Friday, September 7, 2018

Monthly Review: September 2018

Welcome to the monthly review of DivGro, my portfolio of dividend growth stocks. My goal with these reviews is to share updates to my portfolio and to detail the dividends I received during the month. I also look at how DivGro's projected annual dividend income (PADI) has changed.

In August, I added shares to five existing positions. Additionally, I reduced my holdings in one position and closed two positions.

Three DivGro stocks announced dividend increases in August. The net result of these changes is that PADI increased by about 0.9% in August. Year over year, PADI increased by 38.9%.

As for dividend income, in August I received dividends totaling $1,433 from 18 stocks in my portfolio, a year over year increase of 55%. So far in 2018, I've collected $11,947 in dividends or about 66% of my 2018 goal of $18,000.

DivGro's PADI now stands at $21,313, which means I can expect to receive $1,776 in dividend income per month, on average, in perpetuity, assuming the status quo is maintained. Of course, I expect the companies I've invested in not only to continue to pay dividends but to increase them over time! Also, until I retire, I hope to continue to reinvesting dividends, so DivGro's PADI should continue to grow through dividend growth and through compounding.

Dividend Income


I collected dividends totaling $1,433 from 18 different stocks in August:
Here is a list of the dividends I received in August:
  • Apple (AAPL)income of $73.00
  • AbbVie (ABBV)income of $192.00
  • CVS Health (CVS)income of $50.00
  • General Dynamics (GD)income of $32.55
  • Hormel Foods (HRL)income of $18.75
  • Lowe's Companies (LOW)income of $48.00
  • Main Street Capital (MAIN)income of $85.50
  • National Retail Properties (NNN)income of $81.00
  • Realty Income (O)income of $22.00
  • Omega Healthcare Investors (OHI)income of $330.00
  • Provident Financial Services (PFS)income of $21.00
  • Procter & Gamble Company (The) (PG)income of $143.44
  • Raytheon (RTN)income of $20.82
  • Starbucks (SBUX)income of $72.00
  • AT&T (T)income of $140.00
  • Texas Instruments (TXN)income of $31.00
  • Verizon Communications (VZ)income of $59.00
  • Xilinx (XLNX)income of $12.60
The following chart shows DivGro's monthly dividends plotted against PMDI. Quarter-ending months are huge outliers:
This is one reason that I now create a rolling 12-month average of dividends received (the orange bars) plotted against a rolling 12-month average of PMDI (the blue, staggered line):
While it would be great if dividends were distributed more evenly, I don't want to change my investment decisions based on the timing or frequency of dividend payments.

Dividend Changes


In August, the following stocks announced dividend increases:
  • Illinois Tool Works (ITW)increase of 28.21%
  • Main Street Capital (MAIN)increase of 2.63%
  • Altria (MO)increase of 14.29%
These changes will increase DivGro's PADI by $119.

I like seeing dividend increases above 7%, so two of the three increases top my expectations, which is fantastic! The arithmetic average of this month's dividend increases is 15%, which easily beats the rate of inflation.

Transactions


Here is a summary of my transactions in August:
  • Hannon Armstrong Sustainable Infrastructure Capital (HASI) — sold 100 shares and reduced position to 250 shares
  • Provident Financial Services (PFS) — sold 100 shares and closed position
  • Royal Dutch Shell (RDS.B)sold 140 shares and closed position
  • Kite Realty Group Trust (KRG) — added 250 shares and increased position to 450 shares
  • Realty Income (O) — added 150 shares and increased position to 250 shares
  • Quest Diagnostics (DGX)added 15 shares and increased position to 40 shares
  • Medtronic plc (MDT)added 25 shares and increased position to 50 shares
  • Xilinx (XLNX)added 15 shares and increased position to 50 shares
These transactions increased DivGro's PADI by about $73.

In my latest DivGro Pulse article, I used Simply Safe Dividend's portfolio analyzer tool to evaluate DivGro's Dividend Safety.

HASI has a Very Unsafe dividend score of 11, which mean the dividend appears to be much less safe than those of other companies. Over the past year, the company has paid out 103% of earnings as dividends — a fairly high payout ratio for most mortgage REITs. However, HASI expects 2018 growth of 2%-6%, which at the mid-point equates to earnings of $1.32 per share. While certainly not safe at a payout ratio of 100%, HASI's dividend safety should improve over time.

