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Monday, October 8, 2018

Quarterly Review of DivGro: Q3-2018

Welcome to the Q3-2018 review of DivGro, my portfolio of dividend growth stocks.

My quarterly reviews provide a summary of dividend income, dividend changes, and transactions executed in the past quarter. I also provide some charts showing various portfolio statistics. While these reviews are mostly informational, they help me to track progress over time.

My portfolio generated more than $5,370 of dividend income this quarter and I'm projecting dividend income of at least $5,600 per quarter going forward.

Year-to-date I've collected dividend income of $14,660 or about 81% of my 2018 goal of $18,000. DivGro's all-time dividend income total is $59,783.

Dividend Income

In Q3-2018, I collected dividend income totaling $5,376, up 14% from the dividends received in Q2-2018 and up 38% from the dividends received in Q3-2017.

I received quarterly dividends from 60 different stocks and funds:
  • Apple (AAPL)income of $73.00
  • AbbVie (ABBV)income of $192.00
  • Aflac (AFL)income of $26.00
  • Blackstone Mortgage Trust (BXMT)income of $186.00
  • Chubb (CB)income of $36.50
  • Comcast (CMCSA)income of $38.00
  • Cummins (CMI)income of $50.16
  • Cisco Systems (CSCO)income of $66.00
  • CVS Health (CVS)income of $50.00
  • Dominion Resources (D)income of $83.50
  • Quest Diagnostics (DGX)income of $12.50
  • Eversource Energy (ES)income of $50.50
  • Ford Motor (F)income of $300.00
  • General Dynamics (GD)income of $32.55
  • Gilead Sciences (GILD)income of $171.00
  • Hannon Armstrong Sustainable Infrastructure Capital (HASI)income of $115.50
  • Hormel Foods (HRL)income of $18.75
  • International Business Machines (IBM)income of $47.10
  • Intel (INTC)income of $156.00
  • Illinois Tool Works (ITW)income of $19.50
  • Johnson & Johnson (JNJ)income of $111.60
  • Coca-Cola (KO)income of $78.00
  • Kite Realty Group Trust (KRG)income of $63.50
  • Lockheed Martin (LMT)income of $28.00
  • Lowe's (LOW)income of $48.00
  • McDonald's (MCD)income of $27.27
  • Medtronic plc (MDT)income of $12.50
  • 3M (MMM)income of $34.00
  • Altria (MO)income of $122.50
  • Microsoft (MSFT)income of $42.00
  • NextEra Energy (NEE)income of $27.75
  • AllianzGI Equity & Convertible Income Fund (NIE)income of $209.00
  • Nike (NKE)income of $20.00
  • National Retail Properties (NNN)income of $81.00
  • NVIDIA (NVDA)income of $4.50
  • Omega Healthcare Investors (OHI)income of $330.00
  • Pfizer (PFE)income of $68.00
  • Provident Financial Services (PFS)income of $21.00
  • Procter & Gamble (PG)income of $143.44
  • QUALCOMM (QCOM)income of $248.00
  • Royal Dutch Shell plc (RDS.B)income of $131.60
  • Ross Stores (ROST)income of $22.50
  • Raytheon (RTN)income of $20.82
  • Starbucks (SBUX)income of $72.00
  • Stanley Black & Decker (SWK)income of $33.00
  • AT&T (T)income of $140.00
  • TJX (TJX)income of $39.00
  • T. Rowe Price (TROW)income of $70.00
  • Travelers (TRV)income of $77.00
  • Texas Instruments (TXN)income of $31.00
  • UnitedHealth (UNH)income of $36.00
  • United Parcel Service (UPS)income of $31.85
  • Valero Energy (VLO)income of $148.00
  • Vanguard Real Estate ETF (VNQ)income of $114.37
  • Verizon Communications (VZ)income of $59.00
  • Walgreens Boots Alliance (WBA)income of $88.00
  • Wal-Mart Stores (WMT)income of $43.68
  • Xcel Energy (XEL)income of $24.70
  • Xilinx (XLNX)income of $12.60
  • Exxon Mobil (XOM)income of $53.30
Additionally, I received monthly dividends from 3 different stocks and funds:
  • Nuveen Floating Rate Income Fund (JFR)income of $28.75
  • Main Street Capital (MAIN)income of $256.50
  • Realty Income (O)income of $99.00
One stock paid an annual dividend this quarter:
  • Taiwan Semiconductor Manufacturing (TSM)income of $131.11
Finally, I received one semi-annual dividend payment:
  • Walt Disney (DIS)income of $168.00
The following chart shows DivGro's dividend income by quarter:

Dividend Changes

Last quarter, I reported projected annual dividend income (PADI) of $20,966 on investments totaling $446,977, for a projected annual yield of 4.69%. This quarter, PADI increased to $21,574 while total investments increased to $451,371, so now the projected annual yield is 4.78%.

