One quarter ago, on July 1, I started a new model portfolio called the Dividend Growth 30, which features 30 dividend growth stocks that I believe will be solid long-term buy-and-hold investments. Following up on September 30, I will take a look at the portfolio’s performance, and notable items – which stocks did well, which did not? We will also take a look at how dividend changes have impacted the portfolio’s income.
In summer 2020, shortly before turning 30, I decided to build a model portfolio that includes stocks which I believe will do well over the coming decades. I thus chose companies with strong market positions and wide moats versus competitors that should do well in different market conditions. More on the reasoning for individual stocks can be read here. The original article also includes more info regarding why I decided to build this portfolio and why I am writing about it.
One Quarter Has Passed
At the end of Q3, following the market close on September 30, I took a look at what the portfolio looked like following its first quarter. On a share price return basis, the performance has not been bad:
Source: Author’s calculation
During the first three months, the portfolio delivered a return of 4.4% before dividends. Not all stocks moved in line with each other, however, as there were quite wide discrepancies.
Stocks with a 10%+ share price increase during the quarter include Abbott Laboratories (ABT), Albemarle (ALB), Broadcom (AVGO), Brookfield Renewable Partners (BEP), Estée Lauder (EL), Home Depot (HD), Nike (NKE), and Pentair (PNR).
Brookfield Renewable was the overall best performer, with a 37% share price gain, adjusted for its stock split during the quarter. This came on the back of an increasing market focus on renewables, while the market continued to punish oil & gas at the same time. Nike was the second-best performer with a 29% share price increase, driven by the fact that the market realized that consumer spending has not fallen off a cliff so far, despite the pandemic headwinds:
Thanks to massive intervention by both the Fed and the government, personal income in the US is actually up year over year. This allowed many households to continue to spend money, and consumer confidence recently rose to the highest level since the pandemic began. This did not only allow Nike to report solid quarterly results, but it also led to increased market confidence that the company would do well in the future, too, which explains the strong share price performance. Home Depot benefited from solid consumer spending as well, especially since consumers shifted spending towards home & garden upgrades, as travel and other leisure activities were seeing a slowdown due to COVID measures. Albemarle is also a notable performer – the company benefited from increased interest in lithium by Tesla (TSLA), which led to share price increases for the whole industry.
Notable underperformers include Enterprise Products (EPD), which saw its share price decline, along with other midstream names. We believe that Enterprise Products holds significant value at these prices. Essex Property Trust (ESS), an apartment REIT, also saw its shares drop by more than 10% during the quarter, the same was true for several other apartment REITs. Last but not least, Intel’s (INTC) share price was down meaningfully during Q3 as well, on the back of its announcement that its new 7nm process would be delayed by up to 1 year.
All 30 of these stocks are dividend growth investments that have regularly increased their dividends in the past. I also think that all 30 of them will be able to regularly increase their dividends in the future, although the current pandemic results in muted dividend growth for now. Corporations are mostly on the conservative side regarding shareholder returns right now, which is why many chose to maintain their dividend instead of increasing them this summer. Nevertheless, there were 2 dividend increases, and one dividend reinstatement (at pre-crisis levels) during the first three months of the portfolio’s existence:
Source: Author’s calculation
Estée Lauder reinstated its dividend fully after suspending it in spring, while Microsoft (MSFT) raised its dividend by 10% during the crisis. Realty Income (O) continued to increase its dividend quarterly, although the dividend growth rate was not high at all, which was to be expected during times like these. Overall, portfolio income increased slightly during the quarter, and there was no dividend cut, which is not a bad result considering that we are living in one of the harshest crises in recent memory.
During the first quarter since the portfolio started, there was not an overly large amount of dividends to be reinvested, due to a timing factor: If a company made a dividend payment during Q3, the ex-date for that dividend may have occurred during Q2, i.e. before the start of the portfolio. Likewise, if the ex-date for the current dividend was in Q3, the payment will only be made in Q4 in some cases. This is only an issue for the first quarterly update; however, once this has been lapped, there should be regular dividend payments for each stock during each quarter (except if they make payments on an annual basis).
Source: Author’s calculation
We see that 22 out of the 30 companies made a dividend payment during the quarter for which the ex-date was also in the same three-month period. With some others, the ex-date for the Q3 payment was before July 1, while Disney (NYSE:DIS) has still not reinstated its dividend. Tencent (OTCPK:TCEHY) makes annual dividend payments, thus there was no dividend during Q3, as expected. Enterprise Products was the biggest income generator among the group, thanks to a rather high yield on cost based on the purchase price on July 1. A whole of 1.6 additional shares could be bought with the Q3 dividend payment alone. Looking at lower-yielding stocks such as Visa (NYSE:V), the Q3 dividend payment did not add a significant amount to the holding, at just 0.01 additional shares. Nevertheless, thanks to an above-average dividend growth rate, the contribution of Visa should rise over the coming years.
The portfolio’s performance during the third quarter was quite solid, with a return of ~5% with dividends included (4.5% without). On an annualized basis, this would equate to about 20% returns, although this is not realistic in the long run. During Q3, the whole market went up, and it has to be seen how the portfolio will perform during times of weaker market sentiment.
Regarding the dividend growth aspect, there were no dividend cuts during Q3, while two companies raised their payouts. Estée Lauder, on top of that, reinstated its dividend at the old level. Factoring in the macro-environment and the pandemic, a “no cuts and some growth” outcome is not bad at all, I believe. Dividend increases will likely be more plentiful once the current crisis has been overcome and management teams are less conservative when it comes to shareholder payouts.
One Last Word
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Disclosure: I am/we are long BAM, BEP, BMY, EPD, JNJ, MPW, O, SLG, SPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.