In my public Dividend Growth Portfolio (DGP), I reinvest dividends when they accumulate in cash to $1000 or more.
That happened early in November. So I went shopping. I love to shop for stocks with a pocketful of dividends to reinvest.
On November 9, I purchased two shares of Lockheed Martin (LMT). But those two shares cost more than $700, and I did not have quite enough money to buy a third share.
After a few more dividends rolled into my account, on November 17 I was able to buy the third share. The only reason that I split the purchase into two buys was the price of the stock. Two shares cost far less than the $1000 that I wanted to spend, so I needed to wait to buy the third share. (E-Trade does not offer fractional-share purchases.)
Here’s the order summary for the two purchases:
The total amount spent was $1114. The price went up between the two purchases, but there’s nothing I could do about that. E-Trade figures my blended price for the three shares is $371.49 per share.
Purchase Decision
Lockheed Martin is my Dividend Growth Stock of the Month for November, so I did not need to research it again for this purchase. LMT is a very high-quality company that, for reasons I do not understand, is selling at a sale price. That presents a great situation for an opportunist like me.
Lockheed Martin scores nearly perfectly on my Quality Snapshot system. On a 25-point system (5 points for each category), LMT scores 24 points. It is an elite company when it comes to quality ratings.
Plus, Lockheed Martin is undervalued, which I will illustrate with three visual aids.
The first, from FASTGraphs, shows that LMT’s price is just slightly above their basic “default” valuation (orange line), and it is below their adjusted valuation based upon LMT’s actual 5-year market pricing (blue line).
The next graphic, from Morningstar, shows that they too think LMT is undervalued.
Finally, Simply Safe Dividends reports that LMT’s current dividend yield (2.8%) is 8% higher than its 5-year average. This “yield metric” suggests that LMT is undervalued too.
So the decision to start a new position in Lockheed Martin was easy: It’s an elite-level company selling at a discounted price. If today were a Friday, I’d call this a Black Friday purchase.
Wait, there’s more! Again courtesy of Simply Safe Dividends, I got in under the wire for LMT’s next dividend.
I will qualify for LMT’s fourth-quarter dividend payment, because I purchased all my shares before the ex-dividend date. And the payment itself will come my way on Christmas Eve. What a country! Ho-ho-ho!
Impact on My Portfolio
These graphics from Simply Safe Dividends show my portfolio’s annual rate of dividend income before and after the addition of the 3 new shares of Lockheed Martin.
As you can see, the portfolio’s income increased by $31 per year, or about 0.6%. The number of positions in the portfolio rises to 27. The proportion of LMT in the portfolio is small, only about ¾ of a percent. Over time, I hope to increase it.
Whenever I reinvest dividends, I point out that, although the size of the additional dividend flow sounds small, repeated dividend reinvestments help a dividend growth portfolio to expand organically. The process is called compounding, and its impact is powerful.
Since the portfolio began in 2008, I have reinvested more than $36,000, and every transaction looked small, just the way this one does. Dividend growth investing can appear slow, but it turbocharges the portfolio’s cashflow growth:
- From 2009 to 2019, the dividend flow from the portfolio grew at a CAGR (compound annual growth rate) of 10.6% per year. That is way more than inflation, and if you owned bonds instead, their annual income growth rate would be zero.
- The portfolio is now paying me 10.4% per year of the original amount I invested to start the portfolio.
- I estimate that I will receive about 13% more income in 2020 than I got in 2019. Actually, most of the money has already been collected, so it’s a lock.
Closing Thoughts
This addition of Lockheed Martin continues the heightened emphasis on company quality that I have been pursuing for several years. LMT’s quality is stellar.
This purchase is also an example of opportunistically finding excellent companies when the market has undervalued them for some reason. That’s generally how I invest. I don’t focus on a few companies that I “gotta have” and then pay any price to get them.
Rather, I keep surveying the landscape for companies that I want to own, and try to pick them up when their prices are discounted. That happens more often than some investors understand. I don’t care what order I buy things in; I just need them to meet my requirements when I buy them.
Finally, buying LMT continues a move into defense stocks that I have been executing over the past year. I did not have a 2020 strategy to emphasize that particular industry, I just got there by looking for great quality and good valuations.
In the past 12 months, I have added 14 shares of General Dynamics (GD) and three shares of Lockheed Martin. I guess that makes my portfolio well-fortified.
Other Reading on LMT
In addition to my article on LMT as the Dividend Growth Stock of the Month for November, check out these other articles:
Mike Nadel: Mike has placed LMT in the Income Builder Portfolio that he runs for Daily Trade Alert. Here’s his most recent article, from July, on purchasing the stock: We Just Bought Lockheed Martin (LMT) for DTA’s Income Builder Portfolio.
Jason Fieber: Jason chose LMT as his Undervalued Dividend Growth Stock of the Week in October.
Shah Gilani: Shah called out LMT as a “stock to buy now” in August.
Coming in Three Weeks! My New E-Book on Dividend Growth Investing
On December 10, I will publish Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing.
This will be my 8th e-book on dividend growth investing, and my first since 2014. The book contains a ton of new material, plus a brand-new collection of 30 great well-analyzed dividend growth stocks. And don’t forget the complete how-to-do-it manual, which could be a book by itself.
Click here to get on an email list for free updates about the book’s progress, behind-the-scenes information about the writing process, and links to my most recent articles about dividend growth investing.
A special “launch” email will go to everyone on the list the minute the book is available on December 10.
If you sign up, as a thank-you I will send you a free pamphlet about compounding. You incur no obligation from signing up. The pamphlet is yours to keep with my compliments.
— Dave Van Knapp
This article first appeared on Dividends & Income
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