Dividend Investment Portfolio December 2011 Update

Dividend Investment Portfolio December 2011 Update

If you follow my blog you may remember that my original Perpetual Income Machine eventually morphed into my dividend investment portfolio.  Now every couple months I update those specific stocks which are on my “watch list” for the following months to come. While the stocks I am purchasing change every few months, I never sell those stocks previously purchased unless they get kicked off the dividend champion list.  I used to use the dividend aristocrat list, exclusively, as my starting point until I learned that there are other dividend lists that follow my goals and objective.

My eventual goal will have tons of different lots purchased when the stock was the cheapest.  Taxes will be a nightmare, but I don’t plan on selling for a long long time, so we’ll let Future Evan deal with that fall out. My dividend investment portfolio has 2 parts:

  • Three ETFs that cost nothing to buy through my new broker Fidelity and
  • Random purchases of “the watch list” which is created using the same exact metrics

Considering the work it does to create a post like this and the fact that I am investing in companies that have proven themselves by increasing their dividend payouts for the past 25 years I don’t mind putting it on autopilot for months at a time. Notwithstanding my last update was in October of 2011 so it is about time!

Part 1: Income ETFs in my Dividend Investment Portfolio

  1. DVY – The investment seeks to replicate, net of expenses, the Dow Jones Select Dividend index…The index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. index.
  2. IDV – The investment seeks to replicate, net of expenses, the Dow Jones EPAC Select Dividend index…The index consists of 100 of the highest dividend-yielding securities (excluding REITs) in the Dow Jones World Developed-Ex. U.S. index. The fund is non-diversified.
  3. IYR – The investment seeks to replicate, net of expenses, the Dow Jones U.S. Real Estate index…The index measures the performance of the real estate sector of the U.S. equity market. It includes companies in the following industries: real estate holding and development and real estate investment trusts. The fund is non-diversified.

I have not and will continue not to reinvest the dividends in these ETFs.  Instead I use the income produced to purchase additional shares of those stocks that make up Part II. These particular ETFs can be purchased commission free from Fidelity so they really appeal to me, but I refuse to give up on my original idea of purchasing undervalued Dividend payers which leads us to Part II.

Part II: December Update of the Stock Part of my Dividend Investment Portfolio

  1. They have to actually be on the Dividend Champion list – Updated monthly
  2. The stock has to have a Price to Earning that is lower than their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be above 2.5%
  5. Price to Book Value Should be Reasonable (under 4)

Some quick definitions

  • Dividend Champions are those dividend paying American companies that have increased their dividend for the past 25 years.  Unlike the Dividend Aristocrat list they do not have to be part of the S&P500.
  • P/E is Price is “a valuation ratio of a company’s current share price compared to its per-share Earnings.”
  • Operating margin is “a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.”
  • Dividend Yield a “Financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated by dividing Annual Dividends per Share by Price Per Share”
  • Price to book is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

Obviously if the number is close to my goal I will allow some leeway to ignore market fluctuations. 

Dividend Aristocrat Price to Earnings by Stock’s Industry

The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average

Dividend Aristocrat Operating Margin by Stock’s Industry

Next I eliminated those stocks whose operating margin was not better than its peers in the industry (or only marginally better).

Dividend Aristocrat Dividend Yield

While I am not ‘chasing yields’ I am attempting to create a dividend portfolio, so the next elimination step was to remove any stocks with a dividend yield of less than 2.5%. This is a moving target depending on how many stocks I have left to choose from.

Dividend Aristocrat Price to Book

Lastly, I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued.

Remaining Dividend Aristocrats to Build Part II of My Dividend Investment Portfolio

The remaining stocks that I will be investing for the next couple months are:

3M Company    MMM
AT&T Inc.    T
Becton Dickinson & Co.    BDX
Chubb Corp.    CB
ExxonMobil Corp.    XOM
McCormick & Co.    MKC
Medtronic Inc.    MDT
Procter & Gamble Co.    PG
Sysco Corp.    SYY
Target Corp.    TGT
Walgreen Company    WAG
Wal-Mart Stores Inc.    WMT

I purchased at or near dips in the stock.   This time around I will continue my $300 lots at or near short term dips in the stock. I spent a lot of time on this portfolio, but I am not providing investment advice rather I want to hear what EVERYONE thinks about it!

