I don't think we'll see only two home runs between the Chicago Cubs and the Cleveland Indians this year! In Game 1 of the 2016 World Series, catcher Roberto Perez hit two home runs to back up a shut-out performance by starting pitcher Corey Kluber and reliever Andrew Miller. The Indians won 6-0.
In case you're wondering what baseball has got to do with dividend growth investing, I use the term home run to describe any position in my portfolio that has crossed the 100% mark in total returns.
Today, I'm happy to announce that I've scored another home run with DivGro! While my goal with DivGro is to build a growing dividend income stream, it is fun to see some stocks perform well enough to become home run stocks!
In my days as a trader, I often sold half of my shares when a position became a home run position. I justified the action by saying that now I'm playing with "house" money. I no longer think that way. In fact, I'm more than happy to hang on to home runs and to continue collecting the growing dividends.
Here is a list of my previous home run stocks, some of which I've sold with the goal of preparing DivGro for covered call options trading:
- Home run #1: General Dynamics Corporation (GD) – up 139% (38% annualized)
- Home run #2: Nippon Telegraph & Telephone Corp (NTT) – closed for 125% gain (37% annualized)
- Home run #3: Digital Realty Trust, Inc (DLR) – closed for 102% gain (44% annualized)
- Home run #4: Altria Group, Inc (MO) – up 99% (33% annualized)
- Home run #5: Reynolds American, Inc (RAI) – up 102% (43% annualized)
- Home run #6: Main Street Capital Corporation (MAIN) – up 101% (28% annualized)
Once a position reaches home run status, I don't cancel the status when the share price drops and total return falls below 100%. So MO retains home run status despite being up "only" 99% at this time.
Home Run #7
My seventh home run stock is Microsoft Corporation (MSFT). I bought 80 shares at $31.76 per share in August 2013, with a starting yield on cost (YoC) of 2.9%. MSFT now trades above $60 and after several dividend increases, my YoC is 4.9%. Payback is 12.7%, meaning I've received 12.7% of my original investment back in the form of dividends.
MSFT is trading 14% above my fair value estimate of $53.28. The stock has a streak of 15 years of dividend increases and an impressive 10-year dividend growth rate of 15%. Microsoft is one of only two companies with a AAA credit rating. (Johnson & Johnson (JNJ) is the other company).
Home run stocks present dividend growth investors with some (pleasant) challenges. Are the stocks overvalued or are they suitable for further investment? Is it OK to increase your average cost basis by buying more shares at much higher prices? What's the implications of reducing your average YoC when you buy more shares at lower yields?
I mentioned before that Chowder, a Seeking Alpha contributor Chowder, advocates buying shares of a great dividend growth stock that continue to experience higher earnings expectations, even as the share price rises to meet fair value. He calls the strategy dollar-cost averaging up. He argues that fair value estimates will increase with higher earnings expectations and that the stock price will follow. The strong often gets stronger.
My sixth home run stock, MAIN, is one example where I've continued to add shares at higher prices:
The chart is a little outdated (September 5), but illustrates the point. It shows five occasions when I bought shares of MAIN. My average cost basis is $21.71 and my average YoC is 10.2%. With MAIN trading at $34.17 per share, the stock currently yields 6.5%.
Returning to the earlier questions, should I buy more shares of a home run stock even if doing so would increase my average cost basis and reduce my average YoC? Assuming the stock trades at or below fair value, I don't see any reason to shy away from buying more shares. In fact, I like the idea of dollar-cost averaging up, especially if I get to increase my investment in great dividend growth stocks that experiencing higher earnings expectations.
Do you have home run stocks in your portfolio? Do you dollar-cost average up? Please let me know in the comments section...