DGI For The DIY

[EricL]

I provided an update to my dividend growth portfolio on Seeking Alpha.

401(k) Reconstructed - 2013 Third Quarter Review

I would love to hear some feedback on it!

[hendi_alex]

The portfolio of little dabs of so many positions makes me a bit dizzy. Lots of work and lots of tracking for nothing much on the line in any one position. Not being critical for you, just not my cup of tea for a young and growing income portfolio. Mine probably gives you just as much discomfort. My long term (only started funding 2/2012) portfolio is only about $30K so far. Holdings are CSG KMP MCY O ORI POT RDS.B SSL TGP. Funding of initial positions has ranged from a low of $3375 for ORI to a high of $4477 for RSD-B. Current values range from $3978 for KMP to $5436 for CSG. As funds become available, I generally buy an initial purchase of $4000 from my short list of candidates. After I get the breadth of positions, probably about 15-20 tickers, I'll then start accumulating, gradually adding until each position equals about $8000. The accumulation phase will be used to re-balance, so if adding today, would only add about $3600 to CSG for example, so as to move shares to the next weighting target of $8000.

There are probably numerous things wrong with both my selection of holdings and my equal weighting method of purchasing, but until adjustments are made, this is working for me. It requires far less DD than with an expansive portfolio of tiny holdings, requires less incremental trading fees, is much easier to track and or adjust.

Since I'm retired already, the initial dividend yield is more important to me than is dividend growth. As a result, my cutoff is near 5% yield at entry for a company with a reasonable track record of dividend increases and also with prospects for future growth. CSG in my opinion is the most risky play, as the company has only recently moved from being a private REIT to be a public one, so they have a very limited public track record.

ticker/current market yield/notes
CSG 5.5% - earnings are covering newly established 12.5 cent quarterly dividend
KMP 6.6% - long history of dividend increases
MCY 5.0% - long history of dividend increases
O 5.3% - long history of dividend increases, slow but steady
ORI - 4.8% - long history of dividend increases, meager but steady in recent years
POT - 4.4% - steady dividend increases, huge growth story
RDS.B - 5.3% - long history of dividend increases, stable production areas, no foreign taxes
SSL - 3.9% trailing - payout is variable depending upon cash available for distribution I assume
TGP - 6.5% - steady dividend increases since 2005, an income and growth stock

My portfolio probably has a higher risk profile, but I'm willing to accept that in order to keep the average yield above 5%. I'm looking forward to adding some of your tickers, but only in the next brutal take down, when the DOW is once again well under 10,000.

[EricL]

Thanks for the reply Alex.

I can see where the number of positions could make it a bit dizzying. I decided to go with 50 positions after reading a few books, primarily The Single Best Investment, which said that for proper diversification and spreading of risk that 30-50 positions were desirable. I've had no problem finding enough companies to fill those slots, in fact there are still a handful of stocks that I would like to own but don't have room for.

One thing I really like about have the 50 stocks in my portfolio is that I always have a buy list available when new funds are available. With my monthly contributions I am purchasing a stock roughly every two months. Since I follow the stocks in the portfolio pretty closely, I always have a handful of stocks on hand that I can purchase on a pull back to dollar cost average as I build my positions.

It is interesting to see the large difference between our holdings. Of your list, O is the only stock I own.

Different strokes for different folks I guess, especially as we are at different stages in our investing!

[hendi_alex]

I also have 60 shares of AAPL in my more actively traded account. I'm ready to get rid of the position however, and have sold April calls from $430 up to $510 strikes. Hopefully the shares will mostly be exercised when April rolls around. I like Apple, but when a tech stock peaks as with this company, there don't usually seem to be many bells and whistles in the future. How many examples are there of these once high flying darlings that had their moment, and then either went nowhere, or went to dust?

Lots of your tickers are on my, 'really great companies would love to own them list', but not at current levels. IMO this crazy, wildly manipulated market will give much better entry prices in the future. So for now I wait, and insist on getting paid a good income stream from the investments that are in place.

[fiveoh]

I agree you have a lot of stocks to follow, but if you don't mind go for it.

Only thing I don't agree on is:

" After hearing Chowder continually beating the drum for quality, quality, quality and re-reading "The Single Best Investment," I decided to take the advice to heart and swap out a couple of weaker positions into ones that I believe are more stable companies with clearer growth prospects going forward. " with regards to LEG. They have increased their dividend for 41 years... it doesn't get much more stable than that. LEG also have a very high quality management that is shareholder friendly. I don't find the valuation attractive to add more shares here but I wouldn't be selling either.

Also have you considered maybe saving up to $1000 for purchases instead of $500 to bring your fees down?

