My Dividend Growth Portfolio (DGP) wrapped up 2021 in great shape. Here’s a bird’s-eye summary of the portfolio as we enter 2022.

  • Total value grew 20.9% to $177,219. That is a record high for the DGP since the portfolio began in 2008. It has gained 279% in total value since it was started about 13½ years ago.
  • Number of positions grew by two stocks plus 2 ETFs. The ETFs are the first funds that the portfolio has owned.
  • Current yield fell by 0.2 percentage points. This does not indicate falling income. The income rose. Rather it reflects the big jump in the portfolio’s total value. Yield is inversely related to price.
  • Annual income run-rate grew 11% to $5421.
  • Yield on cost grew to 11.6%, a new record high. YOC tells us the speed at which the portfolio is delivering dividends compared to what I originally spent to establish the portfolio. YOC also increased 11% over a year ago, same as the annual income run-rate.
  • Dividend income grew 9.5% over 2020 to $5197. That is a new record high for one year’s dividends collected. I also received an additional $299 when I sold the shares of a spin-off that I did not want.

The DGP’s Objectives

The DGP is a real-time, real-money demonstration of dividend growth investing. It is not a back-test, model, or hypothetical.

The DGP illustrates dividend-growth investing in real life. Iit presents actual situations and examples that investors can relate to their own investment lives.

The DGP has two financial goals.

The primary goal is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement.

Obviously, this is a cash-flow goal, not a wealth goal. The main idea is to develop an “optimal” income stream. That means I want the income to be (1) large enough for retirement needs, (2) reliable, and (3) to grow every year.

The DGP has been successful in meeting that goal. Dividends received in the DGP’s first full year – 2009 – were $1568. By 2021, that amount grew to $5197, or more than 3 times the 2009 total.

That is the result of a CAGR (compound annual growth rate) of 10.5% over the life of the portfolio. That is a fast dividend growth rate for a portfolio yielding over 3%, in my opinion.

The following is my favorite chart, because it illustrates so well the possibilities of dividend growth investing.

(Note that on the chart, 2008 was a partial year. Therefore I compute annual growth beginning with the first full year of the DGP’s existence, which was 2009.)

These results have been achieved without any new outside contributions since the portfolio kicked off in 2008. No additional monthly or quarterly deposits have ever been made into the DGP.

The results have come solely from:

  • the original stocks picked;
  • receipt and reinvestment of dividends; and
  • portfolio management – such as the addition of more stocks and a couple of ETFs – over the past 13+ years.

The dividends are all generated from within the portfolio itself. That means it is “organic” income. I don’t have to sell shares to receive cash. The companies themselves send cash to me. My original capital stays untouched.

The distinction between income and wealth objectives is important for several reasons:

  1. The income objective leads to a smoother ride. Dividends rarely go down, whereas prices go up and down all the time. You undoubtedly remember the Covid crash in February 2020. That crash had no impact on my income, even though it brought the DGP’s value down for a while.
  2. The income objective influences the securities that I select. I look for stocks of excellent companies with good dividend track records, because they are likely to continue raising their dividends. These criteria invariably lead me to high-quality companies with solid, durable businesses.
  3. Portfolio management is simplified. With dividends being far more reliable than prices, there are fewer temptations to sell when prices are falling. In fact, weak prices become a reason to buy. There has been far less turnover in the DGP than in most portfolios.

The secondary goal of the DGP is to be competitive with the S&P 500 in total returns. That goal was achieved until the market’s recovery from the Covid crash last year. The DGP has fallen behind the S&P 500 since then. I will discuss this later.

The Portfolio as 2022 Begins

These were the most important changes to the portfolio in 2021:

  1. The number of positions grew from 27 to 31.
  2. Two ETFs were added to the DGP for the first time.
  3. The portfolio’s income grew 9.5% to $5197.
  4. The rate at which income is arriving increased 11% to $5421 annually.
  5. The portfolio’s total value grew 20.9% to $177,219.
  6. I switched to monthly dividend reinvestments from my former practice of reinvesting when the dividends accumulated to $1000.

In 2021, I was more active in making portfolio changes than usual. In addition to the monthly reinvestments, I made 5 sets of transactions that translate into a turnover rate of 11%. Some years, there is no turnover at all.

