Dividend Income October 2020

The month of October has come to an end and the Dividend Growth Journey continues. It is time to review the earnings of my dividend growth strategy. A total of 15 companies paid me and I received $521.74 in dividends.

I started my dividend growth strategy in 2018, made few mistakes early on and am now on the path of steady and reliable growth to reach financial independence in the future.

This strategy is focused on buying undervalued dividend growth stocks that as a result should provide a higher yield, greater long-term total return potential, and reduced risk. Undervaluation introduces a margin of safety.

Dividend Income October

My dividend income has been growing steadily over the last few months as I keep deploying more and more capital. It is a pleasure to see the fruits of your hard work every single month.

Let’s look at the income details of October. Last month I received dividends from 15 different companies which totaled $521.74:

• Advanced Data Processing (ADP) – income of $14.56
• Comcast (CMCSA) – income of $9.20
• Cisco Systems (CSCO) – income of $10.80
• Gladstone Investment Corp (GAIN) – income of $7.00
• Gladstone Commercial Corp (GOOD) – income of $12.52
• HP Inc. (HPQ) – income of $8.81
• Iron Mountain (IRM) – income of $61.85
• Ladder Capital (LADR) – income of $160.00
• Medtronic (MDT) – income of $8.69
• Altria (MO) – income of $154.80
• Merck (MRK) – income of $4.27
• NetApp (NTAP) – income of $12.00
• Realty (O) – income of $14.04
• Oracle (ORCL) – income of $7.20
• Phillip Morris (PM) – income of $36.00

During the month of October I had two new first time contributors: HPQ and NTAP. Both I bought in August with good dividend yields and high dividend growth rates. Check out my August report.

LADR and MO are my main contributors with $160 and $154 respectively. I plan to reduce their weight in the future by depoying capital to other stocks. At the same time, I do not focus on the dividend payment schedule by month.

The above chart shows my monthly dividend income over time. In October 2020 I received $521.74 compared to September 2019 with $100.98 of income. This is an increase of $420.76 or 417%. Insane! Last year October was a particularly low month because I was in the transition phase to sell my European stocks and switch to US stocks because I consider their dividend policies more stable and reliable.

On a year-to-date basis, from January to October I increased my dividend income from $2,248.14 in 2019 to $4,499.65 in 2020, an increase of $2,251.51 or 100%. Still very impressive. This significant increase is mostly due to my contributions this year.

Check out my current Dividend Income Table for 2020 and the full overview of all the stocks.

Dividend Changes

In October there have been two dividend increases and one dividend cut for the stocks in my portfolio. The table below summarizes the total impact of -$97.20, with an average decrease of -19.8%.

ABBV increased their dividend just above 10% – great. V was a bit disappointing raising their dividend only by 6.7%, well below the average of the last years.

The main shocker was ET with its dividend cut of 50%. The dividend safety score was only 40 – an unsafe rating and it became true. The impact is a $122 dividend income reduction.

Additionally, OHI did not increase their dividend so far, as it was expected for October.

I am looking to receive an average increase of 7% to outrank inflation by a large margin. Hence, the dividend cut killed all hope this month.

As a result of this change, my PADI decreases by $97.20. At a yield of 3.0%, to achieve this dividend income I would have to deploy $3,240.

Expected Dividend Increases for November

The following companies in my dividend growth portfolio have raised their dividend last year:

Automatic Data Processing, Inc. (ADP) – a 10% raise expected, going from $0.91 to $1.00 per share

HP Inc. (HPQ) – a 5% raise expected, going from $0.1762 to $0.1850 per share

Merck & Co., Inc. (MRK) – a 7% raise expected, going from $0.61 to $0.65 per share

Snap-on Incorporated (SNA) – already announced a 13.9% raise, going from $1.08 to $1.23 per share

The Dividend Growth Portfolio

In the Dividend Growth Portfolio I hold 48 different companies. Here is an overview of the status as of Oct. 31^st.

Purchases

With the markets taking a break and dipping in October I took the opportunity to purchase some more shares of the undervalued dividend growth stocks I have on my shortlist. In the table below you can see that I added to five of my existing positions and opened again a position in Visa (V).

Cisco Systems Inc (CSCO)

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The infrastructure platforms group includes hardware and software products for switching, routing, data center, and wireless applications. Its applications portfolio contains collaboration, analytics, and Internet of Things products. The security segment contains Cisco’s firewall and software-defined security products. Services are Cisco’s technical support and advanced services offerings. The company’s wide array of hardware is complemented with solutions for software-defined networking, analytics, and intent-based networking. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

International Business Machines Corp (IBM)

IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients–which includes 95% of all Fortune 500.

Intel Corp (INTC)

Intel Corp is one of the world’s largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets. While Intel’s server processor business has benefited from the shift to the cloud, the firm has also been expanding into new adjacencies as the personal computer market has declined. These include areas such as the Internet of Things, memory, artificial intelligence, and automotive. Intel has been active on the merger and acquisitions front, recently acquiring Altera, Mobileye, Nervana, Movidius, and Habana Labs in order to assist its efforts in non-PC arenas.

Johnson & Johnson (JNJ)

Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas, the device segment focuses on orthopedics, surgery tools, vision care, and a few smaller areas, while the last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. Geographically, just over half of total revenue is generated in the United States.

Merck & Co Inc (MRK)

Merck is a leading pharmaceutical company that makes products to treat several conditions in a number of therapeutic areas, including cardio-metabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to 40% of the firm’s sales are generated in the United States.

Visa Inc (V)

Visa is the largest payment processor in the world. Visa operates in over 200 countries and processes transactions in over 160 currencies. Its systems are capable of processing over 65,000 transactions per second.

