Dividend Investment Portfolio July 2011 Update

Dividend Investment Portfolio July 2011 Update

I recently had to change the way my dividend investment portfolio operated and I realized that while I came to the logistics of how I would actively invest in it I didn’t actually pick the new stocks I would be investing in for the next couple months.  I used to narrow down the Dividend Aristocrat list using the metrics described below and invest in each twice a month for a set amount using Sharebuilder, however, since the change my dividend investment portfolio will have 2 equal 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 May 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 will not be reinvesting dividends in these ETFs, rather I will be using the income from these investments 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 Aristocrat members which leads us to Part II.

Part II:  July Update of the Stock Part of my Dividend Investment Portfolio using the Dividend Aristocrats

  1. They have to actually be on the Aristocrat List
  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

Some quick definitions

  • Dividend Aristocrats are those dividend paying American companies that have increased their dividend for the past 25 years.
  • 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.

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:

  • AFL
  • CB
  • JNJ
  • LEG

I am not sure how much I will be able to purchase in the upcoming months, but I will save at least $200 for each purchase, so that the $8/trade isn’t a huge chunk (percentage wise).  This is going to be difficult for me since the portfolio grew on a platform that was so cheap per transaction ($1/auto trade), but it is what it is.

 

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!

30 Responses to Dividend Investment Portfolio July 2011 Update

  1. That is a good screening process. I own JNJ and may eventually add the others. I haven’t added to my portfolio this year but I think I should have enough income to start building it up again. I’ll eventually do a blog post about it.

  2. Looks like a great screening process you’ve got there. I’m kinda surprised you settled on JnJ though – I remember reading something about their stock in the WSJ and I dont remember it painting it particularly favorably.

    • I didn’t go to the news – I was basing the future purchases on nothing but the metrics…could be a stupid call on my part but I figured with these types of stocks (dividend aristocrats) it may be better to ignore the noise as long as it isn’t huge.

      • I think this is definately the way to do it. Look at Warren Buffet and other great value investors. If they paid attention to the news rather than the fundamentals, they wouldn’t be where they are today. Buy good solid companies with great fundamentals when they are trading at a discount to valuation and you will come out ahead in the end.

  3. Although I do not own any of the stocks you discussed above, I like your screening process and your picks. I need to learn how to spell diversification better but then I am afraid I will lose the pleasure of picking in my sector ;)

  4. Evan, I love it! Although I have gotten away from individual stock picking, preferring etfs and index funds, your selection criteria are simple and easy to implement. Furthermore you are picking blue chips, in general, which are less susceptible to big price fluctuations. Good luck!

    • Very easy to implement but very time intensive to create the spreadsheets. There has to be any easier way lol.

      I am a fan of ETFs/Indexes also but I like the idea that I am building something on my own with my research and money at risk.

  5. While JNJ may currently be out of favor and battling some difficulties, this is the perfect time to buy. The current price reflects these difficulties and unless you expect them to not recover, it is good to get in now while it is cheap and ride the wave back to glory.

    Do you think you should save up more for each individual purchase? $8 commision on a $200 trade is 4%. You’ll have to have pretty decent returns in order to not have transaction costs eat up all your profits.

    • I was thinking that Daniel, but I am much too impatient. I am only looking to put in 300 – 400/month into this account and 150 is eaten up by the ETFs.

      Not sure how else to handle it I am open for ideas!

      • What I do to avoid this issue is save up more before investing. So I’m not investing nearly as often as you are but when I am investing I am buying more and therefore decreasing my costs to something like 1.5% or something.

        As for the impatience I can definately understand that. If I had it my way I’d be making small buys every couple weeks. I have to restrain myself in order to not let transaction costs eat away any gains I am trying to achieve.

        • Daniel,

          “As for the impatience I can definately understand that. If I had it my way I’d be making small buys every couple weeks.”

          You should check out sharebuilder. $12 bucks a month gets you 12 trades. If you build a portfolio of 6 stocks that is buying every 2 weeks its a buck a trade.

          • Unfortunately I am like you in that I work for an investment company therefore am restricted on brokerages I can use and have to get approval before making any buys or sells. If this weren’t the case though I would be using Sharebuilder in a heartbeat as it looks like it would be a great way to accumulate shares over time with small commisions.

    • I FREAKING WISH! Right now my income stream for the most part is being reinvested and is MUCH MUCH less impressive.

      Imagine that picture with a stopper on the faucet. I am hoping one day to remove the stopper and rock out the income.

  6. I think all four of those are great picks. I agreed with most of your previous selections as well, but I think this is the first list I’m 100% in agreement with. Solid choices!A potential issue is that $8/$200, or 4%, is generally considered a bit too steep for fees. If it were me, I might halve my investment frequency and double the amount I put in when I do invest, to cut the percentage down to 2%.

