PG - The Low Budget Dividend Portfolio: August Update

2023-08-11 15:56:01 ET

Summary

• I share updates on my personal dividend growth portfolio, discussing my investment strategy and holdings.
• I'll provide insights into my decision-making process, including adding, holding, or selling positions based on dividend cuts, future growth potential, and portfolio diversification.
• And finally I reflect on the lessons learned, including the importance of steady investing, adapting rules as needed, and understanding one's own investment preferences.

In the Spring of 2021, I wrote a series of articles outlining the conception , construction , and development of my own personal dividend growth portfolio for Seeking Alpha. Given the warm reception with which that short series was met, I have periodically checked back in to share updates with my readers.

Introductory Remarks

For readers unfamiliar with me, I did not begin investing until a few years ago, when I was in my late thirties. Because I had attended graduate school for the better part of a decade, I had reached middle age with very little money. Once I landed a professorship and found myself earning a steady middle-class income for the first time in my life, I found I knew next to nothing about personal finance. After a conversation with fellow Seeking Alpha contributor The Savvy Preferred Investor , I decided to try my hand at investing and decided to construct a portfolio that focused on dividend-paying stocks which would supplement my salary with an income stream while also allowing me to enjoy capital appreciation.

Like many novice investors, however, I was woefully ill-prepared to jump into the market, so I made a few very general ground rules for myself that I refined over time into the following:

1. I would add a set amount of cash to my brokerage account every Monday, as I had been doing, but I would increase that amount as I grew more confident in my investing and as my salary permitted. Furthermore, I would pick up a few side hustles to supplement my income and I would invest all of those earnings.

2. My research would focus more deliberately on a company's future growth trajectory, with an emphasis placed on companies with well-covered and faster-growing dividends.

3. I would only purchase dividend-paying stocks and I would use those dividends to purchase shares of other dividend paying stocks.

4. I would buy-and-hold my shares, but I would consider selling shares if I felt the company's dividend was not secure or if I thought my principal would be better placed in another dividend-paying company with greater potential for future growth.

5. I would diversify my portfolio by:

• holding a minimum of 20 positions.
• owning more than one company in any given sector.
• using each of my income streams (salary, dividends, and side hustle earnings) to purchase different types of stocks.

6. I would purchase shares of each of my chosen companies until those shares accounted for 4% or 5% of my portfolio's weight. I would then do the same with another company.

The Original Holdings

In the three articles last year, I discussed the positions I held in the stocks listed below. I will provide short updates on each, explaining my thinking in adding to, holding, or selling each position.

Coca-Cola ( KO ) As I mentioned in my very first portfolio discussion, Coca-Cola was the first company I invested in and I remain content in that decision. Although I initially bought shares in the low 40s, I have continued to accumulate shares and now have a cost basis at just over $50 per share. At present, KO is 3.3% of my portfolio value and provides a 3.62% yield on cost.

AT&T ( T ) Like many novice dividend-hunters before me, I initially jumped into AT&T for the dividend--and it did provide a very nice early infusion of cash for my portfolio. Knowing a few people who worked for the company, I often heard just how important maintaining the dividend was to the company, so I continued accumulating shares until it became clear that the Time Warner situation and the subsequent Warner Bros. Discovery ( WBD ) spinoff would likely result in a dividend cut. At that point, I sold my shares for a modest loss and invested the proceeds in Lowe's ( LOW ) and Target ( TGT ).

Apple Hospitality ( APLE ) Apple Hospitality may very well be a solid investment today, if Seeking Alpha contributors such as Leo Nelissen , True Orion , and Justin Purohit have anything to say about it, but I dumped the company when it cut its $0.10 monthly dividend in 2020. At that time, I had a rule that any dividend cut would immediately result in me selling my shares. I do not regret the sale, which resulted in a substantial loss both in principal as well as future income, however. The experience helped me see that my disinterested, rules-based strategy was something I could rely upon when I was distracted by all the noise in the world outside.