[EricL]

According to Fastgraphs, over the last 20 years LEG has provided an annual ROR of just 6.3%, over the last 10 years, 6.0%.

Here are the dividend growth rates according to David Fish's CCC spreadsheet.
10YR = 8.7%
5YR = 10.1%
3YR = 3.8%
1YR = 3.7%
Most Recent = 3.5%

While the stock has a nice yield, I didn't like the consistent decline in the growth rate and the fact the company had weak earnings and forward guidance I decided to go another direction. If I was closer to retirement it probably would have been a hold for me over some of my lower yielding stocks, but with another 20+ years until retirement I think I can do better.

As for $1000 per trade rather than $500, it's something I considered but I'm comfortable paying the $8.95 per trade at $500. With a 50 stock portfolio I haven't had much trouble finding stocks I want to buy more of. Prices often swing more than 2% in any given day and waiting another 2 months to make a buy is another quarter's worth of dividends I'm missing out on. I understand the concern about transaction costs, but I don't feel in this situation its hurting me much.

[hendi_alex]

I would take a more positive view of LEG. While not holding the stock, would be reasonably comfortable with LEG, which I did hold for a couple of years. What I'm thinking is that while earnings growth has stagnated over the past five years, this is a consumer discretionary company, and the economy has not rebounded as in most recoveries. When and if the economy would return to robust growth, and people start replacing those big ticket consumables, LEG will have a very robust period of earnings growth. The company is well managed, has a wide array of products, has kept debt to a low level, has about $2 per share cash on hand. They are simply waiting on the economy to catch up so that they can ratchet up production.

[EricL]

(10-16-2013, 08:45 AM)hendi_alex Wrote: I would take a more positive view of LEG. While not holding the stock, would be reasonably comfortable with LEG, which I did hold for a couple of years. What I'm thinking is that while earnings growth has stagnated over the past five years, this is a consumer discretionary company, and the economy has not rebounded as in most recoveries. When and if the economy would return to robust growth, and people start replacing those big ticker consumables, LEG will have a very robust period of earnings growth. The company is well managed, has a wide array of products, has kept debt to a low level, has about $2 per share cash on hand. They are simply waiting on the economy to catch up so that they can ratchet up production.

I can't disagree with anything you said there. I think there is potential upside in a growing economy and I do think the company is well run and has shareholder's interests in mind.

However, after looking more closely at the 10 and 20 year returns and slowing dividend growth I decided to go in another direction.

[hendi_alex]

Like you say, there are plenty of competing choices, many of which have done quite well even during this less than robust expansion.

[EricL]

Been doing some internal debating on my portfolio.

Vectren Corp. (VVC), announced earnings recently and once again had a disappointing increase in the dividend of just $0.01. The stock provides a yield of around 4% and has a 53 year history of increasing dividends. I'm fairly certain this utility will continue to provide a 4% yield and a 4% EPS growth rate and total return of around 9% with reinvested dividends just as it has for the last 20 years.

A near guaranteed 9% return is certainly nothing to sneeze at, but I just keep thinking I can do better.

I've been looking at TAL International, Inc. (TAL) as a replacement. It is a shipping container leaser that currently yields 5.7% that has grown EPS by 24% and the dividend by a similar rate since it went public in 2006. The company is projected to grow earnings by 10% over the next 5 years, which coupled with the high dividend should provide outstanding total returns.

Do I make the switch?

[Kerim]

I've never taken a close look at either of those companies, so my opinion is not very valuable. That said, if you think that VVC still has legs, maybe keep it and allocate new money to TAL? As you acknowledge, they would play different roles in your portfolio, so really it is not just a question of comparing the two, but also looking at the bigger picture of your portfolio. VVC looks like a conservative, slow-and-steady utility play, while TAL is going to be much more cyclical. Which does your portfolio need?

[EricL]

(11-09-2013, 12:44 PM)Kerim Wrote: I've never taken a close look at either of those companies, so my opinion is not very valuable. That said, if you think that VVC still has legs, maybe keep it and allocate new money to TAL? As you acknowledge, they would play different roles in your portfolio, so really it is not just a question of comparing the two, but also looking at the bigger picture of your portfolio. VVC looks like a conservative, slow-and-steady utility play, while TAL is going to be much more cyclical. Which does your portfolio need?

I think I've decided to hold VVC until ex-div on Nov. 14th and then sell to start either a POT or TAL position. Hopefully TAL doesn't take off on me before then as it is already up over 6% so far today.

Is anyone familiar with Potash (POT)? I like the company but its a Canadian company. Are there any tax complications for dividends with a Canadian stock?