While it was a relatively active year for this portfolio, 11% turnover rate would not be considered particularly active in most settings. Dividend growth investing, at least the way I practice it, is not a high-turnover operation. If you are looking to day-trade or for the excitement of constant change, this is not the kind of investing for you.

As we enter 2022, here is the DGP:

There is an error in E-Trade’s record of the portfolio. They miscalculated the annual income from QYLD, overstating it by a factor of more than 2x. I have corrected that error in my presentation of the annual income-run-rate, yields, and so on. At the bottom, they show annual estimated income as $5550; I corrected that to $5421.

There were six new additions to the portfolio in 2021:

  • AbbVie (ABBV)
  • Merck (MRK)
  • Prudential Financial (PRU)
  • Global X Nasdaq-100 Covered Call ETF (QYLD)
  • Schwab U.S. Dividend Equity ETF (SCHD)
  • UGI (UGI)

And I sold out of two long-time holdings: AT&T (T) and Hasbro (HAS). I also received and then quickly sold shares in a spinoff from Realty Income. I put the cash from that sale into the dividend kitty for reinvestment.

2021 Income Performance

In 2021:

  • The portfolio received $5197 in dividends, an increase of 9.5% over 2020 and a new annual high in dollars received.
  • There were 127 dividend payments, 32 dividend increases, and no cuts.

Organic Income Growth

One of the traits of dividend growth investing is that you can expect to receive income increases each year.

As shown in the green bar-chart earlier, that is exactly what happens in the DGP. My stocks declared 32 dividend increases and no cuts in 2021. Those increases, combined with dividend reinvestments and a few portfolio adjustments, grew the total income by $449 (9.5%) in one year.

All of that growth is organic, meaning that it comes from within the portfolio. None of it is the result of adding more outside money to the portfolio.

The reality for many (if not most) investors is that they are adding new money from outside the portfolio. They are setting aside money and investing it every month or two. As a result, their income growth is enhanced by the new money coming into the portfolio.

The DGP is different. I am trying to demonstrate results from just the strategy itself, not from adding new money. I have never added a dime to the portfolio since its inception.

The dividend-growth strategy encompasses three elements that generate organic growth within the portfolio without new money.

  • Dividend increases. The companies in the portfolio announce regular raises. I benefited from 32 raises in 2021.
  • Dividend reinvestments. I collect the dividends and buy new shares in the middle of each month. The new shares then generate more dividends.
  • Portfolio management. I occasionally make swaps that result in dividend growth.

Note that the first item (dividend increases) happens on its own – the companies declare increases. Indeed, I select them for their propensity to do that.

But the second two items (reinvesting dividends and making occasional changes to the portfolio) are dependent on me: They are the result of decisions that I make as the Chief Investment Officer for this portfolio.

Projected 2022 Income

As discussed earlier, I project $5421 in dividends for 2022. The projection is based on information known now. Therefore, it assumes:

  • That all dividends will be paid on their normal schedules
  • That there will be no year-over-year dividend cuts

Current information, obviously, makes no assumptions about dividend increases later in the year. Yet we know they will happen.

Thus, the 2022 projection will prove to be wrong – 2022’s actual income will be higher than the projection.

That happens every year. In 2021 for example, the initial estimate for 2021’s dividends was $4882, whereas I actually received $5197 – 6.5% more than the January estimate.

As we have seen, the long-term compound annual growth rate (CAGR) for dividends received has been 10.5% per year. To be conservative, if I were forced to guess how many more dividends I will collect in 2022 over 2021, I would say about 8% more. With some luck, the actual number will be higher.

Portfolio Yield(s)

“Yield” is a simple word, but it has nuances that can produce confusion if they are not understood.

The simple equation for yield is this:

Yield = One year’s dividends / Price

Confusion comes into play because different values can be selected for the numerator and denominator in that equation.

The differences depend on the timeframes covered. You choose values based upon what you want to measure.

This table compares three flavors of yield. All of them are valid, but you have to know which one you are talking about, because they measure different things.

(1) Last Year’s Yield:

The first flavor is last year’s yield: How much did the portfolio yield in 2021?

To get that answer, divide 2021’s income by the DGP’s value at the beginning of 2021.

$5197 / $146,493 = 3.5%

The DGP yielded 3.5% in cash last year, based on its value at the beginning of the year.