The following table shows the stocks that announced dividend increases in Q3-2018. I'm including the new annual dividend and yield on cost (YoC).

Increase Annual Div
 New YoC
Illinois Tool Works
Texas Instruments
Taiwan Semiconductor Manufacturing
Honeywell International
Lockheed Martin
National Retail Properties
Stanley Black & Decker
Main Street Capital
Verizon Communcations
Realty Income

DivGro's average YoC is 3.79%, down from the 3.85% reported at the end of Q2-2018.

I'd like to see dividend increases above 7%. Eight dividend increases in the table topped 7% and the arithmetic average of these increases is 10.04%.

Some stocks announce dividend increases more than once per year, so it is better to look at year over year increases. Here is a chart of the 1-year dividend growth rates of stocks in DivGro, as of 30 September 2018:

The (arithmetic) average year over year dividend growth rate is well above 7%, which makes me a very happy dividend growth investor!

Note that four stocks are paying the same dividend as they did last year.

CVS yields about 2.5% and contributes 1.11% to DivGro's PADI. The dividend is considered Very Safe by Simply Safe Dividends (SSD). With its recently declared dividend of 50¢ CVS officially froze its dividend. So CVS now joins a few stocks in my portfolio I call dividend-paying, rather than dividend growth stocks.

BXMT, HASI, and F are high-yielding dividend-paying stocks.

BXMT yields about 7.5% and contributes 3.85% to DivGro's PADI. BXMT has an Unsafe dividend safety score of 23 out of 100. I'm considering trimming or outright closing my position.

HASI yields about 6.3% and contributes 1.71% to DivGro's PADI. I've trimmed my HASI position this past quarter and I'm planning to close it in Q4-2018. HASI has a Very Unsafe dividend safety score of 11 out of 100. I'll probably replace HASI with another REIT with a higher safety score, even if the yield is less favorable.

Finally, F yields about 6.5% and contributes 6.22% to DivGro's PADI. While F's dividend safety score is Borderline Safe at 45, I see the position as another candidate for trimming. The fact that F contributes so much to DivGro's PADI is a concern. On the other hand, F is a great stock for options trading. I've essentially doubled my yield from F through options trading. As yet, I'm undecided as to what to do with my F position.


This quarter I deposited $4,394 in new capital, including regular monthly deposits of $3,000 and passive income of $1,394. I call income received from Seeking Alpha publications and from blog advertising "passive" income, largely because the income is not guaranteed.

Additionally, I added $3,614 from options trades. While I have obligations when selling covered calls or secured puts, the options income becomes available as soon as the trades are executed. So, I can immediately put that cash to use. Since starting with options trading, I've added options income totaling $36,284 to my DivGro account.

New Positions:
  • Home Depot (HD) — new position of 12 shares
  • Honeywell International (HON) — new position of 15 shares
  • Simon Property Group (SPG) — new position of 40 shares
  • Union Pacific (UNP) — new position of 16 shares
  • Visa (V) — new position of 17 shares
HD, HON, and UNP featured in my recent article on 7 quality dividend growth stocks. All have Very Safe dividend safety scores from SSD. Given their impressive fundamentals and 10-year performances, it is not surprising that these stocks are trading at premium valuations. Nevertheless, I opened relatively small positions to allow me to track these stocks closely—and add shares if and when they trade at more favorable valuations.

The recent pullback in SPG's share price has given me an opportunity to open a new position. SPG is a high-quality retail REIT with an A-rated balance sheet and great growth prospects. SSD rates the REIT's dividend as Safe.

I opened a small position in V despite the stock's low yield of only 0.56%. V has a spectacular 5-year dividend growth rate of 23%, and with a payout ratio below 20%, I think V has ample room to continue double-digit dividend increases for years to come! According to SSD, V's dividend is Very Safe.

Expanded Positions:
  • Cummins (CMI) — added 6 shares and increased position to 50 shares
  • Quest Diagnostics (DGX) — added 15 shares and increased position to 40 shares
  • Gilead Sciences (GILD) — added 100 shares and increased position to 300 shares
  • Kite Realty Group (KRG) — added 250 shares and increased position to 450 shares
  • Medtronic plc (MDT) — added 25 shares and increased position to 50 shares
  • 3M (MMM) — added 9 shares and increased position to 25 shares
  • Realty Income (O) — added 150 shares and increased position to 250 shares
  • AT&T (T) — added 220 shares and increased position to 500 shares
  • Texas Instruments (TXN) — added 10 shares and increased position to 60 shares
  • Valero Energy (VLO) — added 5 shares and increased position to 185 shares
  • Xilinx XLNX — added 15 shares and increased position to 50 shares
I added shares to 11 different positions in Q3-2018.

