Updated August 1, 2020
Big News of the Month
Dominion Energy (D) restructured its business and announced that it would be reducing its dividend later in the year.
Therefore I sold Dominion and replaced it with Pinnacle West Capital (PNW), an Arizona-based utility. The swap of one utility for another had little effect on the portfolio’s rate of dividend generation.
Other than that transaction, the portfolio continued rolling along pretty much normally in July. A couple of holdings announced dividend increases. Total value increased 4%.
Coming in August: A $1000 dividend reinvestment. I will have several fine candidates to choose from.
Changes in July: I sold Dominion Energy and replaced it with Pinnacle West Capital, swapping one utility for another. All other changes were simply organic results of dividend increases and market action.
The total value of the portfolio went up 4% in July.
- Sold Dominion Energy and replaced it with Pinnacle West Capital. I decided on the swap after Dominion announced a restructuring that would lead to lower future dividend payments.
- Collected $238 in dividend payments from 5 companies. July is a slow month for dividends in this portfolio; that’s just an idiosyncrasy of the payment schedules. The pace will pick up in August.
Primary Goal: Pay Reliable, Growing Dividends Each Year
This chart illustrates how the portfolio has generated reliable, growing dividends since its inception. I am projecting that 2020’s dividends will increase by 11% over 2019’s total.
The DGP’s dividend stream goes up for three reasons:
- Dividend increases. The companies in the portfolio announce regular raises. Every stock is selected for the probability that it will do that. Twenty-two raises have already been declared for 2020.
- Dividend reinvestments. I collect the dividends and buy new shares when the kitty reaches $1000. The new shares then generate more dividends. The last such purchase was in May, and the next one will be in August.
- Portfolio management. I occasionally make swaps that result in dividend growth.
I run the DGP as an investment business. The investment operation’s product is literally a growing dividend stream.
I manufacture that product by selecting, buying, and owning companies that regularly raise their dividends; collecting dividends from them; and reinvesting those dividends to buy more shares.
All growth in the DGP – in dividends and market value alike – is generated from within the portfolio. I have not invested a dime of new capital since I started the portfolio in 2008.
The DGP is a cash-generating machine. My job is to keep it running smoothly: Select excellent companies, reinvest dividends to get more shares, and occasionally trim or replace a stock.
The absence of new outside money makes the DGP a straightforward case study for the power of dividend growth investing, because all growth is generated organically by the portfolio itself.
In 2019, the portfolio received $4287 in total dividends, which was a new record high, 10.7% more than 2018.
My estimate for 2020 is to generate $4733, which would be 11% more than last year.
Note: I spotted an error in E-Trade’s dividend calculator while preparing this report. It has been double-counting Enbridge’s September dividend. This caused previous reports to show about $68 more in expected dividend income than was actually scheduled. I have corrected the error throughout this report.
Because of the Covid recession, there is a caveat to dividend expectations. Control of the virus’s spread has failed in several states, and therefore it looks like the pandemic-induced recession will last longer than it might have. As a result, some companies may be forced to cut dividends in order to remain financially sound.
None of the companies currently in the portfolio have announced cuts yet, so my projection for 2020’s total dividends stands for now.
I am holding off making estimates for 2021, given the unique circumstances of the pandemic-induced recession. When the economic situation begins to clarify, I will make my first estimates for 2021.
Transactions in July
I received $238 from five companies. This matched expectations.
As explained in this article, I sold Dominion Energy (D) and replaced it with Pinnacle West Capital (PNW). This exchange of one utility for another had little impact on the portfolio’s dividend run-rate. Here is the record of the swap:
There were no reinvestments in July. I collect all dividends in cash, and when the cash exceeds $1000, I buy more shares for the portfolio. In July, my cash balance rose to $780, and it will pass the $1000 threshold in August. At that time, I will make my next reinvestment. I may add to one of the portfolio’s smaller positions or select a new company as a starter position.
Dividends Expected in August
July was a slow month for dividends, generating just $238. The pace picks up in August, with $389 expected from nine companies. All of these have been declared.
Dividends Expected in Rest of 2020
The calculator at E-Trade erroneously double-counts Enbridge’s (ENB) September dividend. Adjusting for that error, I expect $2127 to come in over the rest of the year.
Added to the $2644 that has already been received, that brings the 2020 full year projection to $4771, which would be 11% more than last year’s total.
