Wednesday, May 26, 2010

A dividend portfolio for the long-term

As a dividend growth investor you would find that over time some stocks tend to fall off your radar and no longer fit the rising income stream criteria that you purchased them for in the first place. Thus it is important to monitor your portfolio on a regular basis and place such stocks on your sell radar. M&T Bank (MTB) and British Petroleum (BP) are two companies which I am closely monitoring, since they have both frozen dividends for several quarters in a row.

The four important characteristics of successful dividend portfolios include entry and exit criteria, diversification, dollar cost averaging and selective dividend reinvestment. I have built my dividend portfolio around those important characteristics over the past few years. I have grouped the stocks I own by sector. I have also included additional information about each company, and I have also marked any companies which I do not find attractive at the moment with "HOLD". Just because a company is not attractively valued at the moment however does not mean that it is automatically a sell. Any companies which I have considered to be a sell have been sold off.

Consumer Discretionary

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States. This dividend aristocrat has raised dividends for 33 consecutive years and yields 1.50%. (analysis) HOLD

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. This dividend aristocrat has raised dividends for 33 consecutive years and yields 3.20%. (analysis)

The McGraw-Hill Companies (MHP), Inc. provides information services and products to the education, financial services, and business information markets worldwide. This dividend aristocrat has raised dividends for 37 consecutive years and yields 3.30%. (analysis)

The Sherwin-Williams Company (SHW) engages in the development, manufacture, distribution, and sale of paints, coatings, and related products in North and South America, Europe, and Asia. This dividend aristocrat has raised dividends for 32 consecutive years and yields 1.90%. (analysis) HOLD

Consumer Staples

Archer-Daniels-Midland Company(ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. This dividend aristocrat has raised dividends for 35 consecutive years and yields 2.40%. (analysis) HOLD

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. This dividend aristocrat has raised dividends for 32 consecutive years and yields 3.20%. (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. This dividend aristocrat has raised dividends for 38 consecutive years and yields 4.30%. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has raised dividends for 48 consecutive years and yields 3.40%. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has raised dividends for 37 consecutive years and yields 3%. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. This dividend aristocrat has raised dividends for 53 consecutive years and yields 3.10%. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised dividends for 35 consecutive years and yields 2.40%. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend aristocrat has raised dividends for 47 consecutive years and yields 2.70%. (analysis)

McCormick & Company, Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. This dividend achiever has raised dividends for 24 consecutive years and yields 2.70%. (analysis)

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. This dividend champion has raised dividends for 39 consecutive years and yields 3.90%. (analysis)

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend stock yields 6.70%. (analysis)

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. This international dividend achiever has raised dividends for over one decade and yields 3.80%. (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. This dividend stock yields 5.20%. (analysis)

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. This dividend champion has raised dividends for 40 consecutive years and yields 3.40%. (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and Latin America. This international dividend achiever has raised dividends for over one decade and yields 4.10%. (analysis)

Energy
BP p.l.c. (BP) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. This international dividend achiever has rewarded shareholders with dividend raises for 16 consecutive years and yields 7.70%. (analysis) HOLD

Chevron Corporation (CVX) operates as an integrated energy company worldwide. This dividend achiever has raised dividends for 22 consecutive years and yields 3.90%. (analysis)

Enbridge Energy Partners, L.P. (EEQ) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. This dividend stock yields 8.80%.

Kinder Morgan Management, LLC (KMR) operates as an energy transportation and storage company in North America. This dividend achiever has rewarded unitholders with regular distribution increases for 13 years in a row and yields 8.10%. (analysis)

Financials
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. This dividend aristocrat has raised dividends for 27 consecutive years and yields 2.60%. (analysis) HOLD

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend aristocrat has raised dividends for 45 consecutive years and yields 2.90%. (analysis)

Cincinnati Financial Corporation (CINF), through its subsidiaries, offers property, casualty, personal, and life insurance products to businesses and individuals in the United States. This dividend aristocrat has raised dividends for 49 consecutive years and yields 5.90%. (analysis)

Hingham Institution for Savings (HIFS) provides various financial services to individuals and small businesses in Massachusetts. The company currently has nine branches and several ATM locations in Boston and southeastern Massachusetts. The board of directors has raised annual dividends for sixteen years in a row. The stock yields 3%. (analysis)

