Building The DG50 Portfolio
We all have seen sentences such as this one: "A $100 investment in Wal-Mart 40 years ago would be worth $829,600 today." While technically accurate, the reality is that nobody invested $100 in WMT or any other company in 1974. Back then, brokers required purchases in 100-share lots, and commissions alone could approach $100.
Besides, a precise $100 investment would have required that a stock trade in multiples of $10. That rarely happened in 1974... and it still rarely happens, which is why not a single DG50 position cost exactly $500 to buy.
Most of the positions filled within $20 of $500. The largest outlay was $559.77 for three shares of Lockheed Martin; the smallest was $450.75 for five shares of McDonald's.
While the primary purpose of this project is to see how the overall income stream grows over time, many readers love to make total-return comparisons. So I also spent $552.57 for three shares of Vanguard S&P 500 ETF (NYSEARCA:VOO) and $477.18 for six shares of Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). Finally, I bought $5,006 worth of VDIGX, representing one-fifth of the DG50 portfolio's cost. That should allow for easy comparisons over the years.
And yes, I said "over the years." Not weeks or months or even quarters, but years.
Add it all up, and I have committed more than $31,000 toward this project. Although some might use that as proof that I should be committed, I consider it a great investment. In addition to the dividends and capital gains I will receive over time, I will benefit from the lessons this study will teach all of us.
Portfolio Rules
All income will be reinvested into the companies that paid the dividends. Otherwise, there will be absolutely no buying or selling. This will be a passive portfolio - classic buy-and-hold. (Dividends and capital gains also will be reinvested into VOO, VIG and VDIGX.)
While the portfolio starts out as close to equally weighted as possible, it will not remain that way over time, because I will not rebalance. I will let the winners run and losers languish.
In the event of a spin-off, the new company will join the DG50 as kind of a plus-1. Will I change the name if the portfolio grows to 51 or 52 companies? I doubt it; the Big Ten didn't change its name when it grew to 11 and then 12 and now 14 schools. Mergers will be handled on a case-by-case basis.
Should any companies go out of business, the value of those positions presumably would go to zero. The idea is to truly reflect the progress of these 50 companies, which the panelists deemed very high-quality.
If a company reduces or eliminates its dividend, or if its fundamentals erode, it will continue to be held. I want to see how the overall portfolio is affected by all manner of events, good and bad.
Because this portfolio is in an IRA, taxes will not be an issue until I am subject to required minimum distributions in 2031. By then, I will either have converted the portfolio to a Roth IRA to avoid RMDs or, more likely, I will have decided that 17 years was a long enough life span for this project.
Some Dividend Growth investors might say: "But this doesn't really represent how we invest. If the dividend is cut, we sell. If fundamentals change, we bail. DGI is not really buy-and-hold, but buy-and-monitor."
That would be a fair point, but every DG investor has different rules. For example, one frequent Seeking Alpha commenter who goes by the handle Buy & Hold 2012 says he has never sold one share of stock in 44 years - and his methods have helped him become wealthy. Some sell if a dividend raise doesn't meet a certain threshold. Some sell immediately if there is a cut. Some buy only companies with yields of 3% or higher. Some rebalance regularly to maintain equal-weight positions; others overweight their core holdings. Many investors would avoid buying several DG50 components now, due to overvaluation.
One of the interesting things about compiling the DG50 was seeing the panelists' various approaches. The 10 of them combined to choose 160 different companies, including several that pay no dividends at all.
So I believe it would be imprudent to establish rules that supposedly cover the way all Dividend Growth investors operate, because, in fact, there is no DGI Creed.
Conclusion
One could argue quite convincingly that this project is as much about a buy-and-hold strategy as it is about DGI - and I wouldn't argue with that argument at all. No matter how one looks at it, this multiple-year study should be fun and instructive.
Welcome to the Dividend Growth 50, folks. Let the "forward-testing" begin!
Disclosure: The author is long AAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, CVX, COP, D, DE, EMR, GE, GIS, GPC, HCP, HSY, IBM, JNJ, KMB, KMI, KO, KRFT, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, SBUX, SJM, SO, T, TGT, UTX, V, VDIGX, VIG, VOO, VZ, WAG, WEC, WFC, WMT, XOM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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