We Just Put $1,000 Into General Dynamics (GD) For The Income Builder Portfolio

When you call your project the Income Builder Portfolio, and you are building income even better than you had hoped, it’s something to celebrate.

Why the hullabaloo?

Well, in the IBP Business Plan, we detailed our goal:

Build a reliable, growing income stream by making regular investments in high-quality, dividend-paying companies. The secondary goal is to build a portfolio that will experience good total return, much of which will occur organically because of the excellent companies owned.

We also laid out our “Income Target”:

Build a portfolio that will produce at least $5,000 in annual dividends within 7 years of the IBP’s inception.

That was followed by a table showing how the portfolio’s income stream would grow if Daily Trade Alert continued to provide $2,000 per month for investing, if we reinvested all dividends, and if the IBP averaged both 5% annual dividend growth and a 2.5% yield.

Using those assumptions, we expected to reach $5,000 in projected forward income near the end of Year 7 (yellow highlight); along the way, we expected to hit the $1,938 mark by the end of this year (blue).

On Tuesday, April 7, I executed a purchase order on DTA’s behalf for 7 shares of General Dynamics (GD) stock.

Once I plugged that purchase into our handy-dandy IBP spreadsheet, our projected annual income rose to $1,941 — meaning we surpassed our Year 3 expectation more than 8 months ahead of schedule.

Woo-hoo!

The table above, and everything else related to the portfolio, can be viewed on the IBP homepage.

GD = Great Dividends

I had a lot of reasons to select General Dynamics as our 31st position, and I discussed them in my previous article.

Way up there was the reliable, growing dividend that just increased for the 29th consecutive year and now stands at $1.10 per quarter.

With our purchase having directly preceded GD’s ex-dividend date (April 8), the IBP will receive $7.70 on May 8.

That will be reinvested right back into the company’s stock, as per portfolio rules, adding about .06 of a share.

Then, three months later, our slightly higher share total will generate $7.77 in income, which will buy still more GD.

Lather, rinse, repeat, with General Dynamics and all of our positions, and that’s why we’ll have many more income-building milestones to celebrate over the years.

Coronavirus Considerations

With the COVID-19 pandemic devastating the global economy, some corporations already have reduced or eliminated their dividends, and many more undoubtedly will follow.

I am reasonably confident that the companies I have selected for the IBP will be able to avoid such unkind cuts — and that includes our latest addition.

General Dynamics gets a near-perfect “dividend safety” score of 97 from Simply Safe Dividends, which cites GD’s sensible payout ratio, the company’s acceptable debt level, and its long history of increasing its payout even through recessions and other calamities.

The following “Financial Sonar” put out by Jefferson Research illustrates that GD has all of its financial ducks in order.

Analyze This!

In general, market-watchers are high on General Dynamics, as indicated by the 10 analysts Fidelity uses to compile its “Equity Summary Score.”

Thomson Reuters surveyed 18 analysts who cover GD, and a dozen of them rate the stock as either a “Strong Buy” or “Buy.”

One analyst extremely bullish on GD is CFRA’s Colin Scarola, who has set a $211 target price. Should General Dynamics hit his mark within the next 12 months, it would be a 55% gain from the price we paid for our stake.

Scarola’s quick take:

We expect attractive long-term EPS growth due to GD’s strong brands, high barriers to entry, and a healthy environment for U.S. DoD spending. We also see an attractive entry point after the coronavirus sell-off sent GD shares down 32% in a month, even though we expected limited impact to earnings. GD’s government contracts (64% of earnings) should see no impact from the virus, and we think its private jet business (36%) could see higher demand as more executives turn to private flying out of fear and restrictions on commercial.

Value Line also expects significant price appreciation: up to 50% within the next 18 months (yellow highlight below), and more than 100% over the next 3-5 years (red circle).

Valuation Station

Morningstar Investment Research Center, which likes both General Dynamics and the entire defense industry, believes that GD shares are significantly undervalued.

General Dynamics’ current 3.3% yield is well above its 5-year standard of 2.0%, indicating that the stock could be quite undervalued.

FAST Graphs shows that GD, with a “blended P/E ratio” of about 11, is trading at a far lower multiple than its normal 14.

Wrapping Things Up

Hitting an IBP milestone is exciting for me, and I especially like that we did not get here by “reaching for yield” — in other words, we didn’t prioritizing dividends over quality.

I was guilty of reaching for yield early in my Dividend Growth Investing days, and it’s a mistake I still see some DGI practitioners make all too often.

The Income Builder Portfolio’s overall yield is about 3.5%, and it only has gotten up there due to some “accidental high yielders” — stocks whose prices have been beaten down during the market’s 23% decline these last two months.

So this was a doubly happy situation in IBP Land: In General Dynamics, we acquired shares of a high-quality company at a fair price; and we reached another rung on the ladder toward our long-term target.

— Mike Nadel

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