M&T Bank Corporation (MTB) operates as the holding company for M&T Bank and M&T Bank, National Association that provide commercial and retail banking services to individuals, corporations and other businesses, and institutions. This former dividend aristocrat ended its 27-year streak of consistent dividend increases in 2008. The stock yields 3.30%. (analysis) HOLD

National Retail Properties (NNN), Inc. is a publicly owned equity real estate investment trust. This dividend achiever has raised dividends for 20 consecutive years and yields 6.90%. (analysis) HOLD

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This dividend achiever has raised dividends for 16 consecutive years and yields 5.60%. (analysis)

The Toronto-Dominion Bank (TD), together with its subsidiaries, provides retail and commercial banking, wealth management, and wholesale banking products and services in North America and internationally. This international dividend achiever has raised dividends for 15 consecutive years and yields 3.60%. (analysis) HOLD

Health Care

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has raised dividends for 47 consecutive years and yields 3.50%. (analysis)

Teleflex Incorporated (TFX) primarily develops, manufactures, and supplies single-use medical devices used by hospitals and healthcare providers worldwide. This dividend champion has raised dividends for 31 consecutive years and yields 2.40%. (analysis) HOLD

Industrials

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. This dividend aristocrat has raised dividends for 53 consecutive years and yields 2.90%. (analysis)

W.W. Grainger (GWW), Inc. and its subsidiaries distribute facilities maintenance and other related products and services in the United States, Canada, Japan, and Mexico. This dividend aristocrat has raised dividends for 38 consecutive years and yields 2.10%. (analysis) HOLD

3M Company (MMM), together with its subsidiaries, operates as a diversified technology company worldwide. This dividend aristocrat has raised dividends for 52 consecutive years and yields 2.60%. (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised dividends for 17 consecutive years and yields 2.60%. (analysis)

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. This dividend champion has raised dividends for 45 consecutive years and yields 2.70%. (analysis) HOLD

Information Technology
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 consecutive years and yields 3.30%. (analysis)

Materials

Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. This dividend aristocrat has raised dividends for 27 consecutive years and yields 2.90%. (analysis)

Nucor Corporation (NUE), together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. This dividend champion has raised dividends for 33 consecutive years and yields 3.40%. (analysis)

RPM International Inc. (RPM) engages in the manufacture, marketing, and sale of various specialty chemical products to industrial and consumer markets worldwide. This dividend champion has raised dividends for 33 consecutive years and yields 4.20%. (analysis)

Telecommunications

AT&T Inc. (T) provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide. This dividend champion has raised dividends for 33 consecutive years and yields 6.80%. (analysis) HOLD

Utilities

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised dividends for 33 consecutive years and yields 5.50%. (analysis)

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States. This dividend stock currently yields 4.60%.

There are several companies which I hold, that no longer fit my entry criteria, although they might have fit the entry criteria at some point in the past. Building a dividend portfolio does take some time to implement. I typically have between ten to fifteen stocks which are attractively valued at any time. I also keep a list with stocks I would consider buying on dips. This list typically varies depending on market conditions. Back in 2008 and 2009 this list was rather small, and the list of attractively valued stocks was large due to depressed market prices. If a stock is very close to my entry price I might consider initiating a small position and then build my exposure from there. It is very important however to keep current on the overall market environment in order to scoop up any bargains from the waiting list.


Update Note (July 1, 2011): I have since sold off shares of BP after the dividend cut. I also sold shares in AT&T (T) as well.
Update: (January 1, 2012): I have initiated positions in EPD and OKS over the past year as well.

Full Disclosure: Long all stocks mentioned above

This post was featured in the Carnival of Personal Finance #260: Forces of Nature Edition

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15 comments:

  1. How do taxes fit into your analysis? More to the point, how does the proposed hike from the current 15% to 39.6% on dividend income next year alter your thinking?

    Are these investments you listed in a taxable account?

    Would you be more prone next year to overweight dividend growth stocks(3.5% with 8% annual increases) versus higher current income dividend stocks(>6%)?

    Also, how do you determine which stocks are automatic DRIPS versus which ones you take the cash from? Do you look at P/Es or rebalance each year after looking at gains?

