If you haven’t had a chance to listen to Episode 33 ‘The Ignition to Wealth Dividend Portfolio’, I’d highly recommend you jump in and listen to that first before reading further. We discuss a lot of really great things in the episode and you get to hear the excitement of why I wanted to start a Dividend Portfolio, instead of just reading it in this blog. I’ll do my best to try and get my excitement across in this blog, but sometimes listening to it does a much better job. Also, just a quick disclaimer, the information used in this blog is as of the date of writing. Any changes to the Dividend Portfolio will be made in separate blogs.
When I first started investing, the first two investments I bought into were recommendations from my dad. They were Blue Chip stocks that were proven in the market and also had solid dividends. These Blue Chip dividend stocks were Johnson & Johnson (Ticker: JNJ) and Exxon Mobil (Ticker: XOM). Every day my dad and I would discuss the market after it closed. He passed down as much wisdom as he could at one time about the market, but the first thing we would always bring up was the performance of our current holdings. With how great and special those memories were, I told myself I’d never be able to sell those first two stocks. To this day, they are both still sitting in my Brokerage account just collecting dividends. So thank you, dad!
What I Look For
I won’t go into too much detail here since I really break it down in the episode. The first step I took was to look at the Dividend Aristocrats which are companies in the S&P 500 that have paid and increased it’s base dividend every year for at least 25 consecutive years. After I gathered this list, I broke them out into different industries such as consumer staples, industrials, health care, etc. Then I picked out some from each industry that I knew of or that I wanted to do a little more research on to see if they’d be a good fit.
Now this is where the analysis started to come into play. The first number I looked at was the P/E Ratio (Profit to Earnings Ratio). I generally like seeing their P/E Ratio numbers be around 20 for dividend income stocks. Anything more is just showing that they are currently overvalued. The next number I looked at was the Future P/E Ratio. If it was higher, like 60+, then they would be considered undervalued at the current moment. Now, you can look at a lot of other figures such as total debt, how well they have been able to pay their dividends every quarter, etc. I didn’t look much further than the P/E just because these companies were listed on the Dividend Aristocrats list so they are a little more trustworthy (in theory) since they have a track record.
The last thing I did was follow my gut. I have nearly a decade of experience and have noticed that my gut is usually right when picking individual stocks. If I didn’t feel comfortable with a company, I immediately moved it to the bottom of the list or found something to offset that slight discomfort.
Johnson & Johnson (Ticker: JNJ)
I know, I know, you’re never supposed to have any emotions tied to a stock…but JNJ was the first stock I ever purchased. A whopping 5 shares of it and honestly, I don’t think I’ll ever sell them. It was when I first started investing and my dad was teaching me all kinds of things in this brand-new world of investing and money management. Just those memories alone are enough for me to hold onto JNJ forever. Even though I have some strong emotions tied to JNJ, let’s take a deeper dive into the actual analytics behind them. As Eric mentioned in the podcast, they are in EVERYTHING! They are registered as a drug manufacturer however, they sell all kinds of things. With a P/E Ratio of 33, a dividend yield of 1.54%, and being part of the Dividend Kings, this company has done it all and has fought back from all types of lawsuits without taking too big of a hit.
Vanguard High Dividend Yield Index Fund ETF (Ticker: VYM)
There’s not much excitement or insight to VYM as its main purpose in this portfolio is a diversification play and a safe base play to keep things even keel. This is an ETF with extremely low expense ratios 0.06%, a very reputable brokerage firm, and a solid list of well diversified assets to pay out quarterly dividends.
JPMorgan Chase and Co. (Ticker: JPM)
When it comes to banks and dividend income, you need to be careful. They are held to regulations that can force a change to dividend payouts at any time. 2020 was a great example of this since all banks were regulated to only payout a certain dividend over a designated period of time. With that being said, you do need some exposure to the banking industry. I don’t have a lot of expertise in banking, however, being in the business field and knowing a few people who have decades of experience in the banking industry, I’ve come to respect Jamie Dimon (JPMorgan’s CEO) as a business leader. I’ve also listened in on some of his talks about inflation and a few other national and global financial topics and have agreed with his opinion. Generally, if a company has a good leader, they tend to do well in the market. After looking at their financials, I decided to add them to the portfolio.
