Monday, January 6, 2014

Annual Review, 2013

I created DivGro in January of 2013 to generate a reliable and growing dividend income stream. By keeping track of the portfolio in this blog and by interacting with like-minded investors, I've become a better dividend growth investor. I've learned a tremendous amount about dividend growth investing, how to value dividend stocks and, frankly, the benefits of blogging!

The purpose of this post is to review DivGro's performance in 2013. I'd like to do this by measuring DivGro's performance against the goals I've set for 2013 and by looking at the portfolio's overall performance (rate of return, dividend income, dividend growth, and yield on cost).

Review of Goals


I've set four goals for 2013 and reported on achieving three of them in a post on October 23:
  1. Own 10 dividend growth stocks, aiming for diversity.
    Goal achieved on June 4 with purchase of BHP Billiton (BBL)
  2. Earn at least $750 in dividend income with DivGro stocks.
    Goal achieved on September 30 with TRV's dividend payment of $14.50
  3. Average one blog post per week (52 posts).
    Goal achieved on October 6 with 3rd quarter review post
  4. Exceed the performance of the S&P 500 index in total returns.
    Goal not achieved – see below
2013 Goal Strategy OutcomeResult
Own 10 stocks and
aim for diversity
Initial deposit: $12,000 
Monthly deposits: $12,000 
Funds to invest: $24,000 
 Reinvest dividends of $750 
Invest $2,500 per stock 
Initial deposit: $12,000 
 Monthly deposits: $12,000 
Bonus deposits: $40,000 
Funds invested: $64,000 
 Own 24 stocks in 10 sectors 
Happy Dance
Earn at least $750
in dividends
Assuming 3.5% interest rate and
stable market, periodic investments
as above should deliver future value of
$24,657 (stretch $657 to goal of $750) 
Earned $1,346.85
in dividends
 Super Happy Dance
 Average one blog post
per week (52 posts)
10 Recent Buy posts
 12 Monthly and 4 Quarterly Review posts 
1 Annual Review post; 25 other posts
77 posts!Happy Dance
Beat the S&P 500
in total returns
Secondary goal!
Invest in high quality, low risk stocks
that pay growing dividends
DivGro's PRR: 26.5%
 S&P 500's total return: 32.4% 
Sad blinking

Having achieved 3 of 4 goals by October 6th, it may appear that my goals were not quite challenging enough. However, in April I made my first bonus deposit after realizing that I wouldn't have enough funds to purchase 10 different dividend growth stocks if I continued buying them in $2,500 chunks. Of course, I easily could have bought 10 stocks by investing less money in each stock and accepting the resulting unbalanced portfolio. Instead, I felt inspired to commit more funds through bonus deposits, launching DivGro into a new and exciting orbit!

Performance


Below is a spreadsheet showing the state of DivGro on December 31, 2013. 

Only two stocks ended with a slight loss at the end of the year. General Dynamics Corporation (GD) led the pack with a profit of 41%, while AFLAC Incorporated (AFL) came in second at 33%. 

Rate of Return

Having invested $66,500 in 2013, the ending market value of DivGro of $75,145 represents a simple return of 13%. Of course, the simple return does not take into account the timing and size of cash deposits. By using an irr-function, one can determine the personal rate of return (PRR) for cash flows that are not necessarily periodic. DivGro ended 2013 with a PRR of 26.5%, which is an excellent return and one I'm very pleased with! 

In 2013, the S&P 500 had a total return of 32.4%. The following graph, produced by FolioInvesting where I have my DivGro account, illustrates DivGro's performance compared with the S&P 500's total return. (Notice that this graph shows a time-weighted return, which is not quite the same as the calculated PRR).

As a dividend growth investor, one should not be overly concerned about beating the market. It is more important to focus on dividend growth. A fellow dividend growth investor, Dividend Mantra, wrote an excellent post about this issue. Nevertheless, one of my stated goals for 2013 was to exceed the performance of the S&P 500 in total returns and, clearly, I did not achieve that goal.

Dividend Income 

The main goal of DivGro is to generate a reliable and growing dividend income stream. In 2013, DivGro generated $1,347 in dividend income. Without any further investments and assuming no dividend decreases, I can expect to earn dividend income of at least $2,865 in 2014. I call the expected dividend income over the next 12 months the projected annual dividend income.
Another way of thinking about projected dividend income is to express it as a monthly average, called the projected monthly dividend income. That is, what can I expect to earn from DivGro every month, on average, for the next 12 months?

The adjacent chart plots DivGro's monthly dividend income and the projected monthly dividend income for 2013.

Dividend Growth

The other important aspect of the main goal of DivGro is dividend growth. I use selection criteria that favor stocks with a history of paying increasing dividends every year. A long streak of dividend increases is a great indicator of financial security and continued dividend growth. If a company has a long track record of paying increasing dividends, chances are it has the ability to continue doing so. And if a company has a long track record of increasing dividend payments, it would have a strong aversion to decreasing or eliminating dividend payments.

