High Yield Dividend Growth

[EricL]

Hey all, I've got an old retirement plan sitting in some mutual funds that I've requested a transfer over to an online brokerage. I plan on cashing out the funds and investing in a combo of higher yielding dividend growth stocks.

I will have about $8k to invest and I plan on buying 10 different stocks at equal weighting. Since there will be no new money coming into the account, I plan on pooling the dividends from the initial 10 positions and as that builds up I will buy new positions with the goal of eventually reaching a diversified 20 stock portfolio.

Here is a list of the companies I'm currently planning on buying when funds become available, hopefully by the end of this week. I was interested if anyone cares to comment or had any other suggestions. I am looking for 5%+ yield with 5%+ annual dividend growth. I realize COP currently doesn't meet the 5% yield, but figured it was a good, safe and growing yield.

ARCP; American Realty Capital Properties, Inc.; 6.5%
BP; BP plc; 5.2%
COP; ConocoPhillips; 4.1%
DLR; Digital Realty Trust Inc.; 5.7%
LO; Lorillard, Inc.; 5.1%
MO; Altria Group Inc.; 4.9%
OHI; Omega Healthcare Investors Inc.; 6.3%
SO; Southern Company; 4.6%
TCAP; Triangle Capital Corporation; 7.3%
TGH; Textainer Group Holdings Limited; 5.2%

Thoughts?

[TomK]

Hi Eric --

I am not familiar with the last two names on your list, but otherwise it seems solid. I am a big fan of the tobacco stocks. Utilities too, though I'd be surprised to learn that SO is growing the dividend at 5 percent annually. REITs have been beat up badly lately, so if you can stomach that risk, this might be a very good time to get into some of those names.

That said, I don't have anything on my list right now that meets the 5/5 criteria you've set out. Especially given the recent run-up in prices, a 5% initial yield is a tall order (other than REITs, MLPs, etc.).

Do you mind sharing why you've landed on the 5/5 criteria? In other words, is there a reason you need or want an initial yield that high? If your time horizon is long, you might look at stocks with a slightly lower (but still good) initial yield, but very good dividend growth rates. I'm thinking of companies like LMT, WFC, and PM.

Also, why 10 stocks? $800 each seems like a prety small initial allocation. Maybe consider putting all $8k into your three or four highest-conviction plays and then diversify with new funds in the future?

Tom

[EricL]

(08-07-2013, 12:45 PM)TomK Wrote: Hi Eric --

I am not familiar with the last two names on your list, but otherwise it seems solid. I am a big fan of the tobacco stocks. Utilities too, though I'd be surprised to learn that SO is growing the dividend at 5 percent annually. REITs have been beat up badly lately, so if you can stomach that risk, this might be a very good time to get into some of those names.

That said, I don't have anything on my list right now that meets the 5/5 criteria you've set out. Especially given the recent run-up in prices, a 5% initial yield is a tall order (other than REITs, MLPs, etc.).

Do you mind sharing why you've landed on the 5/5 criteria? In other words, is there a reason you need or want an initial yield that high? If your time horizon is long, you might look at stocks with a slightly lower (but still good) initial yield, but very good dividend growth rates. I'm thinking of companies like LMT, WFC, and PM.

Also, why 10 stocks? $800 each seems like a prety small initial allocation. Maybe consider putting all $8k into your three or four highest-conviction plays and then diversify with new funds in the future?

Tom

Thanks for weighing in Tom!

SO currently has a 5 year CAGR on the dividend of 4%, so it doesn't quite meet the 5/5.

I should clarify that the 5/5 isn't a number set in stone, it was just a number that I'd like to get close to. Since I am not reinvesting the dividends back into these positions I am trying to get decent dividend growth so the annual dividend I can pool for new positions will add up more quickly as time goes on. If I can get a 5% portfolio yield I would accumulate about $400 in dividends in the first year and with a 5% annual raise it would bump up to $420 next year, $441 the next, $463, $486, $510, $536, $563, $591, $620 and finally $652 after 10 years.

I'm hoping after a couple years these amounts plus the dividends thrown off from new investments will buy a new stock every year.

I also considered buying an mREIT or two for the 10% plus dividends, but I don't understand that market very well and don't think the risk/reward is worth it.