Also, they helped finance one of Eric’s individual stock picks, Manchester United. Not sure if that’s a positive or a negative, but I guess it’s relevant enough to make the blog!
Realty Income Corporation (Ticker: O)
Realty was a more recent play that I had already incorporated into my portfolio before I started the Dividend Portfolio. I was really interested in the fund back in late 2019 when I was looking for a substitute for a real estate play. I had known about the tax advantages and high dividends of Real Estate Investment Trusts (REITs), but I wasn’t sold on any REIT assets until I found Realty. As a dividend lover, it was almost like love at first sight. High yield, check. Part of Dividend Kings/Aristocrats, check. MONTHLY DIVIDEND, BIG CHECK! It just kept checking off boxes the more I looked into it. The only thing I didn’t like at the time, was that it seemed a little overvalued. I was very patient with it and when the pandemic hit about 5 months later, I pounced. I bought shares almost daily for a solid 2 weeks. Just incrementally buying more as it fell as low as $43.60 per share. Since then, I’m up well over 100% on Realty, including dividends. My favorite play with Realty is keeping it in a Dividend Reinvestment Plan (DRIP) so that their monthly dividend payout continues to buy more shares for me. Now, the future plan is once I see the need to start collecting this cash, then I will be sure to take it off the DRIP and let the cash come through the brokerage for additional other uses.
Fun fact, I almost went with a Publicly Traded Partnership (PTP) back in late 2019. I ended up dodging a bullet there as they were a high risk, high fee, real estate growth PTP. They concentrated on apartment complexes and single-family homes based in California. They are still around, however, that specific market just isn’t bouncing back as quickly.
AT&T Inc. (Ticker: T)
Oh, AT&T…what an interesting company. Originally, when I bought into T, I saw it as a riskier play. No more than 5% of total Dividend Portfolio asset holdings. Well, shortly after the episode aired they announced a split of their Comcast product to merge with Discovery+. Within this same announcement they also announced (in a roundabout way) that they will be decreasing their dividend. Well, the whole point of buying into T for me was to hit that high dividend yield of just below 7%. Because of this announcement, I have stopped purchasing T and also stopped the DRIP, however, I’ll continue to hold until 2022 when the split happens. I’m not sure what the new company will look like, but it’s being reported that it will pay out a dividend as well. Look at this as a learning moment for all investors, experienced and not experienced, don’t chase high-yield just because they are high-yield! I still don’t consider this move as a mistake as an overall investment, but I do look at it as a mistake as a Dividend Portfolio play.
Verizon Communications Inc. (Ticker: VZ)
There’s not much to say about Verizon in the aspect of this dividend portfolio. I used it mainly as a hedge against AT&T since they are both in the same industry. Basically, it’d give me some exposure in case AT&T needed to cut some of their dividend in the future. And after AT&T’s announcement, I’d say the VZ hedge was a good idea.
Merck & Co. Inc. (Ticker: MRK)
Merck is an interesting story. I knew of Merck, but I didn’t really look into it too much until one of my dad’s coworkers pointed it out. After doing some digging, I completely agreed with him! On a plus side, for those of you who happened to have bought in shortly after the episode was released, we received a stock spinoff for Organon & Co. (Ticker: OGN). Without going into too much detail about the spinoff (listen to more about stock spinoffs on Episode 039: What is a Stock Spinoff), for every share of MRK, the investor would receive 1/10th a share of OGN. This means for every 10 shares of MRK, you’d receive 1 share of OGN. Any partial shares would be cash-in-lieu of a partial share.