PPL Corporation ( PPL ) I am a customer of PPL, so I bought some shares when I started investing. I reasoned that I knew the company well enough to know that it is reliable and well-liked by customers. I also liked the big dividend, so I continued adding shares periodically. I even wrote some bullish articles for Seeking Alpha in which I sang the praises of the company's potential for dividend growth and its proposed merger with Avangrid ( AGR ). Over time, I saw that the company's British operations not only weighed PPL down but would likely result in a dividend cut when the time came. I ended up selling my entire position and reinvested the proceeds into UGI ( UGI ). That said, PPL remains on my radar. I believe the company is solid and I think it is headed in a good direction, so I would be open to buying some shares in the future.

Whitestone REIT ( WSR ) I hesitated to even include this one in my initial series because I only bought a single share of Whitestone in the very early days of my investing, but I decided to include it to illustrate how I approached investing at the outset. I sold the share with APLE when the 2020 crash ravaged the market and it seemed like everyone was slashing dividends. The proceeds were used to buy some Walmart.

Johnson & Johnson ( JNJ ) Finally! We've landed on a company I not only continue to own, but have added to over time. I initially bought JNJ when the baby powder lawsuits had tamped the price down. Despite adding shares as the price climbed, my cost basis is below $140, so I am currently enjoying a nice 3.47% yield on cost. At present, JNJ amounts to just under 3.6% of my portfolio. I intend to hold and even add more shares as the company approaches the spinoff of its consumer health division into Kenvue ( KVUE ).

Procter & Gamble ( PG ) Another Dividend King and another long-term hold for me. Like JNJ and KO, PG has proven to be one of the steadiest holdings in my portfolio. I find that the slow, but steady share appreciation and regular dividend hikes suit my investing preferences perfectly. As such, I have continued adding to my position over the past few years, which has slowly dragged my cost basis to just over $100 per share and currently provides a yield on cost of 3.66%. At present, Procter and Gamble accounts for roughly 3.9% of my portfolio value.

Microsoft ( MSFT ) This is one I wish I had bought more of early on! I initially bought Microsoft because I liked how good the company's credit rating was. I bought some shares when they were well below $100 and watched them climb steadily ever since. I did add a few shares over the years, so my cost basis is a bit over $110 per share, but the company was my first two-bagger and my first "so that's how growth works!" experience. As a result of the company's tremendous price appreciation, it has consistently been one of my top three holdings and I enjoy a yield on cost north of 2.4%. At present, MSFT is just a touch more than 5% of my portfolio value, though the fluctuations of the market will often catapult it higher than that. I have not added to my MSFT holdings in a couple of years because I am trying not to have any positions occupying too large a spot in my portfolio. MSFT just keeps climbing and I may snag a few shares despite my previous hesitation.

Starbucks ( SBUX ) I initially bought into Starbucks when it was less than $55 a share and have continued adding to it over time. Although I initially saw the three-digit share price as too high , I have continued buying the company and currently have a cost basis a bit over $80. Despite concerns about its operations in China and the company's hostility towards unionizing workers, Starbucks has largely continued to enjoy the benefits of its dominant market share and deep customer loyalty. As such, it has grown to be one of my top holdings and currently amounts to a bit under 4.25% of my portfolio value. I enjoy the steadily growing dividend and currently collect a yield on cost of close to 2.6%.

Invesco Preferred Portfolio ETF ( PGX ) I have written about PGX on several occasions ( here , here , and here ) for Seeking Alpha, so my readers will likely know I like the fund. I have not added much to my holdings this year since the Fed's interest rate hikes have made other fixed-income investments such as iBonds substantially more appealing than preferred shares, but I continue to hold PGX and collect a nice dividend--albeit one that has accompanied a battered share price.

NextEra Energy ( NEE ) NextEra has consistently been one of my three largest holdings, even though I have not added to it in quite some time. The price appreciation has just been so steady that no matter how much I add to my other positions, NEE keeps floating to the top. As a result, my current cost-basis is about $47 per share and my yield on cost is a hefty 3.98%. At 3.42% of my portfolio value, NEE is a core holding for me and one I will very likely add to when the time comes.