Anyways, here are the numbers for the ones I've considered so far

ARCP 6.5% yield, new REIT
BP 5.2% yield, yield still recovering from Gulf oil spill
COP 4.1% yield, 13.1% 5YR CAGR (4.6% MR)
DLR 5.7% yield, 20.6% 5YR CAGR (6.9% MR)
LO 5.1% yield, 17.3% 3YR CAGR (6.5% MR)
MO 4.9% yield, 14.3% 5YR CAGR (7.3% MR)
OHI 6.3% yield, 9.4% 5YR CAGR (2.2% MR)
SO 4.6% yield, 4.0% 5YR CAGR (3.6% MR)
TCAP 7.3% yield, 15.6% 5YR CAGR (2.2% MR)
TGH 5.2% yield, 52% 5YR CAGR (1.9% MR)

I currently own LMT, PM and WFC in my 401k already. I like those stocks but in this portfolio with no new money coming in I am looking to get as high of a safe yield as possible so I can build up cash to reinvest more quickly.

You may be right that 10 stocks is too many. I chose 10 because I like diversification as a safety net and by doing $800 per position I would be limiting commissions on trades to around 1%. With this portfolio I would have two oil stocks, a retail property REIT, a BDC, a healthcare REIT, a technology REIT, two tobacco stocks, a shipping stock and a utility.

Once again, thanks for commenting!

[Kerim]

Hey Eric --

It is great that you can hold individual stocks in your 401k. We're funds only at my job. The selection isn't bad, but still, I wouldn't mind being able to use a part of my 401k to help build my DG portfolio.

I think the list you have put together is pretty solid given the goals you've set out. And you have clearly put a good deal of thought into it. It worries me most when people don't have a plan, but you clearly do, so let 'er rip!

I understand your caution with mREITS. I own some NLY and I don't really trust it that much. But, I've decided that with a small slice of my portfolio, I'm going to take some extra risk in order to juice my returns a little. So I can't just set it and forget it like I can with my JNJ, for example, but man, those payouts every quarter are nice. Also, the mREITs have been so beaten down lately I have to wonder if now might not be such a bad time to jump in. I guess I shouldn't advocate that you get into a stock that you are not comfortable with or do not understand well enough, but if we are talking about $800 (one of your 10 slices of this pie), and if this account is only a small piece of your overall investing life, perhaps you could consider it a calculated risk to help jump start this account.

Best of luck, and please let us know what you end up buying!

[Horace Cugle]

Well Eric you hit on my #1 pet peeve, LOL,

I have never understood the concept of equal weighting. I get you're trying to spread the money around and dampen the risk, and you absolutely need to diversify, but some stocks just plain offer better opportunity than others, and should be treated that way, IMO.

Take a company like PG, one of the best, most shareholder friendly companies you'll ever find. Why would I want to dilute that greatness with a bunch of other stuff? Sure it can take a dip like it did last year but I'd bet it will be the last man standing if it ever came to that. I am way in the minority on this, so take it for what it's worth.

If you're rolling it into another 401k or IRA you can't hold REITs. I mean you can but you'll have tax problems and nobody wants that.

MO is 6% off its high with a dividend increase coming soon. I've owned MO for over 16 years and I'd buy more here if I didn't already own enough. Same with PM, 8% off its high, dividend increase soon. Both are hold forever stocks in my book.

I'd also look seriously at COP. RDS.A is something I'm looking at too. They just raised the dividend to $3.60/$64.77 = 5.55% yield. Do your homework on this one though.

It also depends on how far you have to go until you retire, if that's what you're investing for. If you have time I'd suggest looking at a few of the really good dividend growers like WAG, TGT, CAT, KMI, WEC. Not the big yields you're hoping for but big dividend growth.
I own all of them except TGT and it's #1 on my list.

If somebody handed me $8k and I had time until I retired I'd probably do something like this (off the top of my head)......

50 WAG = $2500 (I really really love this company)
25 PM = $2200
25 COP = $1600
40 WEC = $1700

As I said in an other thread, if you have time before you retire don't obsess over current yield, rather obsess over getting more money in the market, because the best time to invest is when you have the money.

[EricL]

You are the first person who has ever said not to invest in REIT's in a retirement account. I know MLP's are not good because of UBIT, but isn't a tax advantaged IRA the perfect place to put REIT's since distributions are considered income rather than dividends?

