Stock Purchases – JNJ and More

I recently posted that I will be tracking my dividend retirement portfolio on this website in addition to my dividend empire portfolio. Well my self-directed brokerage account in my 401k is set up and I’m ready to go shopping.

I am in the process of converting 65% of my 401k into dividend growth stocks (full story HERE). I got the ball rolling on Monday when I sold off my large cap index and international value mutual funds. These sales generated about $15000 in proceeds. When the conversion is complete, I will have about $100k total in this dividend retirement fund. Since my goal is to own slices of at least 30 different companies in this portfolio I’m looking to purchase in blocks of $3000 ($100k / $3k = ~33 stocks). With $15k cash I was able to make 5 stock purchases earlier today to initiate my dividend retirement portfolio.

4/22/2015 – Johnson & Johnson (JNJ)

  • Shares purchased: 30
  • Cost per share: $100.4199
  • Commissions: $14.95
  • Cost basis: $3027.55
  • Yield: 2.77%
  • Expected annual income: $84

This stock was a no-brainer for me and one that I’ve been waiting to purchase for a while. JNJ is one of only 3 US companies with a AAA credit rating. In addition, JNJ has increased their dividend for an incredible 52 consecutive years with a 5 year dividend growth rate of 7.3%. If the dividend continues to grow at this rate my yield on cost will be approximately 4% in 5 years! JNJ has increased earnings and free cash flow consistently over the years, which has enabled them to raise dividends while keeping their payout ratio at a reasonable level.




There were also two statements JNJ made in their 2014 annual report that really got me excited. One was their commitment to invest heavily in R&D. Innovation is key and I’m confident they can stay ahead of competition. The other (related) statement they made was that 25% of 2014 sales came from new products introduced over the last 5 years. This is huge because it shows that JNJ doesn’t just rely on a few blockbusters they made decades ago – they are constantly making new products that sell.

Finally, did I get a good deal? Plugging JNJ’s dividend growth rate into the Gordon Growth Model formula with a 10% required rate of return results in an estimated fair value of $103. So I feel like I got this great company at a discount.

4/22/2015 – Microsoft (MSFT)

  • Shares purchased: 70
  • Cost per share: $43.04
  • Commissions: $14.95
  • Cost basis: $3027.75
  • Yield: 2.87%
  • Expected annual income: $86.80

Yet another company with a AAA credit rating. That’s 2/3 now – actually 3/3 since I own Exxon Mobil in my dividend empire portfolio. Microsoft has been increasing their dividend at an insane 5 year rate of 17.5%. If this continues, my yield on cost will be over 6% in 5 years. Now is a great time for dividend growth investors to purchase MSFT since the payout ratio is still low (46%) and the current yield is near all-time highs:



MSFT also sports a very healthy 12% revenue growth over the past 10 years and they have a TON of cash.


MSFT data by GuruFocus.com

Based on all of the data I’ve seen this company, and more importantly it’s dividend, isn’t going anywhere.

4/22/2015 – Home Depot (HD)

  • Shares purchased: 26
  • Cost per share: $112.59
  • Commissions: $14.95
  • Cost basis: $2942.29
  • Yield: 2.09%
  • Expected annual income: $61.36

When you need a tool, something for the house, the garden or you want to build something – where is the first place you look to purchase the items? Well honestly for me its Amazon (AMZN). But if the item is not eligible for prime shipping I go to Home Depot (HD).

What Home Depot lacks in yield it makes up for in growth. Earnings have increased 25.9% over last year (6% over last 10 years) while free cash flow has increased 16% per year. This has enabled HD to increase their dividend at a 16.3% rate over the past 5 years. So while my current yield on cost is only 2.09% it could potentially grow to 3.8% in 5 years.

Home Depot has a consensus 12-month price target of 125 (source nasdaq.com), so I’m comfortable with my entry price. The PE ratio is a bit high for my tastes (24.7) but it is still lower than HDs peers, and the forward (2017/2018) PE ratios are well below 20. This holding will be fun to watch over the years as I’m expecting massive growth in the dividend AND the stock price.

4/22/2015 – Realty Income Corp (O)

  • Shares purchased: 60
  • Cost per share: $49.46
  • Commissions: $14.95
  • Cost basis: $2982.55
  • Yield: 4.59%
  • Expected annual income: $136.8

Realty Income Corp, aka the Monthly Dividend Company®, is simply a dividend machine. I believe this is a must have in a dividend growth portfolio. My yield on cost (YoC) is 4.59% and if Realty Income Corp continues its ~5.8% dividend growth rate I should have a YoC close to 6% in 5 years.

Revenue has also increased steadily over the past 10 years in step with the dividends:


O data by GuruFocus.com

This looked like great time to open a position in this stock as it recently dropped down to a strong support level around $49-$49.50.



4/22/2015 – Altria (MO)

  • Shares purchased: 58
  • Cost per share: $51.75
  • Commissions: $14.95
  • Cost basis: $3016.45
  • Yield: 4.00%
  • Expected annual income: $120.64

This was a tough one for me to pull the trigger on due to moral issues. I am not a big fan of profiting off of people’s addictions. But I’m not in this one for exposure to the tobacco industry, although that aspect alone should make this position highly profitable. I am actually in this for the long-term, waiting for the day that marijuana is legalized. If / when this happens Altria is well equipped to grab billions of dollars per year in market share from legalized marijuana (which I am all for due to its numerous, proven (and non-addictive) health benefits).

While I wait for the legalization of marijuana I am happy collecting 4% on my money. And with a 8.5% 5-year dividend growth rate my YoC could come close to 6% in the next 5 years.

That’s it for now. I think that is a good start to my dividend retirement portfolio. I purchased 5 quality dividend growth stocks from 5 different sectors. I currently have an overall portfolio yield of 3.26% and expect to generate at least $490 over the next year with these stock purchases. More funds will be available in the coming days as I sell of more of the mutual funds in my 401k. I will use the funds to further diversify the dividend retirement portfolio.

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2 Responses

  1. Mati says:

    Very good!

    How do you valuate REALTY INCOME ? is difficult to just say P/E < 20 isn't it ?

    • Dividend Empire Dividend Empire says:

      Hi Mati. I used the Gordon Growth Model to valuate this stock. At the time I calculated a fair value of about $55 using 10% as my required rate of return. This result, combined with O’s tremendous track record of dividend increases and solid portfolio of real estate holdings made it a buy for me.

      Take care,

      Ken

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