There you have it. These are the companies I invested in this month. As a result, I have added $366.72 of dividend income to my PADI. On an investment amount of $11,177.77 including fees it comes to an average dividend yield of 3.28% and a weighted Dividend Safety Score of 85.1 points. Typically, the higher the Dividend Safety Score the lower the dividend yield.

Check out my current Dividend Growth Portfolio and the full overview of all the stocks I hold in it.

Dividend Safety

One of the key metrics for my future passive income is how safe it is. For this reason I have started to track my Dividend Safety Score. For this score I use the weighted dividend safety punctuation from Simply Save Dividends combined with the dividend income of each of my stocks. The higher the score the safer the dividend income.

Dividend Safety Score

For October, the Dividend Safety Score is 61.3 for my dividend growth portfolio, up by 1.7 points over September.

The increase is due to the deployment of money into stocks with a higher than previous average score and the raises of dividends.

I consider the score of below 60 somewhat at the lower acceptable end and my target is a score of 70. I want to have achieved this by the end of 2021. My plan is not to sell low rated stocks but instead re-balancing to high scoring ones when deploying more money.

I strive to continuously add to my portfolio and here really the focus is on high quality stocks. The re-balancing happens over time as new money deployed lowers the proportion of the low scoring stocks. I have seen that this works just fine for other dividend growth investor portfolios.

Let’s look at the actual distribution. I use the same classification as Simply Safe Dividends as it makes it easy to spot the categories.

The different categories and their respective score ranges from very unsafe to very safe are:

In my portfolio 50%* is in the Safe and Very Safe category which has very little risk of being cut. Another 31% is Borderline Safe. The remaining 19% are Unsafe or Very Unsafe. I need to monitor especially the unsafe positions closely.

* In my last post I published an error indicating that this percentage was 57% in September. The correct value was 47%

I managed to grow my Very Safe and Safe proportion by 3% percent points due to the additions in stocks in these categories. At the same time the dividend cut of ET within the Unsafe category automatically dropped its percentage. Hence, a mixed picture.

For each individual stock in my portfolio the current score is as follows:

I hold now 15 companies in the highest category and another 16 companies is the second highest category. Overall, my portfolio contains many high quality dividend stocks with a safe dividend score.

On the other end we see the red alarming light with LUMN (formerly CTL). Luckily this is only a small position and I have also a sold option which boosts the return. I am not concerned about this one.

I am, however, very closely monitoring LADR as it is my largest position for dividend income, and this after their 50% dividend cut. A further cut may hurt my performance significantly. GOOD and ET are also smaller positions and not require any further attention, especially after the 50% cut by ET. The score for IRM surprises me as I consider the business model valid. I will have to monitor closely if there are any negative signs.

When combining the dividend safety score with the income the picture looks as follows:

You can see that the largest group is the Safe category, closely followed by the Borderline Safe one. However, the Very Safe category moved up a rank from 4^th to 3rd. I am very happy with this. Again, this is due to my new purchases but also the dividend cut from ET.

Another way of looking at the dividend safety is by yield and score. For each of my holdings I compare these values to visualize the figures which clearly lets you draw some general conclusions.

The dots represent my yield-on-cost with the color of the dividend safety score. The blue lines indicate the current yield of these stocks. The grey dots represent companies that either do not pay a dividend or are not covered by SSD.

There is a clear correlation between yield and safety score. On the left hand side (apart from the grey dots) we have the low yield, high safety score companies. The further we go to the right, the lower the dividend safety score becomes but it typically comes with a higher yield.

In the midst of the market crash in March I decided to focus more on high quality dividend stocks and this is shown nicely in this chart. There are quite a lot of darker green dots and the blue line (current yield) is below the dot (yield on cost). Companies recovered quite nicely after the low.

At the same time, there a quite a few companies, especially of the mid to low safety score, which have not recovered and the blue line is above the dot, typically for oil and gas companies and the finance sector.

On the right hand side you can also see the extreme values that stocks can take on. ET has still a yield on cost of above 10%, even after the dividend cut. However, one of my goals going forward is not to chase the yield as we can so clearly see that it comes with a lot of risk.

Projected Annual Dividend Income (PADI)

With more money deployed in October my PADI increased accordingly, too. It stands now at $6,892 compared to $6,644 at the end of September. This is a rise of $248 or 3.7%.

My Dividend Growth Journey continues to try to just pour in money to pay off the margin. I still have a few put options on stocks which I would be willing to buy if the share price falls below the strike price at maturity. However, there are very few candidates and it is very unlikely. Hence, for the rest of the year there should be no (or very few) additions.

Dividend Yield

The current yield of the shares in my portfolio is 5.2%, a decrease of -0.2 compared to last month. The investment yield for my dividend growth portfolio is 4.9%, a decrease of -0.3 compared to September. For this yield I compare the current dividend income with the purchase price of the underlying shares. My yield on cost (YoC) is lower at 4.6%, down -0.1%, because of losses taken from options which also required additional funding without adding new dividend income.

Conclusion

The dividend income for October was $521.74 from 15 different companies, a 100% increase over October last year. My PADI stands at $6,892 which marks again a new record. My original target for this year of $5,000 was already reached in June.

The dividend safety score of my portfolio is 61.3, an increase by 1.7 points but still significantly below my recently set target of 70. My analysis has shown that 50% of my dividend income is categorized as safe, up by 3% compared to September, but there are still a few stocks with a high risk of being cut.

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Disclosure: At time of writing long on all above mentioned

Disclaimer: I am not a professional investment or financial advisor. The information presented on this site represents my personal dividend growth journey and it is for informational purposes only. Opinions expressed are my own and should NOT be relied on or taken as investing advice. I have no knowledge about your personal situation and before you make any investment decision you should exercise due diligence and must do your own research. Always consider seeking advice from a professional financial and tax advisor.