My reason for investing in higher yielding stocks with this portfolio is because I won't be contributing any additional capital to the account. I plan to pool the dividends and invest them into either existing holdings or to begin new positions. A higher initial yield on the new positions allows me to do that more quickly.

I currently hold TGT, WAG, PM, LO in my 401K account and am debating on whether to buy any duplicate stocks for this portfolio. I'm now leaning towards investing in only new stocks with this account.

I understand some investors wanting to concentrate on their core holdings and eschew having a large number of stocks for diversification, but I prefer to spread the risk and cast a wide net. I don't believe in rebalancing much at all once the portfolio is going so I will let my winners run, but I prefer having my risk spread out a bit.

I've considered PG a time or two but went with CLX and CHD in my 401k account instead. Its definitely on the watch list though if it ever pulls back and gives me an entry point. Both CLX and CHD have better 20 year returns and dividend growth rates than PG so I went with them at the time.

My account was completed at the end of the day Friday, so I will probably make my move early next week. Still doing some more research today to finalize my list.

I appreciate your comments, you've given me a few more things to ponder.

[Kerim]

Good exchange here. I completely share Horace's pet peeve -- I think many people place way too much emphasis on keeping positions "balanced" to a specific small percentage of their portfolio. That said, it doesn't sound to me too much like that is what is going on with you, Eric. Sounds to me like you have enunciated a clear set of priorities and that your plan is consistent with them. That I might choose five stocks instead of ten for $8k, or choose different names, is of little consequence. There are plenty of ways to the financial independence finish line, and that you have a plan and know what you are doing puts you ahead of most.

Again, looking forward to hearing where you land. And wish a nice dip for you this week so your money gets you a few extra shares.

I also am not aware of any problems with holding REITs in tax-advantaged accounts, by the way. Horace -- can you elaborate?

[Horace Cugle]

I shouldn't have made such a blanket statement. But it seems opinions go both ways on this and there a different types of REITs and MLPs. It seems dangerous unless you really understand the incomprehensible tax laws (which I don't), so I just stay away from them in an IRA.

http://online.wsj.com/article/SB10001424...09464.html

[EricL]

I think I've settled on a final 8 man roster. Dropped OHI, DLR and LO because I already hold them in my 401k and dropped SO after doing a little more research. The cost overruns on the nuclear plant under construction makes me a little leery of expecting much for dividend growth in the future.

I replaced them with Reynolds American (RAI) and Wyndham Worldwide (WYN). Wyndham will be my higher growth, lower yield option in the portfolio.

Here is the final breakdown...
ARCP 6.5% yield, new REIT
BP 5.2% yield, yield still recovering from Gulf oil spill
COP 4.1% yield, 13.1% 5YR CAGR (4.6% MR)
MO 4.9% yield, 14.3% 5YR CAGR (7.3% MR)
RAI 5.0% yield, 7.8% 5YR CAGR (6.8% MR)
TCAP 7.3% yield, 15.6% 5YR CAGR (2.2% MR)
TGH 5.2% yield, 52% 5YR CAGR (1.9% MR)
WYN 1.9% yield, 75.6%5YR CAGR (26.1% MR)

Average yield for the portfolio is 5.0% and I think it should be able to maintain a 5% dividend growth rate going forward. I will be able to buy about $1000 worth of each position which will keep my transaction fees under 1% to build the portfolio. I'll try to post an update at the end of the year to show how things are going.

[TomK]

Nice work, Eric. Looks like a good lineup. Looking forward to the updates.

[EricL]

(08-12-2013, 02:55 PM)TomK Wrote: Nice work, Eric. Looks like a good lineup. Looking forward to the updates.

Just an update after 2 months.

Everything going as planned so far as the account, with dividends, is up a little over 5%. The DJIA by comparison is flat since I created the account on August 12.

So far I have received $75 in dividends.

Here is a link to the Google doc where I track it if anyone is interested.

https://docs.google.com/spreadsheet/ccc?...6YkE#gid=0

[Kerim]

Nice spreadsheet, Eric!

I'm pretty proud of my own, but you've got a few columns there that I hadn't thought to include. I especially like the total return column.

I forget, are you reinvesting dividends automatically? If so, how are you factoring those purchases into your spreadsheet?

Also, does google docs have an easy way to import or update the current share price? I use excel and apparently there is a way to do it, but it certainly isn't simple and I haven't been able to make it work despite some hours of effort.