(2) Current Yield:

Current yield tells you what the portfolio is yielding right now: What your yield would be if you copied the portfolio this instant.

To calculate current yield, divide the current dividend run-rate (the current 12-month estimate) by the portfolio’s current value.

$5421 / $177,219 = 3.1%

The current yield is lower than 2021’s actual yield will end up being, because the numerator – estimated income for the year – is lower right now than it will actually be, as explained earlier. Dividend increases and reinvestments throughout the year guarantee that will happen.

(3) Yield on Cost:

Yield on cost (YOC) measures how much income the portfolio is generating compared to its original cost back in 2008. The numerator is the current dividend run-rate. The denominator is the portfolio’s original value.

$5421 / $46,783 = 11.6%

That’s a new all-time high. What it means is that the DGP is now generating dividends at the rate of 11.6% of the original amount invested per year.

That is the kind of income power that was the original inspiration for the portfolio.

It also underscores why I believe that the DGP has proved the concepts of dividend growth investing in real life over its 13-year lifespan.

Suppose that someone said in 2008, “Here’s $47,000. Create a portfolio that will generate more than $5000 in cash in 2021 without adding any more money along the way.” That would have sounded like a far-fetched idea, but it is what the DGP has done.

Are you curious about how long it would take the DGP to return its original principal ($46,783) in dividends every year? I found a calculator for that: It will take about 21 more years, if the growth rate stays at 10.5% per year.

That’s just about out of reach for me, but if you’re 25 or 30, you may find that intriguing as you think about your financial future.

2021 Dividend Reinvestments

Unlike many dividend growth investors, I do not drip dividends. Instead, I collect them and then reinvest them each month.

My main reason for doing that is so that I can always invest in well-valued stocks.

Reinvesting monthly also helps me start new positions. Remember, there is no new money coming from outside, so new positions need to be funded internally.

Each dividend is small compared to the value of the portfolio, so sometimes it is easy to forget how much they add up and the significant impact that reinvesting them has on returns over the long haul.

So far in this portfolio, more than $42,000 in dividends has been reinvested. These are the reinvestments that I made in 2021:

At the bottom, notice the highlighted part. Through reinvestments (alone), I increased the annual dividend run-rate by 4.3%. That illustrates how dividend reinvestment is one of the drivers of annual income growth.

2021 Sales and Turnover

As I practice it, dividend growth investing is mostly about collecting stocks, without much trading or turnover. Most transactions are simple dividend reinvestments.

However, I make occasional trims or outright sales. When I do, I use the money to purchase other shares. I don’t hang onto it in cash.

Here were the DGP’s sells and buys in 2021.

The yellow highlights at the bottom summarize the net effect of the transactions. I added $59 (or 1%) to the dividend run-rate.

That’s not much, but the sell-out of AT&T in July set the annual dividends back by $204. AT&T had a very high yield at the time, and I didn’t attempt to replace it all at once.

The $18,413 turnover represents a churn rate of 11% for the year. That’s high for this portfolio, but it’s not high in the world at large. For example, the largest dividend ETF in the world, Vanguard Dividend Appreciation ETF (VIG), has a reported turnover rate of 25%. 

Total Return

While total return is not a primary focus of this portfolio, I do record it at the end of each month.

Overall, the DGP’s performance has been pretty impressive. Its starting value was $46,783. Its value at the end of 2021 is $177,219. The entire portfolio is a three-bagger (3.1 to be exact).

Here are the last two years.

Over the life of the portfolio, the DGP’s total gain is +279%, which is very good for an income-focused portfolio.

But it does not match the total return of the S&P 500 (represented by the ETF SPY) +345% (source), both with dividends reinvested.

The DGP was ahead of SPY practically its entire life until the Covid crash last year. Since the crash, technology stocks, Amazon (AMZN), and Tesla (TSLA) have run up in value much faster than other categories, taking SPY with them. The index is now dominated by its top-10 holdings, which make up 29% of the index.

Few dividend-focused portfolios have matched their astounding rates of growth.

On income, of course, it’s no contest in the other direction. My portfolio has a current yield of 3.1% compared to the S&P 500’s 1.2%.

In the last quarter of 2021, so-called value and defensive stocks (like most of those in my portfolio) began to reverse last year’s trend. Whether that will continue into 2022 is anybody’s guess.

— Dave Van Knapp

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