Verizon ( VZ ) Like AT&T, Verizon has a lot of bears on Seeking Alpha. The company's high debt, plunging share price, and questionable management decisions tend to bring out the ursine in even the most bovine of Wall Street denizens. Still, I have continued buying Verizon. I have done so because I do not believe the dividend is at risk and I believe the share price will not drop too much lower than it already has. While many of my investments focus on future dividend growth, I do hold a few like Verizon that I use to generate money today. I invest that cash into other stocks and consider it an income stream. Over time, I have managed to pull my cost basis down to well under $50 a share. I occasionally add a share or two when the price drops more than the market or when VZ drops below 4% of my portfolio value.

PepsiCo ( PEP ) Pepsi has slowly become one of my favorite companies to own. The share price, like those of PG and JNJ, has grown steadily while I have owned shares and the dividend has grown at a good clip, too. As a result, my yield on cost is about 3.3% and looks poised to continue growing as the company resides among my top holdings.

Old Republic International ( ORI ) I love ORI. It has been my largest holding for years. I managed to buy a bunch of shares when the prices dipped into the low teens a few years ago and have watched as the share price has risen back into the low-to-mid twenties. The best part, for me, is that I did not buy Old Republic for share appreciation. I bought it for the dividend which, at my cost basis, yields about 5%. Moreover, I have received four special dividends ranging from $1.00 to $1.50 per share since I first bought the company. As a result, my actual dividend yield from ORI is much, much higher than the already juicy 5.3% I collect annually. As I wrote in another article for Seeking Alpha , Old Republic's management is conservative and keenly focused on shareholder return. Despite activist investors trying to change that approach, ORI has continued to be a SWAN among SWANs.

Dunkin' Brands ( DNKN ) I love Dunkin' Donuts, as I have written elsewhere . I love it so much, that I broke my own rule and did not sell my holdings when the company suspended its dividend in 2020 (though, to be fair, I simply respected the company's announcement that it could continue to pay dividends but would rather deploy that money to support its workers during the lockdowns at the time). But the company went private and my proceeds from the sale ended up in Starbucks shares.

Mastercard ( MA ) Mastercard is one of my smaller holdings, but only because I did not feel that accumulating more shares of a growth stock during last year's bear market and the accompanying uncertain fiscal environment in which we found ourselves made as much sense to me as prioritizing dividends. I will likely continue adding to MA, but it sits on my backburner at about 3.3% of my portfolio's value.

Visa ( V ) Similarly, Visa does not amount for more than 3.6% of my portfolio value. Like its aforementioned competitor, Visa is a powerhouse: it is highly profitable, has a massive competitive advantage, is globally relevant, and poised for continued growth. It also pays a very small dividend that I feel is not substantial enough to justify my adding many shares at the moment.

Apple ( AAPL ) Apple, like Microsoft, has been a two-bagger for me. I think the company's shift from hardware to services (or, rather, hardware and services) has proven to be successful. The company's loyal customer base, which includes yours truly, continues buying Apple products and paying for Apple services even during periods of high inflation. The dividend, while small, is likely to grow annually and the payout ratio is low enough that even a few slow years will likely not staunch the growth much. I occasionally add a share or two when Apple drops below 3.5% or so of my portfolio value and will continue to do so.

Leggett & Platt ( LEG ) In the very first article I wrote for Seeking Alpha , I took a fairly bullish stance on this Carthage, Missouri-based bedding manufacturer. In that time, I have not sold any of my shares--I even bought a few--but I am considerably more ambivalent about the company's prospects moving forward. As a major player in a cyclical industry, Leggett & Platt should make it through a recession in more or less good shape, but the Elite Comfort Solutions acquisition has not had nearly the sort of impact on the bottom line as I had envisioned. The company is unlikely to go anywhere and management has shown a commitment to keeping the company's Dividend Aristocrat status, but the hikes will likely trail the rate of inflation by a considerable margin. As such, LEG accounts for only about 1% of my portfolio.