I still like HASI for its investments in the energy efficiency, renewable energy, sustainable infrastructure markets, and, of course, that attractive 6.15% yield! However, to reduce DivGro's risk profile, I decided to sell 100 shares and reduce my holding to 250 shares.

I'm disappointed with the performance of PFS, which has an Unsafe dividend safety score of 37. When I opened the position I had high hopes for this small-cap stock, but share price momentum stalled when the company charged-off two loans, reducing Q2 net earnings by 18¢ per share. I'm parting ways with a loss of about 8%.

RDS-B has a Borderline Safety score of 59, and, while I still like the stock, I decided to close my position. It is hard to say goodbye to a dividend yield of 5.6%, but the stock's dividend is not growing and keeping up with inflation. In fact, the last dividend increase was in May 2014 and over a period of 20 years, the dividend growth rate averaged only 2% per year.

Closing my RDS-B position reduces my exposure in the Energy sector to just two stocks, Exxon Mobil (XOM) and Valero Energy (VLO). That feels uncomfortable, so I'll need to look at other candidates in the Energy sector in the near future.

KRG has an Unsafe dividend safety score of 35. Nevertheless, I decided to add 200 shares and increase my position to 450 shares or about 1.13% of the total portfolio value. KRG yields 7.3% at $17.40 per share, which helps to offset the dividend income I'm giving up by selling 100 HASI shares.

KRG payout ratio is 69% of adjusted funds from operations, which is quite safe. However, funds from operations have declined for several quarters in a row and if that trend continues, the dividend could become less safe.

According to Simply Safe Dividends, O has a Safe dividend score of 72. To partially make up for the dividend income loss from closing my RDS-B and PFS positions, I decided to add 150 shares to my O position. The buy increases my position to 2.11% of total portfolio value.

Considering that O's 5-year average dividend yield is 4.63%, I probably paid a premium of about 3% to fair value. However, my yield on cost now averages 4.83%, so I'm quite satisfied with the buy and I look forward to collecting monthly dividends of $55 from O.

MDT, XLNX, and DGX are underweight positions in my portfolio. All three stocks have Very Safe dividend scores, so I decided to increase my holdings some. MDT now represents 0.69% of total portfolio value, while DGX is at 0.63% and XLNX is 0.57%. I consider positions with weights less than 1% as underweight positions and therefore good candidates for further investment.

Markets


Here is a summary of various market indicators, showing the changes over the last month:

DOW
30
S&P
500
NASDAQ
Composite
10-YR
BOND
CBOE
VIX
Jul 31, 201825,415.192,816.297,671.792.964%12.83
Aug 31, 201825,964.822,901.528,109.542.853%12.86

In August, the DOW 30 gained 2.2%, the S&P 500 gained 3.0%, and the NASDAQ gained 5.7%. The yield on the benchmark 10-year Treasury note fell to 2.853%, while CBOE's measure of market volatility, the VIX, increased by 0.2%.

Portfolio Statistics


Based on the total capital invested and the portfolio's current market value, DivGro has delivered a simple return of about 55% since inception. In comparison, DivGro's IRR (internal rate of return) is 17.6%. (IRR takes into account the timing and size of deposits since inception, so it is a better measure of portfolio performance).

I track the yield on cost (YoC) for individual stocks, as well as an average YoC for my portfolio. DivGro's average YoC increased from 3.80% last month to 3.82% this month.

Another interesting statistic is percentage payback, which relates dividend income to the amount of capital invested. DivGro's average percentage payback is 12.7%, up from last month's 12.4%.

Finally, DivGro's projected annual yield is at 4.74%, up from last month's value of 4.71%. I calculate projected annual yield by dividing PADI ($21,313) by the total amount invested.

Here's a chart showing DivGro's market value breakdown. Dividends are plotted at the base of the chart so we can see them grow over time:

Looking Ahead


September is a quarter-ending month, so I look forward to collecting lots of dividends this quarter! Perhaps we'll see another record-breaking month in September!

I'm continuing to focus on strengthening DivGro's risk profile, using various tools to identify riskier stocks in order to trim or close them.

Please see my Performance page for various visuals summarizing DivGro's performance.

Thanks for reading and take care, everybody!

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