That said, we are in a recession. Therefore, I expect one or more companies in the DGP to announce dividend cuts before the year is out. In a recession, companies must preserve cash, and lowering their dividend payout is one way to do that.
Dividends Expected in Next 12 Months
Based on information known now, $4733 dividend dollars are expected to be received over the next year. This chart shows that broken down by month.
(Source: Simply Safe Dividends)
Once again, because of the recession, it is hard to know whether that annual total will hold up. Some companies may be forced to cut their dividends. We will just have to wait and see.
Dividend Increases in 2020
Two more increases were announced by the portfolio’s companies in July, bringing the 2020 total to 21 increases vs. no cuts. (Dominion Energy pre-announced a cut that would take effect later in the year, but I sold it before the actual cut.)
In 2019, 29 increases were paid by the portfolio’s 26 companies, with no cuts. The year before, in 2018, we got 28 increases and no cuts.
Two companies have bypassed their typical increase announcements this year, and I consider their dividends to be frozen: Hasbro and Lowe’s. I have both companies under watch, but I have no plans to sell either one at this time.
The following table summarizes the DGP’s dividend increases for 2020. The two increases in July are highlighted in yellow.
The DGP’s Yield
There are two ways to calculate the portfolio’s yield.
Yield on cost is the portfolio’s yield based on the original money invested when I started the portfolio in 2008. Here’s the formula:
Projected 12-months’ dividends / Original cost of portfolio
$4733 / $46,783
This is unchanged from last month.
I am now collecting dividends at a rate equal to 10.1% of my original investment annually in cash dividends. That kind of income-generating power was the inspiration for the portfolio in 2008.
Current yield is the portfolio’s yield calculated as a percentage of the current value of the portfolio. It is the yield you would start with if you duplicated the portfolio today.
Here is the formula for current yield:
Projected 12-months’ dividends / Current value of portfolio
$4733 / $135,844
That is down 0.1% from last month, due to the portfolio’s rise in value during the month.
During its history, the DGP’s current yield has ranged from 3.3% to 4.2%. Over the long haul, variations in current yield within the DGP’s normal range are not meaningful. More than anything, they reflect prices going up and down.
What is meaningful is that the income measured in dollars goes up steadily. That’s what My Favorite Chart illustrated earlier. That chart doesn’t show dividends as a percentage yield; it shows dividends as dollars received, which is what we are all interested in.
For comparison to this portfolio’s 3.5% yield, the S&P 500’s current yield is 1.8%. The benchmark 10-year Treasury (fixed income) is 0.55%. [Source]
As described in DGI Lesson 10, dividends can be reinvested either by dripping them or letting them accumulate in cash for larger targeted purchases.
I use the second method. I collect the dividends in cash, then reinvest them when they reach $1000.
I have made three dividend reinvestments in 2020:
- In January, I added to the portfolio’s stake in Texas Instruments by adding 8 new shares (see this article).
- In March, I added 9 more shares of Texas Instruments (see this article).
- In May, I opened a new position in General Dynamics (see this article).
The kitty is now back to $780. It will build back up to the $1000 reinvestment level in August. I have several good candidates for reinvestment when the money becomes available.
Secondary Goal: Total Returns
For its lifetime, the total value of the DGP has grown +190% from its inception in June 2008. It started at $46,783. It is now worth $135,844.
For comparison, if the DGP’s original money had been invested in the S&P 500 index via the ETF called SPY, with dividends reinvested, it would have increased +200% to a total value of $140,349. [Source] The SPY investment would be yielding 1.8% compared to the DGP’s 3.5%.
Coming Soon: New Dividend Growth E-book for 2021
I am writing my first new e-book about dividend growth investing since 2014.
Its title will be Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing.
My colleagues at Daily Trade Alert have helped me create a website for the new e-book. It includes descriptions of the book, background information on dividend growth investing, a countdown clock, and the opportunity to sign up for a monthly progress report. The report also contains handy links to all my articles for the month.
Please click on this link for more information: Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing. Publication is expected in December.
Background: What is the Dividend Growth Portfolio?
- To see the Business Plan for this portfolio, click here.
- To learn more about the origins of the portfolio, click here.
- To see a list of all the articles about the DGP, see the section below.
Remember, the DGP is not presented as best or a model. Rather, its purpose is to provide a live demonstration of what you can accomplish with dividend growth investing, and what it is like to run a real stock portfolio. I show what I do and explain why I do it.
–Dave Van Knapp
Dividend Growth Portfolio Article Archive