American Tower Corporation ( AMT ) AMT caught my attention as a particularly unique REIT. As the owner and operator of wireless and broadcast communications infrastructure around the globe, American Tower Corporation is a major player in a crucial niche: renting land to companies that provide wireless service to cell phones and related technologies. The company has a dominant market share in an industry that most of us would consider to be unquestionably necessary to our lives. I love the steady quarterly dividend hikes and intend to keep adding to my position moving forward. At about 3.12% of my portfolio weight, AMT is a minor position to which I might add more eventually.

Walmart ( WMT ) I bought shares of Walmart when I dumped Apple Hospitality in 2020. I reasoned, at the time, that the large, discount retailer would be a safe place to park my cash while spitting out regular payments in the form of dividends. Thanks to the company's steady growth trajectory, I made up for the loss I took when I sold my APLE shares and now enjoy a slow-growing (but reliable!) dividend and capital appreciation. At a bit less than 3.7% of my portfolio, I consider Walmart to be an anchor stock: it will help keep my portfolio steady, but will not blow me away with market-crushing returns...and that's okay.

American Water ( AWK ) I bought American Water with my dividends for a few years. I had been eyeing the utility for some time and, when the company raised its dividend during the 2020 dividend slash fest, I decided to jump in. One of my strategies over the past few years has been to pool my dividends from all of my holdings (rather than DRIP them back into the companies paying them) into a new position. For me, it was a tangible way to see the power of my dividend strategy: I would have an entire position paid for by other companies' payouts. AWK has not provided much growth and the dividend yield is a relatively low 2.03%, but I like the company and I really appreciate the ability to "see" my dividends at work.

Bank of Montreal ( BMO ) As a one-time Montreal resident, I have used the Bank of Montreal for decades. As one of the largest banks in Canada and one with a nearly two hundred year history of dividend payouts, I saw the company as a solid source of income. The bank is well-established, the dividend, even after taxes and exchange rate have been factored in, is nearly 4%, and the share price has the potential to provide some nice appreciation over time. At around 3.3% of my portfolio and with some potential headwinds slowing growth, BMO is one company I may consider buying more of as prices drop.

Amazon ( AMZN ) I owned Amazon for about one year. Like many investors, I saw Amazon as a fantastic way to add some growth to my portfolio. I bought it too high and I saw no growth at all. After a year, when the stock briefly crossed the point at which I had opened my position, I sold it for a profit of about $0.16. It promptly dropped down in price again and I have not looked back. I am certainly not averse to buying Amazon in the future, but I have discovered that I am really not a growth-oriented investor. I want something (cash!) in return for my investment. If Seeking Alpha 's Dividend Sensei is correct in his table-pounding assertion that Amazon will become a dividend-paying powerhouse, I will certainly consider buying again--even if it means losing out on capital gains in the meantime.

Invesco QQQ Trust Series 1 ( QQQ ) If owning Amazon has taught me anything, it is that as much as I appreciate growth, I still want something in return for holding shares in a company. QQQ struck me as a way to inject some growth while still collecting something while I wait. Since I wanted to enjoy the growth companies like Alphabet ( GOOG ) ( GOOGL ), Amazon, Tesla ( TSLA ), and Netflix ( NFLX ) could offer, I considered buying some shares directly, but I wanted to be paid, too. Thus, the yield is quite low, it will likely grow over time and I am willing to take on the risk of potential short- and intermediate-term share depreciation for longer-term gains. As I mentioned earlier when discussing Mastercard and Visa, however, I have been putting most of my growth-oriented investing on the backburner until I feel the market stabilizes enough for me to turn back to that corner of Wall Street. Thus, QQQ accounts for a comparatively small 2.7% of my portfolio's value.

Xtrackers S&P 500 ESG ETF ( SNPE ) About 2.95% of my portfolio consists of this ESG version of the Standard and Poor's index fund ( SPY ). I fully intend to add to this position, but am holding off until I feel a bit more confident in the market's stability. I just don't trust this bull market yet. Since I'm not there yet, I am willing to forgo some potential gains while I wait.

iShares Core U.S. Treasury Bond ETF ( GOVT ) I held a few shares of this vanilla treasury fund for a while, but I decided to cash out and reinvest my proceeds in dividend-paying equities since I have started buying treasury bonds directly.

