A Real-time Dividend Growth Portfolio
“In 2008, I wanted to have a real-life, real-time, real-money portfolio to demonstrate what could be accomplished with a dividend growth strategy-without trickery, cherry picking, back-testing, or hindsight.” Writes David Van Knapp in this article titled Happy Birthday! The Dividend Growth Portfolio Turns 5. And so he did. He started his Dividend Growth Portfolio (DGP) in 2008. The starting value of the portfolio on June 1, 2008, was $46,783 – in real money. No money has been removed from nor added to the portfolio since its inception, except of course for dividends flowing in.
(He updates the DGP on a monthly basis on his website and also writes articles about the DGP on the Seeking Alpha website.)
As I have stated before, I consider dividends to be a key source of passive income to enable financial freedom. There are of course thousands of companies that pay out dividends. How do we choose which ones to buy? How many companies do you need to get the benefits of diversification? There are many such questions that need to be answered before you can start actually constructing a solid dividend-based portfolio. And this is where DGP comes in.
The article is almost a complete manual for starting your own process for building up your own dividend portfolio! It is my intention to post updates to DGP on a quarterly basis, so that you can get a feel for how dividends work in real life. Perhaps it will inspire you to start your own dividend portfolio.
I really admire the way David has built up his portfolio, starting with a clear statement of his goal: The main goal of the DGP is to generate a steadily increasing stream of dividends paid by excellent, low-risk companies. There is a lot to unpack in that one sentence! First and foremost, his goal is to create income – nothing more, nothing else. He is not looking to increase the value of the portfolio itself. In other words, if all that happened was the dividends kept increasing, but the share price of the stocks did not, he will be fine with that. This is very important to understand – and to internalize.
(A secondary goal of the DGP is to generate acceptable total returns. The current value of DGP is $67,864, up 45% over 5 years. Clearly he has achieved his second goal as well.)
And here is his basic strategy to accomplish his goal:
Use the current Top 40 Dividend Growth Stocks as my shopping list.
David publishes this selection of Top 40 dividend growth stocks every year, and they become the starting point of his process. This select list of stocks already consists of high-achievers: financially strong companies with a history of increasing their dividends.
Buy only stocks with “Fair” or better valuations.
Stocks can become overvalued, and David wants to make it a point to avoid those.
Reinvest dividends without dripping them. Reinvest when the incoming cash accumulates to $1000. Select stocks for reinvestment with as much care as when the portfolio was created.
“Dripping” refers to automatic Dividend ReInvestment Plans. David wants to control where the dividend cash goes. He does not want to automate it.
Shoot for an eventual total of 20 to 25 stocks. Aim for well-roundedness. Hold no more than 15 percent of the portfolio’s value in a single stock.
David is aiming for a well-diversified portfolio.
He will seriously consider selling any stock under a handful of conditions (such as if it cuts, freezes, or suspends its dividend, or its size increases beyond 15 percent of the portfolio).
It is very instructive to understand the amount of work and care that has gone into the construction of this portfolio! It is very simple and true to its principles. I hope this encourages you to start thinking about your own dividend portfolio. I am planning to put up my own portfolio in the near future. It will be based on similar principles, with my own variations (e.g., addition of high-yield stocks).
David Van Knapp’s Dividend Growth Portfolio (DGP)
He has his strictly defined rules of selecting the stocks for his portfolio. Jim Royal of The Motley Fool has created his version of a dividend generating portfolio. He calls it The World’s Best Dividend Portfolio (WBDP) – tongue-in-cheek, I am assuming! His set of rules is not as well-defined as that of the DGP. He just lists the ten stocks he has picked for the portfolio without giving reasons for the choices.
Both these gentlemen started their respective portfolios with real money, and provide regular updates. DGP has regular updates here. As David Van Knapp writes in the latest article, the DGP has performed as expected and is outperforming the S&P 500 over the past 5 years.
WBDP has been in existence for only 2 years, and here is the latest update on its performance.
In July 2012, Jim added some more real money to his portfolio, and now the WBDP has 12 positions. The WBDP started with all stocks, but one of the later additions is Annaly Preferred D. So what exactly are preferred shares?
Preferred shares are a relatively small corner of the investing universe. They are a cross between stocks (technically “common stocks”, which is what is people normally buy) and bonds (which are purely money lent to the company). They share characteristics of both stocks and bonds. Preferred shares trade on stock markets just like their common brethren. As this article explains it, ” They are called preferred because, in the event a company goes bankrupt, preferred stockholders will get paid back before common stockholders. However, they get paid after bondholders…”
Over the last two years the WBDP has made good money, but has not kept up with the S&P 500. Two years is arguably too short a time period to judge the merits of a portfolio, and we will have to watch how the portfolio performs over a longer period to make any judgment.
Both portfolios are focused on generating income from dividends, but that is where the similarity ends. There are many differences between the two portfolios; here are a few:
- DGP has the target of 20 to 25 stocks, whereas WBDP has only 10. In my books 10 stocks is too few. My personal portfolio is likely to have at least 25 stocks.
- DGP contains only dividend growth stocks, whereas WBDP has 3 high-yield stocks as well (in addition to 7 dividend growth stocks). I wrote about the distinction between the two here.
- WBDP has a focus on infrastructure (including utilities and telecommunications). DGP by contrast has a strong presence of consumer companies such as drug companies and restaurants.
- There is much to learn from each of these portfolios – and others like these. They both purport to create a steady and growing income through dividends, but they do it quite differently. And they are making me think about starting my own personal dividend portfolio.