I attempt to screen and purchase undervalued dividend growth stocks. These companies have increased their dividend for at least 15 years and have a lower than average price to earnings (PE) ratio, a higher operating margin, a low price to book, a reasonable dividend yield and payout ratio. This is easily my favorite part of my financial empire.
Early last month I learned that due to employer constraints I was going to be forced to alter my beloved perpetual income machine, which was essentially a dividend investment account. The point of the machine was to find undervalued (defined below) stocks which were part of the Dividend Aristocrat Index, a stock index which tracks those large cap businesses which increased their dividend payouts every year for twenty five years.
Why Did the Perpetual Income Machine Die?
As you may remember, I was forced to leave my old brokers. One of which was Sharebuilder which allowed me to buy 12 fractional stocks for $12/month; essentially my cost was $1 a trade as long as I did it on Tuesday evenings, which was fine with me. So I would buy 6 stocks twice a month investing approximately $300 a month into “the machine.”
Well my new online broker, Fidelity, does not have a similar deal and so it will cost me $8 a trade or a whopping $96 to follow the same schedule, and to boot, I can’t buy fractional shares.
Completely unacceptable…Something needed to be done…hence the birth of Evan’s Dividend Investing Portfolio (a/k/a Perpetual Income Machine 2.0).
What Will The Dividend Investment Portfolio Look Like?
Since I can’t purchase as many individual stocks as often as I was my plan of action going forward is to mix some ETFs with less stock purchases that are more concentrated. Fidelity offers 30 Free ETFs which I can buy commission free. Of these a few are equity income based (i.e. not bonds or fixed Income Based):
- 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.
- 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.
- 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.
As of writing this post each ETF trades between $35 and $65 per share, so my goal will to buy one share of each fund per month without dividend reinvestments. This will equate to about $150 a month.
All dividends and the remaining $150 will follow the perpetual income machine of stock picking with the following requirements:
- The stock has to actually be on the Aristocrat List
- The stock has to have a Price to Earning that is lower than or equal to their industry average
- Their Operating Margin has to be in line with the particular stock’s industry average
- Dividend Yield should be between 2% and 5%
- Price to Book Value Should be Reasonable
If or when I move from cash accumulation mode I will increase the amount contributed accordingly.