In my Dividend Growth Portfolio (DGP), I reinvest dividends when they reach $1000 in cash. Then I select a stock to purchase. At the portfolio’s current rate of dividend inflows, that happens four times per year.

I eat my own cooking. I almost always buy a stock that I have rated highly in either my Dividend Growth Stock of the Month or Valuation Zone articles. I also check out the smaller positions already in my portfolio for possible beefing up.

My reinvestment selection this time fits two of those categories.

It was my Dividend Growth Stock of the Month for June, and I started a position in the DGP in August.

The stock is 3M (MMM), and I more than doubled my stake in the company with this month’s purchase.

In order for a stock to be selected for the DGP, it must be a high-quality company, selling at a fair price or discount.

It must yield “enough” to fill the role I want it to have in the overall portfolio.

Its dividend must be safe. It must have a strong dividend record, because I expect to hold it for a long time.

3M fits all of those requirements.

3M’s Qualifications

Quality:

Here is 3M’s Quality Snapshot. I derive this from the following sources, which I have come to trust and respect over the years:

• Safety and Financial Strength grades from Value Line
• S&P’s Credit rating
• Morningstar’s Moat rating, and
• Simply Safe Dividends’ Dividend Safety grade.

On a 5-point scale for each category, 3M garners 24 out of a possible 25 points. It’s an extremely high-quality company.

Valuation:

As I said when I purchased 3M in August, it is a company I had been watching for years, but it always seemed overvalued.

Then the trade wars involving China seemed to pull many multi-national manufacturing companies down in price, and there sat 3M undervalued. So I bought it.

In the three months since that purchase, 3M’s price has gone down a little more, so it is a better value now than it was then.

Yield:

3M is yielding 3.5%. That’s a little more than my portfolio itself, so its yield is “enough” for me.

The concept of “enough” yield is personal to each investor. I aim to have a portfolio that yields 3.5% to 4% most of the time. The portfolio’s current yield goes up and down as prices change, and as companies announce dividend increases.

This purchase will keep the DGP’s overall yield right about where it was prior to the purchase.

Dividend Safety:

On Simply Safe Dividends’ scoring system, 3M gets 75 out of a possible 100 points. In other words, its dividend is safe and unlikely to be cut.

Dividend Record:

3M has a very strong dividend record.

Making the Purchase

After I determined that I would buy more 3M, executing the decision was easy.

The cash was already in my account. It’s been flowing in since I purchased 3M in August. All I needed to do was enter a purchase order online.

This order summary from E-Trade shows the purchase on October 16, 2019. I got 6 shares of 3M at $162.99 per share.

The total cost of the purchase was $998. E-Trade has joined the parade of brokers charging zero for stock trades, so there was no commission added.

Portfolio Analytics

I use Simply Safe Dividends’ Portfolio Analyzer to track basic statistics for the DGP. Among other things, this allows me to see the increase in portfolio income from this purchase.

The addition of the 6 shares of 3M brings my position up to 11 shares, and it increases the portfolio’s annual income by $35 to $4470.

Here’s the math behind that: 3M is paying $1.44 per share per quarter. That’s $5.76 per share per year. Multiply by the 6 new shares that I added, and the total additional income rounds to $35 per year.

You might say that this sounds small. But I have now made four dividend reinvestments in 2019. Altogether, they have added $148/year to the DGP’s income stream.

Compared to the beginning of the year, the four reinvestments have increased my income run-rate by 3.7%. That far exceeds the rate of inflation, and it doesn’t even include the additional growth that has come from dividend increases by every company in the portfolio. It is solely the result of reinvesting the dividends.

Another way of looking at portfolio income is yield on cost (YOC). It’s easy to calculate.

Formula for Yield on Cost
Projected 12-months dividends / Original cost of portfolio
$4470 / $46,783 = 9.6%

The DGP’s 9.6% YOC is a new record high. What it means is that this portfolio is now sending me 9.6% of its original cost per year in cash dividends.

Here is a complete summary of the purchase.

Note how the addition of these 6 shares of 3M contributes to the objectives of the portfolio. My main goal is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement. (See the DGP’s Business Plan for more detail.)

• The $35 per year in additional income is new cash flowing into the portfolio that wasn’t there before the purchase.
• The cash was generating nothing.
• Now that the cash has been converted to stock, it becomes a productive asset that pays me money.

Note that the money for this purchase came from within the portfolio itself… mostly from the dividends of other companies.

I did not need to add new outside money to the portfolio to add these shares. I have never added new outside money to the portfolio since I started it in 2008. All of its growth has been organic, coming from the portfolio itself + dividend reinvestments.

3M Is a Popular Dividend Growth Stock

3M is a holding in both Mike Nadel’s Income Builder Portfolio and Jason Fieber’s FIRE Fund.

Important Reminder

As always, do not take what I do as a recommendation for yourself. Always conduct your own due diligence before buying anything. Specifically, nothing in this article should be taken as a recommendation about 3M or its suitability for any particular portfolio. My goal is to explain what I did, why I did it, and how it advances my investment objectives.

— Dave Van Knapp

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