Quarterly Review of DivGro: Q4 2019

This is the 28^th quarterly review of DivGro, my portfolio of dividend growth stocks.

My quarterly reviews summarize the transactions executed in the past quarter and provide a summary of dividend income and dividend changes. Additionally, I include charts showing various portfolio statistics. The reviews are mostly informational and help me to track progress over time.

My portfolio generated $5,769 of dividend income this quarter and I'm projecting dividend income of at least $8,786 per quarter going forward.

Year-to-date I've collected dividend income of $25,542 or about 101% of my 2019 goal of $25,200. DivGro's all-time dividend income total is $90,987.

Dividend Income

In Q4 2019, I collected dividend income totaling $5,769, down 12% from the dividends received in Q3 2019 but up 2% from the dividends received in Q4 2018.

I received quarterly dividends from 78 different stocks and funds:

• Apple (AAPL) — income of $77.00
• AbbVie (ABBV) — income of $214.00
• Accenture (ACN) — income of $8.00
• Archer-Daniels-Midland (ADM) — income of $105.00
• Automatic Data Processing (ADP) — income of $7.90
• Aflac (AFL) — income of $27.00
• Amgen (AMGN) — income of $87.00
• Anthem (ANTM) — income of $8.00
• Air Products and Chemicals (APD) — income of $18.56
• Broadcom (AVGO) — income of $53.00
• Boeing (BA) — income of $61.65
• Blackrock (BLK) — income of $115.50
• Bank of Nova Scotia (BNS) — income of $34.37
• Chubb (CB) — income of $37.50
• Comcast (CMCSA) — income of $42.00
• Cummins (CMI) — income of $65.55
• Canadian National Railway (CNI) — income of $10.12
• Costco Wholesale (COST) — income of $6.50
• Cisco Systems (CSCO) — income of $35.00
• CVS Health (CVS) — income of $150.00
• Chevron (CVX) — income of $95.20
• Dominion Energy (D) — income of $91.75
• Quest Diagnostics (DGX) — income of $53.00
• FedEx (FDX) — income of $19.50
• General Dynamics (GD) — income of $51.00
• Gilead Sciences (GILD) — income of $126.00
• Gap (GPS) — income of $72.75
• Home Depot (HD) — income of $81.60
• Honeywell International (HON) — income of $54.00
• Hormel Foods (HRL) — income of $21.00
• International Business Machines (IBM) — income of $48.60
• Intel (INTC) — income of $94.50
• Illinois Tool Works (ITW) — income of $40.66
• Johnson & Johnson (JNJ) — income of $117.80
• JPMorgan Chase (JPM) — income of $36.00
• Coca-Cola (KO) — income of $160.00
• Lockheed Martin (LMT) — income of $33.60
• Lowe's (LOW) — income of $55.00
• Mastercard (MA) — income of $3.30
• McDonald's (MCD) — income of $33.75
• Medtronic (MDT) — income of $27.00
• 3M (MMM) — income of $144.00
• Altria (MO) — income of $168.00
• Merck (MRK) — income of $60.50
• Microsoft (MSFT) — income of $51.00
• NextEra Energy (NEE) — income of $31.25
• National Retail Properties (NNN) — income of $83.43
• Oracle (ORCL) — income of $30.00
• Pfizer (PFE) — income of $108.00
• Procter & Gamble (PG) — income of $74.59
• Philip Morris International (PM) — income of $140.40
• Public Storage (PSA) — income of $60.00
• Qualcomm (QCOM) — income of $21.70
• Raytheon (RTN) — income of $47.12
• Royal Bank of Canada (RY) — income of $19.73
• Starbucks (SBUX) — income of $41.00
• Tanger Factory Outlet Centers (SKT) — income of $177.50
• Snap-On (SNA) — income of $27.00
• Simon Property (SPG) — income of $168.00
• Stanley Black & Decker (SWK) — income of $34.50
• Stryker (SYK) — income of $5.20
• AT&T (T) — income of $306.00
• Toronto-Dominion Bank (TD) — income of $28.10
• TJX (TJX) — income of $46.00
• T Rowe Price (TROW) — income of $152.00
• Taiwan Semiconductor Manufacturing (TSM) — income of $97.27
• Texas Instruments (TXN) — income of $67.50
• Unitedhealth (UNH) — income of $43.20
• Union Pacific (UNP) — income of $38.80
• United Parcel Service (UPS) — income of $96.00
• Visa (V) — income of $5.10
• Valero Energy (VLO) — income of $166.50
• Verizon Communications (VZ) — income of $61.50
• Walgreens Boots Alliance (WBA) — income of $137.25
• Wells Fargo (WFC) — income of $51.00
• WP Carey (WPC) — income of $51.80
• Xcel Energy (XEL) — income of $26.33
• Exxon Mobil (XOM) — income of $174.00

Additionally, 2 different stocks paid me monthly dividends:

• Main Street Capital (MAIN) — income of $213.75
• Realty Income (O) — income of $34.05

The following chart shows DivGro's dividend income by quarter:

Dividend Changes

Last quarter, I reported projected annual dividend income (PADI) of $25,789. This quarter, PADI increased to $26,358 and relative to the total capital invested, DivGro's projected annual yield is 4.75%.