Illinois Tool Works Inc. (Ticker: ITW) (For the lolz!)
There’s no way Ignition to Wealth could create a dividend portfolio and not include ITW. In all seriousness, I only hold one share of ITW in this portfolio. It’s not that they are a bad company, I just don’t like how they fit into this portfolio so I bought a share just to hold for the lolz!
Walmart, Inc. (Ticker: WMT)
Not a lot of technical analysis was done for Walmart in this portfolio. They are such a massive company with their hands in a lot of different industries, which helps with diversification. On top of all of this, they are starting to ride on Amazon’s coattails regarding online retail and quick shipping. Whether or not they succeed is a different question, but they have a strong enough business model to support this potential growth opportunity.
The Procter & Gamble Company (Ticker: PG)
Procter Gamble is a company that I luckily bought shortly before the pandemic last year. It was more of a gut feeling at the time, but I had no clue what was in store shortly after I bought them. Procter Gamble’s portfolio of brands is so extensive and diversified that they almost have an extra security layer built in to help protect against any kind of market pull backs or recessions. They provide a lot of products that are needed every day regardless of if we are in a recession which gives me a little more peace of mind including them in this portfolio.
McDonald’s Corporation (Ticker: MCD)
Full disclosure…McDonald’s is my go-to fast food! They are my usual comfort food and/or cheat meal whenever I need it so there may be some bias in this selection. McDonald’s was the third stock I ever bought back when they were still trading in the $80 range, and I’ll continue to hold them until I see any major changes. One thing my dad always told me about McDonald’s was that even in a recession, they still have a lot of customers due to their low prices. That has always stuck with me.
The Coca-Cola Company (Ticker: KO)
So, in college, I had a friend who was very interested in getting started with the stock market. I just happened to have been investing for a few years, so I told her that I’d help her set up a brokerage account and told her what I invested in at the time. KO was at a discount in my eyes at the time, so I remember mentioning it to her and she took it and ran with it. Long story short, she just recently told me that she still holds those few shares of KO and does not think she will ever sell them. Several years after buying that first stock, she’s just as obsessed about the market as Eric and I are.
PepsiCo, Inc. (Ticker: PEP)
In my eyes, Pepsi is much more of a dividend growth play as opposed to dividend income play. Not only are they in the beverage industry, but unlike Coca-Cola, they are in the packaged goods industry. Their thought process is if someone buys a sugary drink, they are more likely to buy a salty snack. Pepsi has capitalized on this thought process as nearly half of their global revenue comes from their snack and food brands. In a saturated industry of drinks, I think Pepsi is positioned to be more dividend growth as opposed to dividend income, and adds some additional value to this portfolio.
The Home Depot, Inc. (Ticker: HD)
With how many new houses are being built, the DIY craze, and a lot of people switching to a more permanent working from home situation, I think Home Depot should do well. I don’t have a lot invested in Home Depot or Lowe’s, however, they helped diversify the portfolio enough and also are set up to do well in the upcoming markets. We will see what happens in the near future, but I like the market we are in for Home Depot and Lowe’s.
Lowe’s Companies (Ticker: LOW)
Lowe’s is mostly a play to offset any potential future risk of Home Depot that could be on the horizon, similar to AT&T and Verizon. Like I said under Home Depot, they are set up to be in a good position to continue to grow, but they don’t hold too much of a percentage in the dividend portfolio.
Things to Remember
Don’t tie your emotions in with these stocks, don’t be afraid to pivot drastically if you think an asset isn’t doing what you want it to do, and keep the end goal in mind. What’s your purpose of having this portfolio? To drive additional income? Shield from inflation? These are things that should be running through your mind as you decide which stocks to keep in and which ones to take out in the future. Don’t be afraid to take some healthy risks outside of your Dividend Portfolio. Your Dividend Portfolio should give you more confidence and a little less risk in your overall portfolio. Plus, it never hurts to have an additional stream of monthly dividend income coming in.