    ReplyDelete
  2. I don't worry about taxes even though most of these investments are in taxable accounts. Dividends will be taxable at your ordinary income tax rates, so chances are you won't be paying 39%.

    My goal is to generate the maximum amount of income and capital gains possible, and worry about the taxes later. My investment strategy is not guided by taxes. Focusing too much on minimizing tax liabilities would surely lead to suboptimal gains and even losses.

    I only have a few stocks ( 3 or 4) in drips in one of my accounts. The rest are reinvested once a month in one or more stocks which are attractively valued, as long as do not own too much of a single stock.

    I don't rebalance ( which means selling stock to cut down exposure). I allocate dividends and new funds elsewhere instead.

    ReplyDelete
  3. Thanks for sharing your portfolio. I noticed ABT was not listed. Just curious if you're still long ABT.

    Also I had some questions about your buying strategy. I keep similar lists to the ones that you mention. For me there is a third list that I refer to as overvalued. These are companies that I like and want to invest in, but they just seem too expensive and invariably they stay that way for a very long time. CL is an example that comes to mind.

    1. I'm curious in your own portfolio do you try to invest some money in each stock every year, even if you might be overpaying a bit on some stocks?

    2. Do you try to maintain relatively equal weightings among all your holdings or do you put more money into stocks the market is discounting at the moment? If the latter do you worry about your portfolio getting overweighted in a certain sector or stock?

    3. For any stock that you consider to be overvalued how long are you willing to wait for the stock to come down to your entry price?

    4. One strategy I've considered with CL is to buy a little bit, but put in significantly less money than I would with a stock that I thought was fairly valued or under valued. Just wondered if you do something similar, or if you just avoid them altogether until they're fairly valued?

    Sorry I know these are a lot of questions. Still really enjoying the site and reading you on Seeking Alpha as well.

    ReplyDelete
  4. Anonymous has asked a good question about the taxes. I think so much depends on your individual tax circumstance. For example, I'm a Canadian living abroad. You might find my tax situation and lack of interest in dividend payers to be rather interesting.

    Companies, of course, are taxed at the corporate level before paying out a dividend, and then the shareholder is again taxed at the personal level when receiving that dividend. So, in essence, as the owner of the company, you are taxed twice: once of the corporate level and again at the individual level. Taxes paid at the corporate level represent money that can't be reinvested in your business (ie. Chevron or whatever it is) so there's a reluctance (for many investors) to wish being taxed twice like this.

    When companies have a high rate of return on total capital, you might not want them paying dividends (or you might want a low payout).

    If they reinvest that money into the company, they'll increase their business' intrinsic value, therefore generating a higher future stock price than if they had paid out the dividend instead.

    For patient investors not looking for immediate cash, this is more beneficial in a taxable account, because capital gains are taxed more leniently than dividends. That situation isn't just right for me, but pretty much anyone dealing with a taxable account. But the tough part is waiting, realizing that you'll accumulate more, long term, this way, but you won't get paid along the way. Mentally, I think this can be hard for people.

    In my situation, as an overseas expat, I pay 30% tax on dividend income, but I pay nothing in capital gains---ever.

    So my circumstance makes the choice clear. I look for businesses with high return on total capital that don't pay high dividends---if possible.

    Companies like Berkshire Hathaway fit my bill. But I can see the dividend investor's attraction to dividends as well. It can be a long term gauge of legitimate earnings--proving that the company has the legitimate net income that it's claiming to have.

    Cheers,
    Andrew

    ReplyDelete
  5. What I do is, I have 24 different stocks. I keep the same amount in each stock.I try to keep 4.2% in each stock. If one goes up a lot, I don't buy any of that stock until my other 23 stocks are up to that same 4.2%.

    Vacboy

    ReplyDelete
  6. DGI-

    Question on your HOLD for BP.. At what price or time (if any) do you see yourself switching back to BUY? With prices dipping into the 30s, it seems tempting to make a long-term investment in BP once the spill is finally contained. Curious to hear how you are approaching this specific situation.

    I love the site. Thanks for sharing your strategy with similar minded investors.

    Jared-

    ReplyDelete
  7. DJ,

    Thanks for your comment. I do own ABT, I donot know I didn't include it. I also own UHT.

