DGI For the Middletons January 2019 Update

Windfalls and a stock market crash led to some small – but important – changes in one of my dividend growth portfolios.

As promised, I am revisiting my DGI for the Middletons dividend growth portfolio this month. The premise behind this experiment is to see if a dependably, growing stream of dividend income can be averaged into slowly over time. Since most of us aren’t lucky enough to have a huge lump sum or windfall to start our dividend growth experiences with, I would like to see if it’s feasible to take a snowball approach to building dividend income.

The portfolio is held in a Robinhood account – one limitation is that none of my dividends can be reinvested outright, they are paid as cash into my account, and then will be reinvested as I make quarterly reviews of the portfolio. I am also contributing a small amount each month to this portfolio as seed money to buy new investments.

My Watchlist

I came up with an initial watchlist of 10 companies and seven investment metrics to monitor – the watchlist is updated quarterly, with one new stock added each quarter. Last quarter, we added in AT&T, which became our first purchase.

Q1 19	PRICE	PE	FWD PE	PB	YIELD	PAYOUT RATIO	5-YR DIV GRO
PEP	110.16	21.68	19.5	15.15	3.37	65.57	8.29
ITW	125.51	18.56	16.41	11.68	3.19	52.63	14.08
WBA	68.27	12.57	10.47	2.51	2.58	27.08	9.16
XOM	68.17	21.07	14.78	1.52	4.81	71.09	7.02
SBUX	64.38	19.19	23.96	70.96	2.24	54.43	23.87
IFF	133.02	24.33	21.55	3.01	2.2	47.59	15.4
FDX	160.41	8.75	9.87	2.15	1.62	16.15	28.14
D	72.29	21.4	17.93	2.59	4.62	81.76	7.54
DIS	109.11	15.09	15.17	3.3	1.61	24.89	16.65
MO	49.07	13.77	12.23	5.93	6.53	80.05	8.36
T	28.34	19.07	8.13	1.13	7.2	58.24	2.18
BAC	24.54	14.09	9.54	1	2.45	23.47	57.69

A quick comparison between October’s watchlist and the recent New Year update is that valuation multiples have contracted quite a bit – as far as price is concerned, the market has gotten a lot cheaper thanks to some severe declines during December 2018. December was an excellent month to buy equities in general, and we made several purchases in our IRAs and our brokerage account for index funds (which deserve their own post).

As prices went down, yields went up. A lot of people pooh-pooh the idea of “yield on cost,” and it does nothing to help design an income stream that will suit my needs over time, but as someone who is concerned about price and value, buying an income stream of $2 a year at $28 is demonstrably better than buying the same income stream for $30.

This quarter’s newcomer: Bank of America

Bank of America (BAC) is a bank and diversified financial services company coming off a low in the fourth quarter of 2018 – one share of BAC was bought on Dec. 31 for a price of $24.50. As of Jan. 9, the stock was trading for $25.76.

BAC is the second largest bank in the U.S. and, while many analysts believe Citigroup is the better stock, it represents the best deal among the big four financial firms in the U.S. as it has traded at less than 10 percent its forward earnings in recent months – when bought, it was also trading at its book value.

Bank of America has a long history of dividend growth that was interrupted by the near collapse of the financial sector during the 2008 global financial crisis. As banks crashed and burned, BAC cut its dividend (as it should have) but has returned to steady dividend growth in the decade since. Because it has returned to paying a dividend and has been relatively conservative at reinstating its payout, BAC has posted a 57.69% five-year dividend growth rate (which it definitely should not continue indefinitely) with a low 23.47% payout ratio. Though the stock only yields 2.45% annually at the time of writing, this is a purchase with dividend growth in mind, not mere yield.

Odds and Ends

We increased the amount being contributed to our new account by $1 a month since inception – so the first monthly deposit into the account was made on Nov. 1 at a total of $16, that number grew to $17 on Dec. 1 and $18 on Jan. 1. On Feb. 1, a $19 deposit will be made into the account.

Like many mid-level, mid-career professionals, I (and my wife) received holiday bonuses this year. To reflect our windfall, I contributed an additional $55 to the account on 12/31, with which I made purchases. As a result, there is a total of $55.51 of deployable cash residing in the account in addition to $88.06 in stocks, for a total portfolio value of $143.57 as of Jan. 9, 2019.

Adding to T

AT&T was the first buy in the new portfolio back in October, when one share was purchased for $30.66. A review of the fundamentals and share price on Dec. 31 revealed that T was still an attractive buy – though the company’s ability to pay off debt and continue its dividend growth should come under greater scrutiny moving forward. On New Year’s Eve, one share of AT&T was purchased for $28.33.

Where the Portfolio Stands

2018 Dividends

BAC: $0.60/share

T: $2.04/share

None of which were paid into my account, as the initial investment into T was made after its ex-dividend date.

T has announced a $0.51 dividend payment that will be paid on 2/01/2019

BAC has yet to announce a 2019 dividend – its last dividend was $0.15 paid on 12/16/2018

If both companies follow suit – and steady dividend payers usually do – then they should pay out quarterly in 2019 like so:

J     Feb     M       A May   June  J  Aug    Sept. O  Nov.  Dec.

0    $0.51 $0.15 0 $051 $0.15 0 $0.51 $0.15 0 $0.51 $0.15

Projected 2019 dividends in our portfolio assuming no growth - $4.68

Projected 2019 dividends extrapolating growth - $4.75

Projected 2019 contributions: $18 already made, $264 to be made

Projected 2019 buying power, all told: $323.75

Moving Forward

The next update to this portfolio should be made in March. I will add a new stock to our watchlist, most likely Johnson & Johnson to add in some healthcare representation (JNJ is also one of the most vaunted dividend growth companies) but we’ll see. I do have a “secondary” watchlist of companies that I may consider adding to this portfolio’s watchlist, but barring news or market events that create an unique opportunity to buy a great company, sector concerns will dictate what I add.

Moving forward, I will also begin to add other investment metrics to our watchlist to move beyond the value factor (concern about relative valuation) and more towards value investing (comparing price/market value to “intrinsic value” or what a company should be worth). A real value investor incorporates measurements of quality/profitability and growth into their reasoning, and that’s the direction I would like to move in for this portfolio.

Though I may be biting off more than I can chew in doing so, I am also going to try to take a deeper dive into each company on my watchlist on a monthly or weekly basis to discuss headlines, analyses, and my views on each stock - hopefully, readers will come away with a good idea of why or why not each stock was included on my list.