My Perfect Divided Portfolio - Summary and Update

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In December, I started building what I call my Perfect Dividend Portfolio – one company at a time, and analyzing each company using a rating system I developed myself.

I review the stocks on seven different criteria; I feel that my selection covers the company’s past dividend-paying history, its potential future earnings growth, and the valuation of the company.

The company must be yielding at least 3.0% annually, it must have a history of paying and raising dividends for at least 10 years, and the company must have a 5-year dividend growth rate (DGR) of at least 5.0%.

I also look at the estimated earnings growth rate (EGR) for the next 5 years, and the company’s share price total return over the previous twelve months. (I do not think that a company whose yield is high because its share price declined precipitously is a company that is good for my portfolio.)

I am also looking at PE, because I am aware that dividend stocks have been quite popular over the past few years. Because the yield goes down as the share price goes up, in some ways this does tend to temper the valuation somewhat; if the stock becomes overpriced, the yield can drop low enough that the company is no longer desirable as a dividend-payer. However, I still look out for companies that are overvalued, even if their yield is still high enough to pass my screens.

And I consider payout ratio. A company that pays out too much of its earnings in the form of dividends may not retain enough to continue growing. It may also make the dividend vulnerable to cuts in the case of a quarter of underperformance.

I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.

At this point, in the middle of March, four months into the process, I have picked only 8 companies of the 10 that I wished to select. Over the past month, I have been frustrated at not finding anything that I feel is worthy of selection.

I have decided to take a step back and re-evaluate the companies that I have selected to date, and update where the portfolio stands as a whole.

My portfolio as a whole is yielding 3.8%, which is excellent considering my minimum criterion is 3.0%. I’d like to eventually grow the yield to 4%.

The average number of years that these companies have raised their dividends is 16.75, again, a very nice number. These companies all made it through the 2008-2009 recession without cutting their dividends, and I feel confident that they will all work hard to maintain their streaks. None of these companies will cut or even freeze their dividends based on any small trouble.

The average 5-year annual dividend growth rate is an extremely healthy 15.75%. I am very pleased with this number. This means that all of these companies are not only committed to paying and raising their dividends every year, but that they are committed to growing their dividends at a rate that far exceeds that of inflation. These dividends will continue to grow at a healthy pace regardless of what their stock price does.

On top of a terrific DGR, the companies in my portfolio reflect an average 5-year annual earnings growth rate projection of 9.75%. Professional analysts have estimated that all of these companies are on the path to significant earnings increases in the future.

The PE ratio average for the portfolio is ideal, at 14.9. The current PE of the S&P 500 is 21.2. I was looking for a PE under 20, which all of the companies have except Williams Companies, the last company I selected, which stands at 25.6.

The payout ratio average for the 8 companies in my portfolio is 43.4, extremely reasonable. This despite the fact that two of the companies (Enterprise Products Partners and Sunoco Logistics) are Master Limited Partnerships which must, by law, pay out 90% of their earnings as distributions.

The final criterion was total return over the last twelve months, and my portfolio average for this is 20.7%.

All in all, if my portfolio was a single company, it would receive a ranking per my system of 21 points. It would be the highest-rated company in my portfolio.

I am extremely pleased with these numbers, and because of the current structure, I may make a couple of concessions in choosing the last two companies for the portfolio. I intend to choose them and complete the portfolio by the end of March.

Now, for a quick update on where a few select companies stand:

My first selection was Abbott Laboratories. Once the company split into two on Jan. 3, I sold the Abbot shares (then yielding only 1.8%) and reinvested in AbbVie (NYSE: ABBV) shares (then yielding 5.0%). AbbVie paid out its dividend on Feb. 15. The company is currently trading at $38 per share, up 17.5% from where I bought it in December.

While I acknowledge that AbbVie is a new company and separate from Abbott, I believe that the management team will attempt to continue the same dividend growth strategy that Abbott has pursued. With that in mind, Abbott has a 40 year history of consistently raising dividends, and a 5-year DGR of 5.6%. The payout ratio is reasonable at 45%, and the company has returned 28% over the past twelve months, all while maintaining a PE far below the S&P 500 at 9.2 Should Abbvie prove to follow a different dividend growth strategy, I will assess and remove it from my portfolio when it becomes necessary.

Enterprise Products Partners (NYSE: EPD) paid a dividend on Feb. 7. It is trading at $57, up 15%. Enterprise Products has a 15-year history of raising dividends, and a 5-year DGR of 5.7%. The company tends to raise dividends more than once a year, and its 1Q dividend was an increase of 2% over the previous quarter. EPD has a twelve-month total return of 17.3%, and a payout ratio of 95%, which is typical for a pipeline operator. EPD's metrics have not changed significantly since I analyzed and selected it in December.  

Lockheed Martin (NYSE: LMT) will pay its dividend on Mar. 29, and is trading at $90, and is down 4.3%. Lockheed Martin is the only company on my list to have lost ground since I bought, and I believe that is due to the current uncertainty over defense spending due to the federal budget debate. Lockheed Martin is the only defense-industry company that I have selected, and I am still confident in it. The yield is great, the 5-year DGR is excellent at 29%, and the payout ratio is low enough (55%) that the company can suffer some degree of earnings growth decreases without having to cut the dividend.

Sunoco Logistics Partners (NYSE: SXL) is trading at $68, up 16.2%. It paid its dividend on Feb. 14. Sunoco is another pipeline Master Limited Partnership that pays out 90+ percent of its earnings by law, and it also is subjected to special tax provisions that make MLP dividends extremely attractive. Sunoco's 5-year DGR is 11.8%, and it is a company that raises its dividends multiple times during the year. The 1Q dividend was an increase of 5% over the previous quarter. Sunoco returned 72% over the past twelve months, and still sports a reasonable PE of 14.6.

The final company, Williams (NYSE: WMB) will pay its dividend on Mar. 25. It is trading at $35, and is down 1.3%. Williams has been paying and raising dividends for 10 years, and its 5-year DGR is 29.2%. Its 1Q dividend was an increase of 4% over the previous quarter, and Williams is another company that tends to raise its dividend multiple times during the year (it is another pipeline operator.) Williams has returned 22% over the past twelve months; its PE is high, at 26, but I judged its other metrics sufficient, and decided I would rather buy now than wait for a potential pullback.

Overall the portfolio has 10.6% in unrealized gains and 1.1% in dividends since I began this project in early December, 2012.

In comparison, the S&P is up 9.7% and has yielded approximately .5% in dividends.

My original goal with this portfolio was to achieve capital gains similar to those achieved by the S&P 500, as well as significantly better dividends.

I think at this point I am succeeding, although I am wary of counting my chickens before they hatch.

Stay tuned for two more company selections, and further updates.

Karin Hernandez has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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