UGI ( UGI ) When I sold PPL, I decided to buy UGI as a replacement. With its high dividend yield, PPL had been a steady source of income in January, April, July, and October and losing it had a noticeable impact on my income stream. I bought UGI for its high(-ish) dividend, which is paid out on the same quarterly schedule at PPL. UGI has a tremendous history of paying dividends and has raised them steadily for decades, so the swap helped me keep my income stream from taking too much of a hit.

Target ( TGT ) Like Walmart, Target struck me as a relatively safe place to put my money when I sold a dividend-cutter. In this case, I bought Target with the proceeds from my sale of AT&T shares. I have continued adding to that half position ever since. As some of my readers may recall, I am fairly bullish on Target despite some disappointing earnings reports. To me, Target is about as safe an investment as one can find in the retail space. The chain has a deeply loyal customer base (and, importantly, one that often refuses to shop at places like Walmart or Dollar General ( DG )), a strong balance sheet, and a commitment to raising dividends annually, including a whopping 20% hike last year--in the midst of all the bad news swirling around the company. At about 3% of my portfolio, there is room for more Target, especially if the price drops to a more appealing level.

Lowe's ( LOW ) Lowe's, like Target, started out as a half-position I bought with the proceeds from my AT&T sale. It has proven to be a great investment. Despite adding to the company as the prices have risen, I am still in the green with Lowe's and I have watched the quarterly dividend climb from $0.60 per share in April of 2021 to $1.10 per share today.

JPMorgan Chase & Company ( JPM ) I started buying JPM late last year as a way to add to my financials holdings. I bought my shares right before the bear market started, so I am just barely back in the green after the stock's recent climb. While I waited, I contentedly collected $4.00 per share in annual dividends and am currently pleased to be collecting $4.20 per share.

Waste Management ( WM ) Waste Management is still one of the most recent additions to my portfolio, so it only accounts for 1% of my portfolio's value, but the company is a dominant player in the collection, removal, and processing of waste, which is an industry that is not likely to go anywhere soon. While I did consider Republic Services ( RSG ), I ultimately chose Waste Management because of my familiarity with the company and its respectable history of dividend growth.

Realty Income ( O ) I'd had my eye on Realty Income for several years for all the reasons one would imagine: its status as a reliable dividend payer, its history of raising dividends, and its enviable position as a leading retail REIT. Once American Water hit what I considered to be a full position in my portfolio, I decided to open another position with my dividend income. Initially, I started to buy the ESGV index fund, but when the market started falling earlier this year, I decided to focus more deliberately on generating passive dividend income, so O became the company on which I spent my dividends. So far, I like it: my income has been increasing every month since I began buying O--both from the new shares as well as from O's quarterly raises. At present, Realty Income represents a bit more than 2.25% of my portfolio, but I fully intend to continue buying shares with my dividends for the foreseeable future.

Vanguard ESG U.S. Stock ETF (ESGV ) As I mention above, I bought a few shares of ESGV a couple of years ago and through last summer, but I decided to put my index fund purchases on hold while focusing more concertedly on buying equities with higher dividends. I like ESGV, though, and continue to hold the shares I bought, which amount to a bit over 0.4% of my portfolio.

3M Company ( MMM ) The last company in my portfolio is 3M. I bought all of my 3M shares with proceeds generated by selling cash-secured puts and covered calls. Given 3M's legal problems, I consider the company to be one of my riskiest investments--along with Leggett & Platt. As such, I have not added anything to 3M in some time, though I will continue holding my shares and collecting the dividends they generate until the clouds surrounding the company's future trajectory clear a bit. At present, 3M is 0.6% of my portfolio, so a complete loss would not be devastating, but I am not inspired to buy more at this time.

The New Additions

Caterpillar ( CAT ) Earlier this year, I decided to add Caterpillar to my portfolio, reasoning that demand for its products would remain strong, especially when compared with other industrials stocks. With continued--and even growing--demand for construction in the United States and abroad, Caterpillar looked ready to sail on those tailwinds. With a reasonable payout and a solid market for its products, Caterpillar's Dividend Aristocrat status looks safe. Although I only started picking up shares of Caterpillar relatively recently, it has already grown to become my fifth-largest position at 4.14% of my portfolio. That's how much I like it.

