Dividend Growth Checkup
A little over a year ago I wrote a post discussing how to properly calculate the dividend growth rate of your portfolio. Most likely each company you own makes up a different weight in your portfolio so just using a straight average won't suffice. A quick summary of the method is a weighted average 1 year, 3 year, 5 year and 10 year growth rate as well as a weighted average of the weighted averages. I'm not going to go into detail on how the calculations are made, but I recommend you check out my post detailing that if you're interested. The whole point of dividend growth investing is to become a part owner in companies that continue to improve their operations and in turn pay you, the owner, a piece of the profits. Ideally I'd always be able to improve the growth rates of my holdings, but I know that won't be the case. I feel it's important to at least do quarterly checkups on each company that you own and for me an annual review of the overall portfolio dividend growth seems about right as most companies only increase the dividend once each year.
When I first calculated the growth rate of my portfolio I was quite pleased with the results. I didn't keep as good of records as I should have so I only have the total overall weighting of the dividend growth rates for my portfolio. Back in January 2013, my portfolio was much smaller but the weight dividend growth rate was pretty solid at over 11%. As of February 16th, here's where the dividend growth rates sit for my portfolio.
*Growth rates shown under 2014 only account for dividends paid through the end of 2013.
All growth rate periods and the weighted growth rate period are over 10% which is awesome, especially since I use just a 5% dividend growth rate in my projections to reach FI. Even better is when you consider the fact that the average YOC of my portfolio at the time of the original post last year was just under 3.00% and now it's around 3.50% with a current yield of 3.10%. Throughout the year I was able to increase both the yield and the dividend growth rate which is fantastic. I purchased a solid mix of higher yield companies, mainly REITs, and some higher growth rate companies like Visa (V). I feel that a solid dividend growth portfolio will have a good mix of companies across the yield and growth spectrum from the higher yield companies (5%+ yield, 3-6% growth), the sweet spot companies (3-4% yield, 7-12% growth), and the high growth companies (1-2% yield, 15%+ growth).
The actual growth rates for the 3, 5 and 10 year periods should be higher though as some of the positions I own (KMI, PM, PSX, LO, V, ARCP) weren't around 10 years ago or don't have dividend growth streaks that long yet. So it's factoring in 0% growth rates for their respective missing years. If I put in a 6% growth rate for each of the missing years the weight growth rates increase to 12.66%, 12.32%, 16.23%, 11.63%, and 12.59% which looks pretty good.
Overall I'm very happy with the way my portfolio is currently constructed in terms of yield and dividend growth. Since these are all historical dividend growth rates, I don't expect to see my portfolio continue to crank out 12%+ growth rates for decades on end but things look very good for 7-8% overall dividend growth in the long-term.
How do you calculate the dividend growth rate of your portfolio? Are you looking to add more high yield, sweet spot, or growth companies to your holdings?
**Thanks to All About Interest for showing me the error of my ways. Instead of calculating based off the portfolio weight, it should be calculated on the dividend weight. Dividend weight is the forward dividends for each position divided by the total forward dividends. The weighting process remains the same. Values have been updated to reflect this change.
When I first calculated the growth rate of my portfolio I was quite pleased with the results. I didn't keep as good of records as I should have so I only have the total overall weighting of the dividend growth rates for my portfolio. Back in January 2013, my portfolio was much smaller but the weight dividend growth rate was pretty solid at over 11%. As of February 16th, here's where the dividend growth rates sit for my portfolio.
| 2013 | 2014** | |
|---|---|---|
| Overall | 11.0%+ | 11.95% |
| 1 year | 11.32% | |
| 3 year | 15.68% | |
| 5 year | 10.94% | |
| 10 year | 11.02% |
All growth rate periods and the weighted growth rate period are over 10% which is awesome, especially since I use just a 5% dividend growth rate in my projections to reach FI. Even better is when you consider the fact that the average YOC of my portfolio at the time of the original post last year was just under 3.00% and now it's around 3.50% with a current yield of 3.10%. Throughout the year I was able to increase both the yield and the dividend growth rate which is fantastic. I purchased a solid mix of higher yield companies, mainly REITs, and some higher growth rate companies like Visa (V). I feel that a solid dividend growth portfolio will have a good mix of companies across the yield and growth spectrum from the higher yield companies (5%+ yield, 3-6% growth), the sweet spot companies (3-4% yield, 7-12% growth), and the high growth companies (1-2% yield, 15%+ growth).
The actual growth rates for the 3, 5 and 10 year periods should be higher though as some of the positions I own (KMI, PM, PSX, LO, V, ARCP) weren't around 10 years ago or don't have dividend growth streaks that long yet. So it's factoring in 0% growth rates for their respective missing years. If I put in a 6% growth rate for each of the missing years the weight growth rates increase to 12.66%, 12.32%, 16.23%, 11.63%, and 12.59% which looks pretty good.
