I Just Bought More Shares of Lockheed Martin (LMT) for My Dividend Growth Portfolio

My Dividend Growth Portfolio (DGP) is a real-time, real-money demonstration of dividend-growth investing. The portfolio is now in its 14th year. I started it in 2008.

I want to tell you what I bought in November in my monthly dividend-reinvestment program.

I’ll start off by saying that I strongly considered jumping on the shoulders of my colleague, Mike Nadel. Mike made a compelling case for Snap-On (SNA) a couple of weeks ago.

But that would have been a new position for me, and I decided instead to focus on the small positions in my portfolio. My portfolio has 31 positions, and the maximum size I allow for any one is 8% of the total portfolio value. Some positions are in the 6%+ range, while others are relatively tiny.

The average size is 3.2%. Here are the ones that are less than 3% of the DGP. I was a little surprised to see that 19 of my 31 stocks are such relatively small positions. The relative size of each one is shown in the last column.

My instinct tells me to consolidate a few of them, but some of the positions are small for good reasons:

QYLD – This is an experimental position that I just started in a high-yield ETF, which I intend to keep at a minimal size for a while I observe how it works out. With its high yield and small growth, I want to see if it has a place as an income generator in this kind of portfolio.

SCHD, MRK, PRU, and ABBV are new positions (all started in 2021) that I have been building up since I started them. They are small because they are young.

But other positions are small because I started them small several years ago, and I haven’t paid much attention to building them up. Sometimes it’s more fun to find a new “name” for a portfolio than attend to the more boring business of sticking with previous good ideas.

So this month I decided to add to one of my smaller positions that I have owned for a while, and whose investment thesis is still strong.

Lockheed Martin (LMT) jumped out at me from the list above, because I’ve been aware that its price has slid recently. In the logic of dividend-growth accumulators, price drops are good things, because they often signal good valuations, higher yields, and better long-term risk profiles.

Lockheed Martin (LMT)

Lockheed Martin was founded in 1912, and it is now the world’s largest defense contractor and supplier of fighter aircraft.

LMT is organized into four segments:

  • Aeronautics
  • Mission Systems
  • Missiles and Fire Control
  • Space Systems

This diagram shows how much each segment contributes to LMT’s overall operation.

LMT’s products include the F-35 joint strike fighter, various combat aircraft, missile defense systems, military helicopters, and satellite systems.

The majority of Lockheed Martin’s business is with the U.S. government, with a smaller fraction coming from international governments.

Lockheed Martin’s scale and reputation give it a pre-eminent position in the defense industry. Few other firms have LMT’s capacity to fulfill massive decades-long defense projects from start to finish.

Lockheed Martin grades at almost the maximum level on quality. Here is its Quality Snapshot:

LMT falls just one point short of a perfect score, landing in the highest tier of ratings in four of the five categories, and gaining 24 /25 total quality points.

As a dividend-growth investor, I pay special attention to a company’s dividend record.

Lockheed has paid uninterrupted dividends since 1995 and raised its payout each year since 2003. LMT’s yield of 3.3.% is higher than my portfolio’s yield.

LMT is a mid-yield, fast-growth DG stock, which puts it pretty much in the wheelhouse for many dividend-growth investors.

Finally, I find LMT to be undervalued. I mentioned that its price has been sliding recently. In fact, it has been flat for almost four years (as shown by the green arrow on the following chart) even though its earnings have been growing steadily and are expected to grow in the next two years (see the yellow highlights at the bottom).

Without going into the computational details, I come up with these valuation estimates:

At its current price of about $340 and yield of 3.3%, LMT is a steal for a long-term dividend-growth investor.

The Purchase

In addition to the dividends I had accumulated since last month’s reinvestment, Realty Income Trust (O) recently spun off its office assets into a new company in which I have no interest. They “gave” me 13 shares in the new company, which I sold as soon as I could on Monday, November 15. That added $299 to my kitty for reinvestment, giving me a total of $742 to work with.

The extra money allowed me to purchase two shares of Lockheed Martin on Tuesday, November 16.

Below is my LMT position before and after the purchase. In the lower line, I highlighted the two new shares and the advance of the position to 2.4% of my portfolio.

Impact on My Portfolio

Here is the impact of the new shares of LMT on my portfolio’s income:

The additional $22 in annual income is a 0.4% increase. That is not quite enough to move the needle on the portfolio’s yield on cost when rounded to one decimal place, but it is another step forward.

This chart shows the relentless upward movement in dividend dollars from these monthly reinvestments:

You can see how the small regular increments add up. The following table shows the details of each reinvestment this year, with this month’s purchase highlighted in yellow:

As highlighted in green at the bottom, the dividend reinvestments by themselves have added 3.9% to my annual dividend run-rate, with one more month still to go.

Final Thoughts

Your income, as a dividend-growth accumulator, goes up each year for three reasons.

  1. Dividend reinvestments

My reinvestments, shown in the chart above, illustrate this growth perfectly.  

  1. Portfolio adjustments

Some investors tinker with their portfolio more than others. I make adjustments only when circumstances suggest that it’s a good idea, based on the guidelines in my portfolio’s business plan. Some years I make no adjustments at all, although 2021 has been relatively busy.

My biggest move this year was to jettison AT&T in July after it fell from the ranks of dividend-growth stocks. While that change actually lowered my dividend stream for a while, most adjustments that I make raise it.

This segment of growth has increased my annual dividend run-rate by $49 or 1% this year.

  1. Dividend Increases from portfolio holdings

The increases that the companies make in their dividend payouts is usually the largest source of overall growth in annual dividends. So far this year, I’ve received 31 raises, with one more likely.

At the end of the year, I will add up the total growth coming from this source. It will be around $300.

Bottom line:

Overall, it looks like the DGP’s 2021 dividends received will increase around 11% over 2020’s total. That will have come approximately 4% from dividend reinvesting, 1% from portfolio trading, and 6% from dividend increases.

That leads to the following. I call this My Favorite Chart, because it shows the long-term real-life growth in annual dividends from this portfolio. The chart is up-to-date as of the beginning of November.

This article is not a recommendation to buy, hold, sell, trim, or add to Lockheed Martin (LMT). Any investment requires your own due diligence. Always be sure to match your stock and fund picks to your personal financial goals.

— Dave Van Knapp

We’re Putting $2,000 / Month into These Stocks
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.

Source: DividendsAndIncome.com