Nine of DivGro's holdings announced dividend increases after I acquired them, while the effective dividend of one holding (NTT) decreased. As explained in an earlier post, NTT didn't actually announce a dividend decrease – it pays dividends in yen and the decrease is due to an unfavorable dollar-yen exchange rate.

Dividend GrowthTickers (Increase)
High (above 8%)
GD (9.8%) • CVX(11.1%) • MSFT (21.7%) 
 Medium (4% to 8%) 
COP (4.5%) • AFL (5.7%)
Low (below 4%)
 ETP (1.3%) • TGH (2.2%) • BBL (3.5%) • CHL (3.9%) 

Yield on Cost

Another way to look at dividend growth is to see its effect on Yield on Cost (YoC). The portfolio's initial YoC is 4.35%, whereas the current YoC is 4.42%. YoC should slowly increase over time, as companies increase their dividends.

Outlook for 2014


I've set some fairly challenging goals for 2014. I plan to increase my monthly deposits to $2,500 and increase DivGro's number of holdings to 36 by year's end. Also, I'd like to earn $3,600 in dividend income in 2014, and boost DivGro's projected annual dividend income to $4,800 by December 31, 2014. I plan to make minor adjustments to my stock selection criteria, which I'll report on soon. My plan is to continue to add new holdings to DivGro throughout 2014, rather than to add to existing holdings. Although DivGro is now diversified across all 10 sectors in my watch list, I do want to add additional stocks to each of the Consumer Staples, Materials, and Health Care sectors for better balance. 

Thanks for reading! 


12 comments :

  1. Looks like a great year and you blew past your dividend goal by about 80%. That's a pretty impressive. I wouldn't be too worried about the total return goal though, as the main focus should be on the income. If it's still a few more years down the line and you're way behind then maybe but the dividends are the important thing.

    ReplyDelete
    Replies
    1. I agree with you! Income is the main focus. In fact, for 2014, I don't have the "beat the S&P 500" goal again. One thing I'm thinking of doing is to figure out my portfolio's overall beta. Maybe that would provide some indication of what to expect in the long run.

      Delete
    2. As far as beta goes, I have no idea what my portfolio's is and I just don't care. To me it's one of those metrics that is good in theory but in practice it just doesn't provide real value. If a company's share price begins to decline, not due at all to company operations just investor sentiment, the beta will increase meaning that it's a "riskier" stock. But did it really get riskier? Operations are steady as she goes, only it's cheaper now. So even though the beta is higher, your risk actually declined because you're getting a larger margin of safety.

      Delete
    3. Beta measures volatility of a stock relative to the market, so I'm assuming you mean a company's share price declines more than "usual" compared with the market. In that case the beta will increase.

      I share your skepticism about beta's utility, especially for long-term and fundamental investors. My idea of figuring out beta is more a curiosity, not something that I would act upon.

      Delete
  2. Hiya DivGro, awesome progress this year! Especially the bonus deposits of 40k per year are nice! You'll be swimming in dividends in no time if you keep this up :) Good luck in 2014!

    ReplyDelete
    Replies
    1. Hi Robin -- thanks for stopping by. I wish I could afford more 40k per year bonus deposits, but that's not going to be possible -- my youngest is off to college next year... Thanks for your wishes for 2014. Good luck to you, too!

      Delete
  3. Differently a solid year for you.

    Are you just going to invest in new company? If there is a drop in a company you are currently holding, will you use the $2,500 to buy more shares?

    ReplyDelete
    Replies
    1. My plan is to continue to add new holdings to DivGro throughout 2014, rather than to add to existing holdings. I want to get up to 36 holdings, so one new buy per month for 2014. Of course, there's accrued dividend income to think about. At some point I'll have enough to buy one more stock. Perhaps an MLP for $5000 instead of a non-MLP for $2500? (Like I did with ETP and VNR). We'll see...

      Delete
  4. You had a great year with impressive yoy gains. Keep up the consistency and you will have a great 2014. You are certainly adding a lot of solid dividend paying companies.

    ReplyDelete
    Replies
    1. Thanks AAI -- I'm not planning on doing things differently, though the pace of adding stocks will need to slow down. I don't think I'll be able to wing many more bonus deposits, if any...

      Delete
  5. FerdiS,

    Wow! You killed it, man. Awesome work. :)

    You're investing some serious capital there. If you can invest that kind of cash every year you'll be drowning in dividends here pretty soon.

    Keep it up!

    Best wishes.

    ReplyDelete
    Replies
    1. Thanks for stopping by, DM!

      I wish I could repeat the same capital investment this year, but that will be unlikely. Hopefully I can hit the 6-figure mark near the end of 2014... I would need to, to hit my goal of $400 in projected monthly dividend income by the end of the year.

      Thanks for the encouragement, and best wishes to you in 2014!

      Delete

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