14 Responses to Dividend Investment Portfolio December 2011 Update

  1. Hi, I’m commenting because I know it sucks to research a post and spend hours writing it only to have no one read it. I read it. Thanks for the info. Have you considered MO or BMY? Both of them have performed very well for me over the past couple of years.

    • Hmmmm a pity comment? Thanks I think lol. I didn’t consider them only because I started with the base of the Dividend Champions if they aren’t on it then I don’t consider.

  2. Thanks for the investment advice. I will now buy all the stocks on your list and sue you when they go down. Just kidding!
    I’ve been looking to get into the market as well, trying to get my parents to get me some shares for christmas, but Im not sure how well it’s going. Like you, Im really into dividend paying stocks.

    • Almost gave me a heart attack with that first part!

      They could give you cash and you can open your account instead of just shares?

    • No mistake nothing was a hard and set rule. If you look at the other categories there are a few other “mistakes” cause they were so close.

  3. I have WMT in my portfolio, so we have one in common. I have noticed that a lot of telecom companies pay out great dividends if you can tolerate the industry declines. CTL is a good one that I sold when I bought my condo.

  4. I love me some P/B ratios. That said, TGT and WMT’s P/B ratios scare me more than…say, KO’s price-to-book.

    Walmart and Target can both be dethroned, whereas Coke probably won’t ever be displaced by a competitor.

    On the topic of asset valuations – which are key to the book value – TGT and WMT have high concentrations of PP&E as part of their balance sheets. Naturally, a lot of this is commercial real estate.

    Now, say what you want about commercial property and it’s future. Up, down, whatever. Regardless of the macro commercial sector, one has to question how easily WMT or TGT could get their PP&E’s book value back from their storefronts. WMT and TGT are both anchor stores; if they leave, the value of the commercial property they own drops considerably. Also, there aren’t many other retailers that can easily take their place.

    So, for the sake of conservatism, I’m not sure how much of the PP&E on the balance sheet is really all that beneficial as a safety net or as an indication that retail firms are or are not undervalued. Both have ROAs of <10%.

    Curious as to what you think about their balance sheets.

    • I do not go as deep as you do – didn’t look at balance sheets yet (usually do right before I purchase blocks of shares, so after I get my watch list down).

      Obviously WMT and TGT own property but I wonder how many stores they actually own or are leases that they’d walk from.

      I don’t think either stores is one that can be dethroned as easily as you briefly indicate…plus isn’t WMT one of the largest employers in the US? If that is dethroned we may have a ton more problems on the macro level lol

      • Notwithstanding everything I just said I don’t think I take into account the intangible business enough when I start with the modeling.

        • I guess my point was that book value is relative.

          Coke is Coke. I won’t stop drinking it.

          Walmart and Target are…retailers. There are plenty of companies that can sell me other company’s products, but there’s only one Coke.

          B/V, to me, is relative. WMT and TGT may be relatively undervalued to Coke on a BV basis, but I like to think about what purpose I want BV to serve.

          Is BV attractive to me for the purposes of safety? If so, then I want it to be liquid/as valuable as it can possibly be.

          WMT and TGT both own significant real estate positions and lease their space to other businesses. Thing is, space around WMT’s locations is really only valuable because WMT makes it valuable.

          If BV isn’t for purposes of safety, then it’s of little value. Coke could have a ton of cash on the balance sheet, but that hardly makes it a safer company. It’s going to sell more and more sugar water regardless. I have no concern for safety.

          WMT and TGT have tons of direct competition, so their BV has to be high to warrant an investment. In this case, the value of the underlying holdings is very important to me.

          I’m a big intangibles guy. I mean, I like the cold hard numbers, but if the business is secure with limited competition (such as Coke) then I don’t really care about the balance sheet.

          I wouldn’t even say that KO is a relatively better investment than either of the two because it has a FCF yield of right around 4%. 4% isn’t enough to make me jump up and down for joy for any investment.

          Then again, I’m both stubborn and picky, so it is what it is.

  5. Good list of stock choices. Have you ever looked outside of the Aristocrats for possible investments, since companies are constantly dropping off and being added to the aristocrats list.

    • I just moved from the aristocrats to the champions list. But outside those lists? No not right now as I am looking for an income stream and companies that have paid dividends for 25+ years seemed like a good place to start.

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