There was more action in my portfolio in July and early August than there normally is in several months.
The reason is that on July 27, a trailing sell-stop that I had under Digital Realty Trust (DLR) was hit, and the position was liquidated.
On Monday, July 31, I replaced DLR by adding to three stocks already in my Dividend Growth Portfolio. Then, a couple days later, I made my August dividend reinvestment.
Let’s start with what happened in the DLR matter.
Selling Digital Realty Trust
A trailing stop-sell order is where you say you want to sell a stock at a percentage of your choice beneath the price at the time you enter the order. The order’s selling price then follows the stock’s actual price up when the latter rises, but if the stock’s price goes down, the order does not move.
That way, if the stock’s price rises steadily, you keep the stock and benefit from the price increase. The trailing sell order follows along behind as a safety net. But if the stock’s price suddenly falls, the order is triggered, and the stock is automatically sold.
I set a 5% sell-stop order under Digital Realty Trust (DLR) in early June for three reasons: DLR froze its dividend in March; its Dividend Safety Score was downgraded in April; and it became unclear whether the company was taking full advantage of AI (artificial intelligence) opportunities.
On July 27, DLR’s price took a tumble, and the order got triggered. I netted $7372 from the sale, but also lost $307/year in annual income.
Buying Crown Castle, Evergy, and VICI Properties
To replace DLR, on July 31 I added to three stocks already in the portfolio.
- Crown Castle (CCI), a telecom/transmission/tower company.
- Evergy (EVRG), an electric utility in Missouri and Kansas.
- VICI Properties (VICI), a young REIT with extensive gaming, hotels, and “experiential” properties in Las Vegas and elsewhere.
This is a summary of all the transactions.
As you can see, I spent all but $5 of the proceeds from DLR on the three replacement purchases. And the new replacement shares will bring in $37 more in annual income than DLR as well as remove the cloud over future dividend increases from DLR.
Rather than re-analyze the three replacement stocks here, please consult my original analyses about them when I first opened the positions:
- I Just Sold 3M (MMM) and Bought Crown Castle (CCI) Instead (video, 2/28/22)
- I Just Opened a New Position in Evergy (EVRG) for the Dividend Growth Portfolio (4/5/23)
- I Just Opened a New Position in VICI Properties (VICI) in My Dividend Growth Portfolio (6/9/23). Also read this article from just a few days ago by my colleague Brad Thomas: This Strong Retirement Stock is Trading at a Discount and Yields a Safe 4%-6%
I updated my research before buying the new shares to confirm the companies’ quality, dividend records, financial positions, and valuations. This table summarizes what I found. Green scores are above average, while yellow scores indicate average investment quality.
I have been slowly reducing the number of small positions in this portfolio since the beginning of 2022. I define “small” as meaning less than 3% of the portfolio. Here is the impact of these purchases on the sizes of the three stocks that I added to:
- CCI: Goes from 1.6% to 2.7% of the portfolio
- EVRG: Goes from 0.9% to 3.2% (no longer small)
- VICI: Goes from 0.6% to 1.4%
So in sum, I reduced the portfolio’s holdings by one (eliminating DLR), and grew EVRG out of the small category.
August Dividend Reinvestment
After all of the above activity, I still had the cash dividends collected since the beginning of July to invest.
For my selection, I turned once again to the dividend ETF that I consider the best, which is Schwab’s Strategic Trust US Dividend Equity ETF (SCHD). This is another sub-3% position that I have been building up.
I have no question about the long-term quality and performance potential of SCHD. In my most recent deep-dive analysis into SCHD – see this article – Schwab’s fund once again beat out all other dividend ETFs on my rating scale.
That article was written in February. In April, Morningstar promoted SCHD from Silver to Gold status on their rating scale, supported by comments like this:
This fund has compiled a stellar track record since its October 2011 inception. It beat the Russell 1000 Value Index by 2.3 percentage points annualized through February 2023, with lower volatility. Solid downside protection drove most of that lead. But handsome payoffs to the quality factor and some favorable sector exposure helped it measure up well in bull markets, too.
With SCHD’s quality status in no doubt, the only thing I re-checked this month was SCHD’s valuation. An easy approach when valuing a fund is to use the so-called dividend metric: Is the fund’s current yield higher than its 5-year average yield?
This chart shows SCHD’s average yield over the past five years.