    • I finally get Dividend Monk approval! The problem with doing $400 every two months is that I have to re-do all this work. Just for one purchase since I would have to buy $400 of ONE single stock so I couldn’t buy the other 3.

      Do you know of a way to automate it? Right now I literally type everything into a spreadsheet.

  7. I’ve started looking harder at master limited partnerships like KMP and ETP. Such companies have high dividends and growth, but the taxes are a pain.

    So far I just have 1 such company called EVEP, and it’s part of my lunch dividend experiment. It’s been off the charts for me while still paying me a 10% dividend. Unfortunately, it’s appreciated in value so much that it now only provides a 4.70% dividend if you were to buy it today.

    Knowing your job, do you see many such holding with your clients?

    • When you invest in MLPs the brokerage house doesn’t take care of the tax forms? If not, it is enough of a reason to make it not worth it for me lol

      Not really it seems most people do the mutual fund thing of set it and forget

  8. Nice picks! For real estate, I have the ETF ACC, the college campus REIT. High yield, low volatility. I love campus housing so much more than commercial or residential; it just works – kids gotta rent a house and there’s no room to build more! So much so, trying to close a gig this weekend – wish me luck!

    • ACC sounds like a really cool REIT ETF…The ETFs I chose were commission free from Fidelity that is the only reason I picked up any.

      GOOD LUCK!

  9. I like your screening process. For my money and from a macro view, I’d feel better about J&J than Leggett & Platt, even though I hold neither. With a manufacturer of home and office furnishings, you’re more exposed to the skill of individual managers/CEOs and how they manage their operations, factories, and supply chain. This is especially true with manufacturing these days, a sector which is facing deep structural changes and overseas low-cost competition. Just an opinion.

    • I would agree to an extent, but I think LEG is a strong business. I mean, if I had to put my net worth into either JNJ or LEG, I’d put it into JNJ, but I think LEG has a lot to offer to a diversified portfolio.Leggett and Platt has a fairly new CEO who so far has been wonderful in my view. He changed the way the company views its segments, and I expect this to have great long term results. The company divested underperforming assets, and now has a much more intentional capital allocation plan. I published an article on Leggett and Platt on Seeking Alpha if anyone is interested. http://seekingalpha.com/article/250562-leggett-and-platt-high-dividend-yield-and-strong-cash-flowThe more thoroughly I looked into the company, the more bullish I considered its prospects to be.

      • DM – agree that Leggett seems to be an attractive company with a nice chunky yield, and I personally have a soft spot for domestic manufacturers. But I’m also wary of huge diverse manufacturing groups with multiple divisions and product lines scattered around the globe. Wouldn’t be surprised if there are several or even many different ERP systems.
        An interesting question to ask during an investor conference call would be just how integrated their procurement process is for raw materials, and are they leveraging their spend for bulk buys.
        As far as the “core” groups, hard to grow the business or wring out cost savings in manufacturing without at least some capex.
        Still, it’s an interesting story, I think I’m going to keep an eye on them.
        Good article on SA, by the way.

  10. I use a similar strategy, but I would caution on filtering by P/B. Some industries just don’t have a lot of book value, so it’s worth understanding their industry and whether they are truly over-priced. It can be safe to over-filter, but you may be passing up some higher yields.

    You said you wouldn’t buy less than $200 due to the $8 fee. That’s 4%, more than your first years yeilds in the stocks you investing in. I would strongly suggest you look at trading within Vanguard or Fidelity with no brokerage fees until you have more money to play with. My personal rule is that I invest no less than $5000 per $10 trade (0.2%) and even that annoys me. 4% is way too much to give up.

    • I am using Fidelity (the 3 ETFs named are commission free)

      Considering my main current goal is to build up cash like there is no tomorrow, it would take way too long to build up to $5000 for just this purpose. I fully hear the concern and plan on buying in higher quantities than $200, but not a crazy amount more.

  11. I know it’s kind of been beaten to death, but that $8 commission is killer. Think about rotating the purchases to buy 1 stock a month for the next four months and cut down the commission expenses.

    Or you could just pile up in the ETFs and do a once-a-year rebalancing into your selected dividend aristocrats then.

      • What he was suggesting is that rather than 4 stocks maybe just buy 4 times as much of 1 stock. Then rotate. You’ll lack the diversification early, but it will even out.

        The ROI is heavily impacted by taking your 4% buying fee. As an example, if you let $1000 grow 8% Y/Y for 30 years, it turns into $10,062. If you pay a 4% fee at the beginning (like you will if you buy $200 at a time) it grows to $9660. That’s a $400 difference! And since you want to reach millions, it would be more like $40,000 difference.

        Good luck!

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