Overall I'm very happy with the way my portfolio is currently constructed in terms of yield and dividend growth. Since these are all historical dividend growth rates, I don't expect to see my portfolio continue to crank out 12%+ growth rates for decades on end but things look very good for 7-8% overall dividend growth in the long-term.
How do you calculate the dividend growth rate of your portfolio? Are you looking to add more high yield, sweet spot, or growth companies to your holdings?
**Thanks to All About Interest for showing me the error of my ways. Instead of calculating based off the portfolio weight, it should be calculated on the dividend weight. Dividend weight is the forward dividends for each position divided by the total forward dividends. The weighting process remains the same. Values have been updated to reflect this change.
To be honest JC, I've never tried to project my portfolio's dividend growth rate. I'll have to try that in the next couple days. Currently, I'm not looking to add much of anything.....although I'm most likely to add to the Sweet Spot, as you call it. McDonalds, Coke, etc. Speaking of Coke, I hope they have good earnings and a nice dividend boost this week. That would certainly brighten my week :o) Have a great day and let me know if you want to try and work on those technical issues later today.
ReplyDelete-Bryan
Bryan,
DeleteIt's pretty simple to maintain once you get things set up. If I'm not adding a new position or closing one out then all I have to do is keep up with dividend increases. Everything else is linked so it's easy enough to keep it up to date. I want most of my portfolio in the "sweet spot" companies but there's a place for the high yield and high growth too so I like to sprinkle them in.
Obviously you can't project too much based off these numbers since they are historical and not predictions of the futre. But to me it's something I like to keep up with because it let's me quickly see how each company and the portfolio as a whole has done in the past. If I project my dividend growth at 8% is that even realistic given the history of the companies I own? Sure the growth outlook could have changed but if on a historical basis they're at 6% and I project off 8% I'll probably end up being disappointed and have to work another year. I'd rather project conservatively and get to retire a year earlier than planned.
Thanks for stopping by!
It's not something I have done. I generally look to achieve a reasonable dividend yield (over 4% generally), but sometimes can't achieve this. I also look for companies that I think can grow their income over the years and therefore provide me with growing income.
ReplyDeleteThis income is currently re-invested to keep the income growing, and I am tracking the position with my holding in Glaxo Smith Kline to see the benefit of DRIPing.
Great dividend growth rate that you have achieved though.
FI UK,
DeleteI'd love to be able to get closer to 4% yields on a fairly consistent basis but yields are typically lower here in the states. Still lots of options in the 3-3.50% range though. Before I purchase, the focus is on the future growth prospects because past dividend growth is just that, it's in the past. It's still something I like to calculate though to see the organic dividend growth that the companies are providing. This doesn't take into account reinvestment but just the changes in dividend paid amounts. When you're adding new capital to the portfolio it just gets too hard to see the dividend growth from your companies improving, reinvestment, and added capital so this lets me break out the improving companies aspect.
Thanks for stopping by!
You're beating your projections by a good margin, and you have to be happy with that, right? Well done. I hear what you're saying about the averages regressing towards the mean over time, but here's to hoping you're an outlier. ;)
ReplyDeleteDone by Forty,
DeleteOh I'm definitely happy to be beating my projections by more than double. That'll just help to push FI up sooner if these kind of DGRs can keep up. I expect them to regress but even 6-8% over the long-term would still be ahead of my projections.
Thanks for stopping by!
That's a great portfolio dividend growth rate JC! I haven't ever calculated mine out but would definately be pleased if it was around 10%.
ReplyDeleteMost of the companies I buy tend to be in that "sweet spot" as far as yield and growth.
I've considered V before but haven't pulled the trigger because of the higher valuation given to the company than I'm normally used to paying. But I'm sure the growth will make it worth it over the long run. I still keep my eye on the company and would love to grab some shares soon.
Dan,
DeleteI'd love to be able to keep this kind of DGR forever, but I'm sure it'll come down in the future. I think the "sweet spot" is a good place to be for the majority of your portfolio and then fill in around the edges with the higher yielders and higher growers.
I was able to get V when it was at a better value but you have to move whenever the opportunity presents itself. It's typically pretty fully valued and even though the growth is great, a slight hiccup there can send the shares down in a hurry.
Thanks for stopping by!
Several of my investors also don't have 10 year DGRs, some even don't have 5. That can make it rough for estimates for sure.
ReplyDeleteYou are looking solid there. Double digits are great.
PMU,
DeleteI don't like to base projections off these numbers because they are on a purely historical basis, but it's good to see the trend in DG for each of my holdings and the portfolio overall. Double digits sure are nice.
Thanks for stopping by!