CMI, GILD, and T are all trading below fair value. I nearly doubled my position in T for its very attractive 5.9% yield. The dividend is rated Borderline Safe at 55. In comparison, CMI and GILD have Very Safe dividend safety scores.

DGX and TXN are underweight positions in my portfolio, so I decided to add a few shares while these stocks are trading near fair value. Both have Very Safe dividend safety scores from SSD.

MDT, MMM, and XLNX also are underweight with Very Safe dividend safety scores according to SSD. These stocks have strong fundamentals and I decided to add to my positions despite somewhat premium valuations.

VLO's dividend is considered Safe by SSD. While the stock is trading above fair value, I really like VLO's dividend growth prospects, so I added a few shares in my retirement account. I'll add more shares as dividends flow in!

O's dividend is considered Safe by SSD. The REIT is one of only nine REITs with a strong credit rating of A- or better. With O trading at about fair value, I decided to increase my position substantially, partly to compensate for trimming my position in HASI.

Finally, I increased my position in KRG despite an Unsafe dividend safety score.

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 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.

Closed Positions:

  • Anheuser-Busch InBev SA/NV (BUD) — sold 100 shares and closed position
  • Provident Financial Services (PFS) — sold 100 shares and closed position
  • Royal Dutch Shell plc (RDS.B) — sold 140 shares and closed position
  • Schwab US Dividend Equity ETF (SCHD) — sold 100 shares and closed position
  • Vanguard Real Estate ETF (VNQ) — sold 100 shares and closed position

  • I closed my somewhat larger position in BUD for a loss of about 14%. After being assigned the stock due to an options trade, the stock's performance has been rather disappointing. Weighing on BUD's prospects is the assumed debt when BUD acquired SABMiller in a $100 billion-plus deal.

    I'm also 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 dividend 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.

    Finally, I closed my positions in two ETFs, SCHD and VNQ. I decided to close my SCHD position for a gain of 5.6%, including dividends. SCHD's performance has been so-so, and the yield is nothing to get excited about. I also closed my VNQ position, for a small gain of 3%. VNQ was a temporary position until I decided which individual REITs I wanted to add to DivGro. SPG (see above) is my first REIT addition, and I'm looking at several additional candidates in Q4-2018.

    Trimmed Positions:
    • Hannon Armstrong Sustainable Infrastructure Capital (HASI) — sold 100 shares and reduced position to 250 shares
    • Microsoft MSFT — sold 40 shares and reduced position to 100 shares
    While I still like HASI for its investments in sustainable infrastructure, I decided to part ways due to the REIT's Very Unsafe dividend safety score. I'll be selling the remaining 250 shares in Q4-2018.

    In July's Pulse article, MSFT's yield channel chart shows that the stock is trading at an overvalued yield based on historical yield patterns. I decided to sell 40 shares and ride the upward trend in the stock price as long as it lasts. MSFT is DivGro's seventh home-run stock and, with total returns of more than 280%, one of my top performers! Annualized total returns are 55%!

    DivGro now contains 72 different positions. Of these, 50 are dividend growth stocks, 5 are dividend-paying stocks, and two are funds, one CEF (closed-end fund) and one ETF (exchange-traded fund).

    Here is the distribution of DivGro's dividend growth stocks by sector:

    Currently, I don't own any stocks in the Materials sector.

    I also own 5 stocks that do not pay dividends:
    I call these stocks my future dividend growth stocks!

    Market Value

    At the end of Q3-2018, DivGro's market value of $704,248 represented a simple gain of 56.0% on $451,371 invested. Of course, this does not take into account the timing and size of cash deposits. DivGro's internal rate of return since inception is 17.5%.

    Portfolio Statistics

    I monitor DivGro's performance in regular Pulse articles, the latest of which you can be seen here. For quarterly reviews, I review general portfolio statistics.

    First, let's consider the weight of individual holdings in DivGro. I prefer to see equal weights, but this is difficult to achieve because I sell covered call options and to do so I need 100 shares (or multiples of 100 shares). Quite naturally, therefore, my portfolio will not be ideally weighted.

    QCOM is my largest position at about 4.07% of portfolio value. I'll probably trim my position soon. The stock had a nice run-up lately, and I'm uncomfortable having a position much larger than about 3.5% in a single stock.

    Next, let's look at the contribution of each position to DivGro's PADI, which depends not only on the stock's yield but also on the size of the investment. Here, OHI, F, MAIN, and T dominate:

    OHI has an Unsafe dividend safety score of 40, while F is Borderline Safe with a dividend safety score of 45. I consider both positions candidates for trimming, but I have yet to decide if or when to pull the trigger. Anytime the contribution of a single position creeps up above 6%, I get nervous.