The following table shows the stocks that announced dividend increases in Q4 2019. I'm including the new annual dividend and yield on cost (YoC).

Company	Ticker	Increase	Annual Div	New YoC
Hormel Foods	HRL	10.71%	0.93	2.68%
Stryker	SYK	10.58%	2.30	1.10%
Amgen	AMGN	10.34%	6.40	3.44%
AbbVie	ABBV	10.28%	4.72	7.66%
Accenture	ACN	9.59%	3.20	1.82%
Illinois Tool Works	ITW	7.00%	4.28	3.15%
Pfizer	PFE	5.56%	1.52	4.10%
Bank of Nova Scotia	BNS	5.34%	2.75	5.05%
Toronto-Dominion Bank	TD	4.08%	2.25	3.98%
Royal Bank of Canada	RY	3.16%	3.06	4.02%
Philip Morris International	PM	2.63%	4.68	5.83%
Simon Property	SPG	2.44%	8.20	5.03%
Verizon Communications	VZ	2.07%	2.46	5.23%
AT&T	T	1.96%	2.08	6.46%
Taiwan Semiconductor Manufacturing	TSM	0.65%	1.30	3.06%
Realty Income	O	0.22%	2.73	5.76%
WP Carey	WPC	0.19%	4.15	6.38%

DivGro's average YoC is 3.65%, down from the 3.70% reported at the end of Q3 2019.

I'd like to see dividend increases of at least 7%. Only six dividend increases in the table topped 7%. Fortunately, the arithmetic average of the increases in Q4 2019 is 8.63%.

Dividend Growth

Some stocks announce dividend increases more than once per year, so when considering dividend growth, it is better to look at year-over-year increases. Here is a chart of the one-year dividend growth rates of stocks in DivGro, as of 31 December 2019:



At 9.32%, the (arithmetic) average year-over-year dividend growth rate of dividend growth stocks in my portfolio is well above 7%, which makes me a very happy dividend growth investor!

And here is a chart of the 5-year dividend growth rates of my dividend growth stocks:



Generally, I would expect stocks with smaller dividend growth rates to offer higher yields.

Here is a summary of the dividend yields offered by stocks with the lowest 5-year dividend growth rates, and a column showing the so-called CDR number, which sums the dividend yield and the 5-year dividend growth rate [DGR]:

Company	Ticker	Sector	Yield	5-Yr DGR	CDR
WP Carey	WPC	Real Estate	5.18%	1.79%	6.97%
AT&T	T	Communication Services	5.33%	2.04%	7.37%
Chevron	CVX	Energy	3.93%	2.15%	6.08%
Verizon Communications	VZ	Communication Services	4.07%	2.26%	6.33%
Procter & Gamble	PG	Consumer Staples	2.43%	2.99%	5.42%
Philip Morris International	PM	Consumer Staples	5.50%	3.19%	8.69%
Main Street Capital	MAIN	Financials	5.67%	3.82%	9.49%
National Retail Properties	NNN	Real Estate	3.87%	4.16%	8.03%
Realty Income	O	Real Estate	3.70%	4.40%	8.10%
Exxon Mobil	XOM	Energy	4.95%	4.75%	9.70%
Digital Realty Trust	DLR	Real Estate	3.60%	5.41%	9.01%
Coca-Cola	KO	Consumer Staples	2.93%	5.57%	8.50%
Pinnacle West Capital	PNW	Utilities	3.52%	5.63%	9.15%
Stanley Black & Decker	SWK	Industrials	1.65%	5.82%	7.47%
Xcel Energy	XEL	Utilities	2.58%	6.19%	8.77%
Merck	MRK	Health Care	2.67%	6.27%	8.94%
Walgreens Boots Alliance	WBA	Consumer Staples	3.10%	6.27%	9.37%
Johnson & Johnson	JNJ	Health Care	2.63%	6.30%	8.93%
Pfizer	PFE	Health Care	3.90%	6.30%	10.20%
Aflac	AFL	Financials	2.04%	6.72%	8.76%
Intel	INTC	Information Technology	2.10%	6.96%	9.06%

Proposed by Seeking Alpha author Chowder, the CDR measures the likelihood of stocks to produce annualized returns of 8%. Chowder used 8 as a minimum number for utilities yielding at least 4%, 12 for stocks yielding at least 3%, and 15 for stocks yielding less than 3%.

