October 2011 Dividend Investment Portfolio Update

October 2011 Dividend Investment Portfolio Update

About 18 months ago, I started my Perpetual Income Machine which then 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 Aristocrat list.  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 will have 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 July 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 Aristocrat members which leads us to Part II.

Part II: October 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
  • PG
  • WMT
  • WAG

Last time I updated the portfolio I mentioned that I would be putting at least $200 into each purchase, however, reading everyone’s comments I decided to do it in $300 chunks.  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!

7 Responses to October 2011 Dividend Investment Portfolio Update

  1. Nice and thorough one Evan. You’re helping inspire me to do something similar as I have no dividend portfolio.

    I’m worried that capital gains tax and dividends will be raised to normal income tax levels, thereby crushing stocks. I’m also afraid that stocks are so vulnerable that any dividend gains will be wiped out by capital losses.

    Im so preferring rental property now, but I should start.

    • Sam, I agree. What fun times to invest.

      I’ve already opened up space in tax differed accounts for dividend stocks. Besides for savings for emergency purposes, I’ve been buying just stocks (no dividend) or very tax efficient index funds in my taxable accounts.

      For RE around NY I’m not liking anything I see and hesitant to jump the gun on a out of state purchase.

      • I really go back and forth with real estate investing. My father owns two properties (one is a two-family house and the other is a 2 family place with a bar underneath) both in NYC which is notorious for anti-landlord laws and I am not sure I can sign up for the kind of stress.

        Yes it pays him well, but if I had to guess his income stream is probably 8-10% before mortgage expenses….so, the question is whether I would rather 5 to 7% from a REIT?

        I know it is more complicated than that, but I don’t see myself in the near term future buying real estate for investment purposes, and hopefully he has another 30 or so years in him that I won’t inherit the homes for a while!

        • NYC landlord? Good luck! ugh. I would only do commercial. At least you have somewhat of a chance, though the unions will kill you.

          A REIT would be less hassle though best to put into a retirement account.

          I personally want to invest in RE in the south. the rent/price ratio is much more favorable right now. The issue is management then.

  2. You’ve put a lot of work into this post. Wow. Unfortunately, I cannot offer any advice since this is WAY over my hear. It sounds like a good plan though. :-)

  3. Time is your most valuable asset and you are certainly using it wisely by building a portfolio that is as close to being on autopilot as you can get while still providing income. Well done! I myself added AFL, WMT, and JNJ to my own portfolio over the last few weeks.

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