SCHD’s current yield of 3.5% (per Morningstar and Simply Safe Dividends) is 7% higher than its 5-year average shown on the chart above. For my purposes, that makes SCHD decently valued, if not a little undervalued.
So on Wednesday, August 2, 2023, I purchased a few more shares of SCHD:
The purchase brings SCHD up to 2.5% of the portfolio and adds $18 to the annual dividend stream.
Update of Full Portfolio
Now let’s review the portfolio as a whole.
My Dividend Growth Portfolio (DGP) is now into its 16th year. The DGP is real: It resides at E-Trade, and all decisions about managing the portfolio have been made in real time. DGP is not a hypothetical or “model,” nor is it a back-test.
The main financial goal of the portfolio is to generate a reliable, increasing stream of dividends in meaningful amounts, without ever adding more new money to the original cost of the portfolio.
That goal has been accomplished, as shown by this chart of the actual dividends received by the DGP since its inception in 2008.
I calculate the 2023 full-year estimate by adding the dividends already collected ($3560) to the dividends currently expected over the remainder of the year.
The actual total collected should be a little higher than that, because the dividend stream will benefit from dividend increases still to be announced for this year plus the additional reinvestments I will make each month.
The portfolio is well on it way to hitting the year-end estimate. Through the end of July, dividends collected in 2023 are more than 11% above the dividends collected last year in the same time period.
The 2024 estimate is a SWAG. I simply added 9% to the 2023 estimate for now.
There are three reasons that dividends go up in a DG portfolio, as shown by the three blue circles on this chart:
Reason #1. Stocks increase their dividends
The DGP has received 20 dividend-increase announcements so far this year. Collectively, they have added $172 to the annual run-rate of dividends into the portfolio.
This is a bit unusual: In July, no dividend increases were announced. I still expect to hear about 13 more by the end of the year.
Reason #2. Dividend reinvestments
The second reason the portfolio’s overall dividends go up is that I reinvest them monthly. They arrive and sit in cash until I reinvest them. I never remove them, because this portfolio is a demonstration of accumulation: Building an income stream for eventual use in retirement.
Since dividends are paid per share, each additional share that I buy with reinvested dividends causes the portfolio’s income to increase.
The table below shows how my dividend reinvestment program is going so far this year, with the new purchase of SCHD highlighted in yellow.
At the YTD pace, it looks like the reinvestments will add upwards of 4% to the portfolio’s annual dividend run-rate by the end of 2023.
Reason #3. Portfolio adjustments
The third reason that dividends go up is via standard portfolio management activities, such as trimming or selling a stock, deciding how to replace it, and executing those decisions.
So far this year, I have made three such adjustments. Here is a summary:
As you can see, this year’s activities have so far caused an insignificant drop in the annual dividend run-rate.
Last month, I published the following table of changes under consideration:
The red notations show what happened. The stop on TROW was hit just as I am finishing this article. I will buy something to replace it after I finish this article and report on that next month.
There is one more row to add to the above table:
JNJ is an iconic DG stock, and I am unlikely to swap any shares. But I want to consider:
- The 7% discount on KVUE shares.
- KVUE’s 3.3% yield, which is higher than JNJ’s 2.8% at the moment.
- How/whether to credit KVUE with JNJ’s dividend-growth streak. Because KVUE is like a branch off the JNJ tree, I would expect it to become a dividend-growth company just like its parent. I would also expect it to be a slow-growth company.
- JNJ’s alteration in its business model by divesting its consumer business. JNJ becomes a pure-play pharmaceutical and medical-technology company. One can sort of “put the pieces back together” by exchanging 10-15% of JNJ shares for KVUE shares. (That percentage approximately represents the contribution of the consumer business to the integrated JNJ prior to the split-off of the new company.)
- Talc/cancer lawsuits that face JNJ.
Over the years, I haven’t churned the DGP very much. Every stock or fund I buy is one that I expect to hold “forever.” Not everything works out that way, but my portfolio turnover rate rarely exceeds 10% per year, and some years it is zero. So far this year, the turnover rate is about 5%.
That brings us to the end of this month’s DGP review. If you want to see the positions in the portfolio at any time, its status as of the end of the previous month is always available here. That link also has an archive of all the articles and videos that I have published about the portfolio.
Thanks for reading!
-–Dave Van Knapp
The name of the ONE stock (ticker symbol and all) that has helped over 170,000 people discover how to gain their financial freedom... Learn More.
Source: Dividends & Income