I color-code the CDN column as follows:

• green indicates suitable candidates (stocks likely to deliver annualized returns of 8%)
• yellow indicates possible candidates (stocks less likely to deliver annualized returns of 8%)
• red indicates unsuitable candidates (stocks unlikely to deliver annualized returns of 8%)

I use 5 as the threshold number for utilities yielding at least 4%, 8 for stocks yielding at least 3%, and 10 for stocks yielding less than 3%.

So, for example, for stocks yielding at least 3%:

red < 8 ≤ yellow < 12 ≤ green

If the CDR column is colored yellow,  then the position warrants closer monitoring. And if the CDR column is colored red, then due diligence and a consequential decision about the position is called for. There are several positions I'll need to look into to see if action is required.

Transactions

This quarter I deployed new capital and options income to add new positions and to expand existing positions. I also trimmed and closed some positions.

New Position

• Pinnacle West Capital (PNW) — new position of 50 shares

Closed Positions

• Ford Computer (F) — sold 2000 shares and closed position
• Gap (GPS) — sold 300 shares and closed position

Increased Positions

• Archer-Daniels-Midland (ADM) — added 100 shares and increased position to 300 shares
• Bank of Nova Scotia (BNS) — added 50 shares and increased position to 100 shares
• Cisco Systems (CSCO) — added 100 shares and increased position to 200 shares
• FedEx (FDX) — added 45 shares and increased position to 75 shares
• 3M (MMM) — added 40 shares and increased position to 100 shares
• Oracle (ORCL) — added 15 shares and increased position to 140 shares
• Royal Bank of Canada (RY) — added 25 shares and increased my position to 50 shares
• Simon Property (SPG) — added 20 shares and increased my position to 80 shares
• Toronto-Dominion Bank (TD) — added 150 shares and increased my position to 200 shares
• Union Pacific (UNP) — added 8 shares and increased position to 48 shares
• United Parcel Service (UPS) — added 50 shares and increased position to 100 shares
• Wells Fargo (WFC) — added 100 shares and increased my position to 200 shares

Reduced Positions

• Intel (INTC) — sold 200 shares and reduced position to 300 shares

I covered these transactions in monthly reviews and other articles on my blog, so I won't rehash details here. Some transactions resulted from options assignments, while others continued my effort to strengthen DivGro's risk profile.

To assess risk, I utilize Dividend Safety Scores provided by Simply Safe Dividends (SSD):



From left to right, the colors represent Borderline Safe, Safe, and Very Safe dividend safety scores. (I no longer own Very Unsafe or Unsafe dividend growth stocks).

DivGro now contains 93 different positions. Of these, 81 are dividend growth stocks, seven are dividend-paying stocks, and one is a CEF (closed-end fund). I also own four stocks that do not pay dividends.

Here is the distribution of DivGro's holdings by sector:

Market Value

At the end of Q4 2019, DivGro's market value represented a simple gain of 66% on the total amount 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 15.5%.

Portfolio Statistics

In quarterly reviews, I like to present 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.



At 3.23% and 3.18%, respectively, Apple (AAPL) and Walt Disney (DIS) are my largest positions, followed by T. Rowe Price (TROW) at 2.71% and AT&T (T) at 2.54%. I don't like having positions much larger than about 3.5% of portfolio value, and I'm happy to see that all my positions are now less than 3.5% of portfolio value.

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, T dominates with 4.73%:



Single positions that contribute more than 6% to DivGro's PADI make me nervous. Fortunately, I have none at this time.

Here is a chart showing the distribution of dividend yields of stocks in my portfolio:



At 9.96%, Tanger Factory Outlet Centers (SKT) is the top-yielding position in DivGro, followed Altria (MO) with 6.77%. The arithmetic average yield of my portfolio is 2.82%. If instead, I weigh yields based on each position's contribution to PADI, then the average yield is 3.69%.

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.



Main Street Capital (MAIN) is my oldest position and has, by far, the largest payback in my portfolio.

DivGro's position-weighted average payback percentage is 8.84%.

Concluding Remarks

I'm happy with DivGro's overall composition and performance. When deploying available capital, I'll focus on buying high-quality stocks trading at or below fair value.

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