Broadcom ( AVGO ) In March, I wrote an article on Broadcom and Texas Instruments for Seeking Alpha. In that article, I concluded that "I do not think an income investor will regret purchasing either (or both!) companies in the long run," and ultimately convinced myself to do just that. I started accumulating shares of Broadcom shortly after publishing the article and continued to build my position until NVIDIA Corporation ( NVDA ) blew the market away with its earnings in May, setting off the AI-frenzy and pulling Broadcom's share price into the stratosphere along with it. With a cost basis just over $630, I am enjoying a 25% jump in share price while still collecting close to a 3% yield. I only wish I had been able to buy a bit more before that jump.

Texas Instruments ( TXN ) Like Broadcom, Texas Instruments landed in my portfolio back in March and I have been slowly adding to my position since that time. I like the company's long track record of paying dividends, which it has done since 1962. The company's annual dividend payout has grown from just under 9 cents per share in 2004 ($0.02125 quarterly) to $4.96 per share ($1.24 quarterly) and looks poised to continue growing for the foreseeable future.

Air Products and Chemicals ( APD ) As a resident of Pennsylvania's Lehigh Valley, I am accustomed to watching Air Products-branded trucks driving into and out of its headquarters in Allentown. They never seem to stop coming or going, which is no surprise given the tremendous demand for Air Products' products. While I had been eyeing APD for a few years, I generally sat on the sidelines as I waited for "the right time" to jump in and buy shares. Eventually, I realized that, like many great companies, APD shares exchange at premium prices. I began purchasing shares earlier this year and intend to continue doing so.

Kenvue ( KVUE ) As a long-time shareholder of Johnson and Johnson, I decided to load up on Kenvue once the $0.20 quarterly dividend was officially declared. At present, it accounts for about 2% of my portfolio and I intend to keep buying shares and cost-averaging until I hit the 4% mark. I like the company's portfolio of consumer healthcare products, believe the dividend is likely to grow steadily in the future, and think that the stock may also offer an opportunity to sell covered calls.

Parting Thoughts: The Lessons I Have Learned

1. Don't Fear the Bear. Among other things, I have learned that I can handle market volatility. Until last year's bear market, I had been living with the constant fear that I would react too emotionally to seeing my portfolio's value drop precipitously. I didn't and I haven't. By adhering to the rules that I set out for myself: steady investing, diversification, and holding shares long-term helped smooth out the ride. I have also found that watching my projected future dividends climb makes seeing my portfolio value plummet easier to stomach. For me, I could always turn to the dividend stocks on my watchlist or in my portfolio and think "the lower the prices, the higher the yield." That provided me with a long-term focus so that I could look past the near-term volatility.
2. Change the Rules When They Need to Be Changed. The rules I set at the beginning of my investing career proved to be blunt tools. They helped me dig out a space for myself when I was completely lost, but I need new and different tools as I learn more. For most of the bear market, I followed a rule I created where I would buy the company with the lowest weight in my portfolio to balance things a bit. I have done well enough with that strategy to see that it can lead to two outcomes: a more balanced portfolio or a portfolio with more dead weight. I have now changed that rule to allow me to add to some of my larger positions as long as they are below 5% of my portfolio's weight.
3. Know Thyself. Every investor has a different set of goals and comfort zones. I have found that I am absolutely not a growth investor, am not really an options guy, and not a trader. I am a boring buy-and-hold dividend investor. While there is absolutely money to be made by investing in growth stocks, trading options, or pulling off swing trades, that money is not for me. I have neither the stomach nor the interest in high-risk, high-reward investing. If that is all there was, I would probably not be investing at all. But I have done well enough to build a small nest egg with a steady and growing income stream that I can rely upon--and I would not have had that had I not figured out that, as boring as they may be, slow growth and steadily trickling dividends are what have motivated that.

Happy investing, everyone!

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