    I try to invest new money each month in approximately 10 stocks. This means that I add new money to most stocks in my portfolio every 2 or 3 months. If I believe I am overpaying for stocks I would not add to this position. I would also allocate dividends elsewhere.

    I do try to maintain equal weights of the stocks I own. However as some stocks become too expensive, I don't put any money there and as a result I am underallocated in them. I would say that in over two thirds of the stocks I own I have a similar dollar amount invested, while the remaining one third are pretty much underallocated.

    I am willing to wait for the stock to come down to my entry price for as long as it takes. Falling in love with a stock just fo the sake of owning that stock with a reckless disregard to valuation is crazy. If the stock is overvalued, I would buy another stock. I would much rather buy a new undervalued stock,rather than invest money in an overvalued stock that I own and know inside out.

    I have done what you have done with CL. The weakness of my portfolio is that I do not buy stocks yielding less than 2.50%. If you watch the history of the dividend growth stocks, some of the best performers have always yielded between 1% and 2%. I have written previously about having a "half position" in such stocks, although I haven't really done much on that. BDX would be such a stock, as would FDO ( although I do hold a very small position there)

    Andrew,

    The issue with relying exclusively on capital gains is that they are very unreliable as a source of income for someone living off their investments. Taxes could be avoided by using a ROTH IRA for example ( or an equivalent account for Canadians).

    Another issue is that for every Berkshire Hathaway, there are at least 20 companies which fail at allocating extra capital at high incremental rates of return. A recent example of that includes Vivendi, which transformed itself into a media juggernaut from a sleepy utility company in the late 1990s. It's shareholders are suing execs for their losses now... I do like BRK, but I have not found the "next Warren Buffett". Have you found him?

    Next to Last Anon,

    Maintaining an equal stock allocation is what I try to do, but sometimes I cannot afford to overpay for stocks. And I also do not want to sell stocks in order to cut my allocation there.

    Last Anon,

    I would consider BP as a dividend buy if it starts raising dividends again. Until then it is a hold.

    BP could be a speculative buy, and if you are able to time it well in the short run you might buy it low and flip it over the next few years. It could go lower from here however as well. Other speculative buys could be greek stocks such as NBG or OTE. But I do not engage in speculation, so I cannot help you here.

    ReplyDelete
  8. FYI, I believe you have typo in your post for the symbol for Enbridge Energy Partners, EEQ instead of EEP. You have "Enbridge Energy Partners, L.P. (EEQ)"

    No need to publish this comment just wanted to point out the mistake.

    ReplyDelete
  9. Anon,

    Technically the name is Enbridge Energy Management (EEQ). But EEQ is the same thing as EEP. EEQ only pays dividends in shares, which lets your stake compound tax free.

    ReplyDelete
  10. DGI-

    Ah ha, thanks for the clarification and explanation. I own EEP but didnt realize that's how EEQ worked.

    So EEQ provides tax free capital growth, while EEP provides a taxable dividend income stream?

    Are there never any applicable capital gains taxes related to EEQ or similar stocks?

    Jay-

    ReplyDelete
  11. There are cap gains taxes on EEQ when you sell. A similar stock is KMR - which derives its value from KMP.

    ReplyDelete
  12. Hi DGI,
    I appreciate your posts, however, I have to disagree with you on MTB. While they have frozen their dividend over the past few quarters, they are one of a very small number of banks that never cut their dividend during the financial crisis, and their dividend (and stock price) are still much higher relative to the levels of other regional banks compared to pre-crisis levels. In fact, many other banks that have increased dividends over the past year or two are still below 50% of pre-crisis level dividends. In any case, keep up the good work.
    Chris

    ReplyDelete
  13. Noticed on a follow up that you sold T --did you sell all or just a portion, and why?

    ReplyDelete
  14. Regarding taxes on a dividend portfolio. I have three main accounts - regular normal stock account, a 401k Roth and a IRA Roth. They are all dividend stock accounts, but the Roth's will provide tax free income when I retire. Most of the dividend stocks are reinvested and are paying a yield on capital of about 15%. I expect to have a YOC of about 25% when I retire in 10 years just through the magic of dividend growth.

    ReplyDelete
  15. Is this your current list of stocks that you own now? ... OR have you bought or sold any of these stocks in your report above as of today (04-26-2012)? I enjoy your articles ... Thank you for all you do!!

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

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