My Dividend Growth Portfolio: a review

One small portion of my invested portfolio is run as a ‘Dividend Growth Portfolio’ (DGP).  I kicked off this portfolio in early 2013, and have run it pretty consistently ever since.  It’s time for my first ever ‘deep dive’ into how this portfolio has been performing.

The strategy: buy growing dividends

I didn’t document  my exact strategy for this portfolio at the time, but it has been something along the line of this:

To own Dividend Champions, and their ilk, with a strong likelihood of growing their dividend over the short and long term.

I have been a longtime admirer of the Dividend Champions, who are the ~100 publicly listed US companies that have raised their dividend for 25+ years in a row.   The UK has hardly any companies that can boast of this track record, and the UK approach to paying dividends (interim + final, rather than 4 equal quarterly instalments) makes the UK fiddlier to monitor for shallow analysts like me.  I will certainly consider shorter track records than 25 years, such as the Dividend Achievers, Dividend Contenders etc, but for true quality you need Champions.

You will note that there is nothing in this approach that prioritises high yield payers.  In fact US companies tend to have lower yields than UK companies.  Much as I like dividend income, for this strategy I am prioritising predictable growth in dividends, not the level of dividend itself.

Leverage: a changing approach

This portfolio was one of my early uses of leverage, though in a very modest way: I used to leverage up the portfolio by one to two year’s worth of dividends (i.e. 2-5%).  In late 2015 this approach changed as I leveraged up across the board to buy my Dream Home and by 2016 my leverage for this portfolio had risen to over 40%. As rates have risen, I have reduced my leverage, so right now the Loan to Value is around 30%, and I am in fact paying almost as much interest (~3%) as the after tax dividend yield of the portfolio.

How the stock lineup has expanded over time

My initial set of about a dozen holdings comprised stocks like AXP, CAT, KO, MCD, T, VZ, WFC, with a smattering of IBM, GE in there too.  Sizing my positions has been very ad hoc.

Over the years I have topped up the portfolio, and broadened it out. It now includes about 30 stocks, including a handful of European stocks (e.g. BMW, RDSB, NESR, ULVR), and more USA dividend stalwarts like ADM, CSCO, DIS, JPM, MMM, QCOM and XOM.  It also includes some Berkshire Hathaway; though BRK doesn’t actually pay dividends, in other respects it behaves exactly as a good dividend portfolio does.

I keep an eye on Dividend Champions and I try to buy in when dividend yields are at or near historic highs.  This can feel like a hopeless quest but has proved very successful with, for instance, MMM which I bought in late 2015 for around $140/share due almost entirely to spotting that its yield was untypically high; less than two years later this share was nudging $250/share.

I have occasionally reviewed particular stocks and pruned the portfolio. If the dividend is cut, I sell – this has only happened to one or two stocks (e.g. KMI).  If I just can’t build confidence in the business model, I will sell too – this saw me exiting AXP (doh! the shares have doubled in fact), reducing MCD (doh), and has had me in/out of TGT – these have been less good calls.

And while I can’t claim Oxbridge rigour here, I am looking for projected total return (i.e. yield plus projected dividend growth) of 8% or more.  If I spot that a stock with a yield of under 3% starts appears likely to grow its dividend by under 5%, I typically sell it. This approach has seen me exit KO (a BRK/Buffet stalwart), CAT (doh! the shares doubled two years later), IBM and PG – all mostly good calls.

The results: pretty good, even after a rotten 2018.

Using a simple time-weighted measure of return, my results are OK so far.  The portfolio performed strongly in 2016, and has underperformed by a couple of points in other years – especially 2018 when it is has fallen about 10% vs a S&P500 fall of 6%. But the strong 2016 means that my almost-six year returns are slightly ahead of S&P500, pre tax.

What next for my DGP?

I’m pretty happy continuing my current approach.

I’ll probably slightly deleverage, reflecting the much higher interest rates than when I started.

As to the current holdings, and looking at the 75% of the portfolio which has held steady over the last two years and which pays dividends (i.e. excluding BRK), the current runts are EMR and NESR. I will prune the runts, starting with EMR.  I am looking to top up AMGN, which is currently at historically high yield and is showing strong short term dividend growth.

What do you think?  Have you tried segregating your portfolio into different strategies?  Do you like dividends, or prefer, Buffett style, capital gains?  Any tips for how to find strong dividend growth?