Let me start with a recap of my goal
- The target dividend income is 10% yield on cost. The cost is $211,281 and so a 10% yield (or income) will be $21,128.
- The starting date of this portfolio s the date we rolled my wife's 401(k) into an IRA - July 2011.
- The target date is 10 years from the start date - July 2021.
- So, my goal is to build $21,128 of dividend income by July 2021.
- Put another way, the average yield for high quality companies is 2.5%. 2.5% of $211,281 is $5,282. In 5 years, I will need to double that amount to $10,500 and in 5 more years double it again to $21,128.
Earnings Per Share
Using the Rule of 72 as a rough guide for estimating an investment’s doubling time, 72 / 10 years = a minimum EPS growth rate target of 7.2%. The companies in my portfolio have future EPS growth rate estimates of 5% to 19%. The weighted portfolio average is 12% estimated annual EPS growth. No portfolio problems here.
Dividend Growth Rate
I’m looking for a combination of Yield and Dividend Growth Rate (DGR) that will provide a 10% yield on cost in about 10 years. If a starting yield is 2.5% on the day I buy a stock, then the dividend will need to double to 5% in 5 years and double again to 10% in 5 more years.
Using the Rule of 72 as a guide, 72 divided by 5 years tells me I need to look for a minimum DGR of 15%. The weighted portfolio DGR has improved from 16.8% to 17.9% and the Yield on Cost is up from 2.68% to 2.89%. This combination of yield and dividend growth rate will get me to a 10% yield on cost in about 9 years.
I will look to improve my holdings, specifically looking to improve my starting yield while maintaining the dividend growth rate. One way to do this is to sell off some of my Apple holdings and move a portion into McDonald's.
Apple has a nice run up these past few months and my portfolio is overweight in the stock. You'll notice too that Apple doesn't really fit into my DGR model. It's combination of Yield and DGR will provide a 10% yield on cost in about 17 years.
On the other hand, McDonald's should reach that same goal in 7 years!
I plan to own about 20 stocks with no more than 15% of the portfolio in any one company. And no stock should contribute more than 10% of income. I have been selling some holdings lately that exceeded those numbers, such as Lorillard (LO), Coach (COH) and Apple (AAPL).
My wife’s IRA now has 15 stocks in five sectors. Last year, all of our holdings were Large Caps. I've since added some Small and Mid Cap holdings - Copa Airlines (CPA), Textainer Holdings (TGH), Orchids Paper Products (TIS) and AmTrust Financial Services (AFSI).
I've recently sold about 1/3 of my Apple (AAPL, Technology Sector) holdings and will use the cash to buy a mixture of McDonald's (MCD, Consumer Discretionary Sector), Helmerich & Payne (HP, Energy Sector) and BlackRock (BLK, Financial Sector) to bring still more diversification to my portfolio.
|August 2014 Holdings|
The Monthly Dividend Income graph below shows how much dividend income varies from month to month.
One of the changes I made this year is to turn off automatic Dividend Reinvestment (DRiP). I now collect the dividends as cash. Once I accumulate $1000 or more than I choose which existing stock or new stock to invest it in.
The Annual Dividend Income graph below shows how I expect the income to grow over the years. The yellow line is a plot of my goal. The blue line is a plot of actual income. The 2014 goal is $6700. Actual income is estimated to be $7100, slightly ahead of schedule.