Pursuit,
ReplyDeleteVery nice numbers there! That's an outstanding growth rate. Does it come at the expense of current yield? Last I looked, my overall yield was about 3.5% or so.
Very interesting exercise, and I think it's also pretty worthwhile to know where you stand.
I have a healthy mix of the low yielding/higher growing, medium yield/medium growth and higher yield/lower growth plays spread across the portfolio. I'll have to take a look at this and see what I come up with. I'd be happy with an overall portfolio yield of somewhere around 3.5% and average growth of 8-10%.
Best wishes!
DM,
DeleteYOC is 3.50% and current yield is around 3.10%, so I guess it's a bit of a sacrifice on current yield. Although that includes my position in HAL which is about to be closed out. That'll add another ~0.05% or so to the current yield. The biggest drags on current yield right now are BAC, IBM, V and WAG. WAG is now yielding less than 2%. That's some nice appreciation but I'd rather had more chances to add to the position. I've been focusing more on the 3-4% current yield range so the current yield should start to come up.
Over the long term 3.5% yield and 8% growth is where I would like to be as well as it's a good yield but still grows well above inflation.
Thanks for stopping by!
DM,
DeleteIf you do check this out for your own portfolio please pass along the info in either a post or email me. I'd be curious to find out how the portfolio's compare.
I've never actually calculated the dividend growth (just the actual numbers). Of course, I'm a pretty boring blue chip kind of guy. But I think Dvidend Mantra asked a good one- does the growth rate come at the expense of current yield?
ReplyDeleteRyan,
DeleteEven though my goal is to be mainly invested in the blue-chips, I think I'd still go through this exercise to get an overall feel for the portfolio. 3.1% current yield is in the ballpark of where I'd like to be. I expect to be able to bring it up some but I don't want to get anymore REIT exposure right now since I'm trying to purchase a rental property so the yield will have to come from somewhere else.
Once BAC starts paying an actual dividend instead of the token $0.01 per quarter the yield will also adjust higher. I think it's a pretty good mix of growth and yield, but who wouldn't like a bit more?
If you happen do this with your portfolio please let me know what kind of numbers you get. I'd be curious to see how mine compares to some other investors.
Thanks for stopping by!
Correct me if I'm reading your post wrong (I skimmed through the previous one), but are you using dividend growth rate with the actual dollar weight of your position? If so this isn't accurate. You need to use a dividend weight. For example, I currently own Visa and it's portfolio dollar weight is 2.17%. However, since V has such a low dividend, my dividend weight is .4%. I'm calculating dividend weight by projected 12 month dividends divided by my total yearly projected dividends. If V has a big dividend increase, which I do expect this year, it only increases my total dividends based on dividend weight. In this case it's a very small increase to my dividends since the starting dividend is so low. For any holdings that are large dollar weights but pay low dividends, this will really skew the numbers.
ReplyDeleteAll About Interest,
DeleteThe way it's calculated now is based off portfolio weight. I didn't even think of calculating it based off the dividends so I'll recalculate to see what the difference is compared to the portfolio weight.
I'd be curious to know what you come up with. This is actually something on my list to do also. On my portfolio page, I've already got my dividend weights listed. I plan to add a column for 5-Year CAGR and use that against the dividend weights to come up with a total dividend growth of my portfolio.
DeleteThe weights changed to 12.04%, 11.43%, 15.85%, 10.95%, and 11.03% moving from overall, 1, 3, 5, & 10 year DGR's respectively. So they're at least still in the ballpark of the first calculations. Not quite as good but everything is still over 10% which is pretty good to see. This is definitely the way to do it rather than portfolio weighting since each company pays a different yield. Thanks for bringing that up and I'll make the corrections on this post and the previous one.
DeleteThose are excellent numbers! I would have thought they would have lowered more. You obviously have a nice group of high growers. My overall yield is higher at the expensive probably of the growth. If I had to take a guess I'd say mine is close to the 8% mark.
DeleteNo worries man, that's what the community is here for. If you think about it though, it makes perfect sense why you have to use the dividend weights but I can understand how it can be confusing.
Also nice analysis on KO, I just read it on SA. I'm probably going to get assigned shares the 22nd on my $38 put I sold.
Take care!
I think they stayed relatively flat because the majority of my portfolio is at similar yield/growth combinations. There's a few outliers like IBM, V, BAC that have very low yield or very high growth or no growth, but for the most part it's mainly 2.8-3.5% yield w/ 8-12% growth. I don't have a whole lot of high yielders either so that doesn't bring the overall DG down. PM and KMI really help to juice both the yield and growth numbers though.
DeleteMy put doesn't expire until August so I've got a lot of time before expiration. I'd love for it to get down near $36 which could be possible. I'll be looking forward to that dividend increase to see what we get. My guess is it's bumped to $0.30/$1.20.