the $141 in annual dividends that Hasbro has been sending me.
Why Buy Prudential?
Prudential Financial (PRU) was my Dividend Growth Stock of the Month in July.
Here it is summed up:
Things that I like about Prudential are:
- High yield at 4.0%
- High dividend growth rate, which was 16% per year for the prior 5 years, before dropping to 5% this year. I compute the new 5-year DGR at 12% per year.
- Good dividend safety score (75 /100) from Simply Safe Dividends.
- Solid, sustainable, profitable business, with investment-grade quality and financial ratings from independent analysts to go along with an A-level credit rating from S&P.
Regarding Prudential’s valuation, I updated my valuation from July’s article, because Prudential’s price has gone up since then. I concluded the following.
At a current price of $114, I was able to obtain Prudential right at what I consider its fair price and fair yield (4%).
I bought 32 shares, using $3565 of the proceeds from selling Hasbro.
As we will see, that purchase completely made up for the loss of dividend income from Hasbro, and it still left me with $1054 to spend.
Why Buy QYLD?
The NASDAQ-100 Covered Call ETF (QYLD) was my Dividend Growth Stock of the Month for October.
QYLD is not actually a stock, it’s an ETF. And it’s not a dividend-growth ETF either. Most of its stocks don’t even pay dividends.
What QYLD is, is an income generator. It generates a high yield – 11.3% currently – by writing (which means selling) covered calls on the tech-heavy Nasdaq-100 index.
QYLD earns the money to distribute to shareholders by collecting premiums from the buyers of those covered calls. It sends out dividends (or distributions if you prefer) monthly.
As with all ETFs, QYLD’s individual payments vary in size, as shown on this chart of QYLD’s payouts since its inception in 2014.
But when added up by calendar year, they smooth out, as shown here.
Those payouts have tended to produce yields in the 11% range the past few years, as indicated by the yellow stripe I drew on the next graph.
So overall, QYLD’s dividends don’t grow much, but they’re large.
Why would I add such an animal – high-yield, no-growth — to my dividend-growth portfolio?
Because copious dividends from an income generator like QYLD can be reinvested back into conventional dividend-growth stocks. That, in turn, grows the portfolio’s overall dividend stream by adding more shares of dividend-paying stocks.
By buying conventional dividend-growth stocks using QYLD’s high yield, I can improve the portfolio’s quality, dividend safety, dividend growth rate, and other attractive characteristics.
That’s how I intend to use QYLD.
This is an experiment for me. Prior to this year, I never held ETFs in the Dividend Growth Portfolio. Now I own two, having added the Schwab U.S. Dividend Equity ETF (SCHD) earlier in the year.
- SCHD is a portfolio of dividend-growth stocks that pays its dividends from their dividends.
- QYLD is an income generator that pays dividends by selling covered calls and collecting premiums for them.
Buying the shares of QYLD was straightforward, since ETFs trade on the market just like stocks do. I snagged 41 shares of QYLD at a price of $22.66/share, for a total of $929.
The current yield of QYLD is 11.3%, and it pays monthly. Valuation looked good at the 11.3% yield point. In my prior article on QYLD, I suggested that it was at a fair price any time it yielded 11% or more.
Summary of Changes to the DGP
Here are the transactions I made:
The red dot indicates the sale of Hasbro, while the two green dots mark the purchases of Prudential and QYLD.
Here is a portfolio summary from Simply Safe Dividends after making the trades:
My annual dividend income went up $111 to $5301 per year. The former income from Hasbro ($141) went away, but the projected income from Prudential ($147) and QYLD ($105) more than makes up for that.
The net of the three changes is +$111 in annual income.
That, in turn, jumps the portfolio’s yield on cost to a new record high of 11.3%.
Here’s what the transactions accomplished:
- The DGP’s annual dividend income went up $111 per year, or about 2%.
- The portfolio’s probable dividend growth rate inched up a little by getting rid of Hasbro, which was not growing its dividend.
- Overall dividend safety stayed about where it was, and the portfolio’s organic 5-year dividend growth rate improved from 6.7% per year to 7.0% per year.
- The portfolio’s yield on cost went up 0.2% to 11.3%. I have succeeded in overcoming the income I “lost” when I sold AT&T in July.
- I added one position (net) to the portfolio, bringing it up to 31 positions. The business plan calls for up to 35 positions, so there’s room for more as opportunities arise.
This table summarizes my portfolio management moves in 2021.
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 did here: I moved capital from a stock (Hasbro) whose dividend characteristics made it unsuitable for my dividend-growth approach, and into two investments that I believe will generate more dividends and more portfolio growth in the future.
On running your investing like a business:
–Dave Van Knapp
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.