    OHI is the top yielding position in DivGro, followed by KRG, BXMT, and F. The average yield of my dividend growth stocks is 3.05%. In comparison, DivGro's YoC is 3.79%.

    Finally, let's look at the payback percentage, or how much of my original investment I've received back in the form of dividends. Generally, stocks I've owned for a long time will have larger paybacks, but dividend yield also plays a role: payback will grow faster for stocks with larger yields.

    The payback percentage for MAIN is above 30%. Soon, more than a third of my original investment in MAIN will have been returned in the form of dividends!

    Goal For Q4-2018

    I've made good progress on strengthening DivGro's risk profile, but I have more work to do. So in the fourth quarter, I'll continue to identify riskier stocks to trim or close. Doing so without impacting PADI significantly will be a challenge, as riskier stocks tend to offer higher yields.

    I'm busy reworking my ranking system and I'm looking forward to deploying the new system in the next month or so. I'm hoping that the new ranking system will improve my ability to identify great candidates for further research and possible investment. We'll see how it goes!

    Thanks for reading! Please subscribe to receive an e-mail whenever I post new articles.
    Feel free to comment on this article and I'll do my best to respond as soon as possible.


    1. May I ask you why you don't have great REITs like EPR or GEO in your portfolio ?

      1. Why do you think GEO is great? According to Simply Safe Dividends, GEO's dividend is unsafe.

        As for EPR, I'm actually looking into EPR at the moment. Thanks for your question!

    2. Hi

      very nice update and impressive performance. Are your charts based on MS Excel? How do you calculate the portfolios IRR - based on the development of the NAV or based on invested capital vs dividends received + unrealized gains?

      Thanks a ton and keep up the work. I consider this the best DGI site available.


      1. Thanks for your kind words, Bastian -- truly appreciate it!

        I mostly use Google Sheets, but sometimes MS Excel when the charting functionality of Google Sheets does not quite provide what I need. For quarterly reviews, the charts are from MS Excel.

        I use the XIRR function. In my case, since I don't yet withdraw money from my portfolio, the only inputs are (1) a list of deposits and dates (of those deposits) and (2) portfolio value on date of calculation.

        Dividends don't figure into the equation. Dividends are generated by the portfolio and is not new capital added to the portfolio.

      2. Thank you for your answer FerdiS! The IRR calculation makes sense if not withdrawing since the dividends impact the NAV 1:1.

        One more question - if i may -:
        How do you calculate the portfolios average annual dividend growth rate?

        What I currently do is based on # of shares at the beginning of the period (to avoid impact from shares purchased during the period) x the increase in dividends. Subsequently, I add up all increases and divide those by the monthly portfolio run-rate dividends received at the beginning of the period (what you call PADI).

      3. Like with deposits, withdrawals would simply add another input: a list of withdrawals and dates (of those withdrawals). Withdrawals would have the opposite sign (mathematically), of course.

        As far as portfolio annual dividend growth rate is concerned, I actually don't calculate that.

        I don't quite understand your calculation, but it doesn't seem like "monthly portfolio run-rate dividends received" and PADI (projected annual dividend income) are equivalent terms. PADI is what others call forward dividends.

    3. What brokerage firm do you use and do you have a minimum amount you buy to minimize comission impact in the returns??

      1. I'm with Interactive Brokers (IB). Commissions are quite favorable compared with other on-line brokers. IB charges $0.005 per share with a minimum of $1.00 per transaction and a maximum of 1% of trade value.

        In essence, buying less than 200 shares means I pay the minimum of $1 commission. I don't often buy more than 200 shares, so the 1% of trade value infrequently applies.

        Given IB's commission structure, I don't even think about the impact of commissions on returns. In my view, that's how it should be!

      2. Nice. I didn't know about this $1 commission from IB. I'm paying 4,95 with Fidelity and that kinda hurts the returns. Do you think i should switch? How safe is IB in your view? Also, I'm not american but I reside here until a L1 visa. I'll move back to my country in 2 ys and will have to convert the acct into an NRA, does IB do that?

      3. I can't say whether it makes sense for you to switch.

        I did, so I could trade options and pay smaller commissions. The trading tools on IB gets taking used to. I've used Scottrade and FolioInvesting before. Both have simpler interfaces. (TD Ameritrade bought Scottrade, so they no longer exist).

        I don't know what an NRA is. Check with IB -- I believe they cater for international (outside USA) accounts.

      4. NRA - Non resident alien. Thanks for the tips. Much appreciated.


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