In the past couple of months, I have written about two high quality healthcare companies, Amgen (AMGN) and Medtronic (MDT), as Dividend Growth Stocks of the Month.
In my Dividend Growth Portfolio (DGP), I collect dividends in cash and reinvest them when the kitty reaches $1000. That happened last week, and so on Friday, February 23, I decided to start a new position in Amgen.
The Purchase
This order summary from E-Trade shows the purchase towards the end of the day on February 23. (I could have gotten a better price earlier in the day, but we went to a movie. I highly recommend “Molly’s Game.”)
The total cost of the purchase was $938 including commission.
The cash in the portfolio dropped back to $66 after the transaction. I will accumulate incoming dividends back up to the $1000 trigger for my next reinvestment, which should occur in May.
Why I Chose Amgen
Amgen was my Dividend Growth Stock of the Month for January. It rated highly on almost all points. The company is generally considered to be one of the highest quality dividend growth stocks available. The article details the reasons, which can be summarized like this:
• Excellent dividend resume: Decent yield at 2.8%; strong dividend growth rate; 15% increase this year; and strong dividend safety, protected by very good cash flow. The only weak spot is the short streak of increasing dividends (7 years).
• Stock is slightly undervalued.
• High quality company with wide moat and strong credit rating.
• Good pipeline of drugs in development, including biosimilars.
• In midst of cost-cutting program as well as programs to improve manufacturing efficiency and buy back shares.
• Good financials, including high return on equity, strong cash flows, and moderate debt.
It is no coincidence that two other Daily Trade Alert authors recently featured Amgen.
• Jason Fieber selected Amgen as his Undervalued Dividend Growth Stock of the Week in December.
• Mike Nadel selected Amgen as the first stock in January for the Income Builder Portfolio that he is creating for Daily Trade Alert.
The three of us do not collaborate on our picks, but we all arrived at the same conclusion at roughly the same time: Amgen is a good stock with a promising future.
I got my shares at about $3 less than when I wrote the article in January, so its valuation is a little better now than it was then. At the price I paid, I got it at 2.8% yield.
Impact on the Portfolio of Adding Amgen
The following images are from Simply Safe Dividends’ Portfolio Analyzer, which I use to keep track of several metrics pertaining to the portfolio.
Here was the Analyzer’s dashboard before the purchase. Note the annual portfolio income of $3899 in the yellow box.
And here it is after I added the 5 new shares of Amgen:
The addition of Amgen kicks the portfolio’s annual income up by $27 to $3926.
Amgen is paying $1.32 per share per quarter, or $5.28 per share per year. Multiply by the 5 shares I bought, and you get $26.40 more in dividends per year flowing into the portfolio (the slight dollar difference from the dashboard is a result of rounding).
$26-27 more per year sounds small, but it’s almost a 0.7% increase in annual income. Mighty oaks from little acorns grow, and this is a long-term purchase for a long-term goal.
Other boxes in the Analyzer dashboard indicate that:
• The current yield of the DGP will stay the same at about 3.7%. Actually the purchase kicked it up a little, but the value of the portfolio rose during the time between the two screenshots, nullifying the visibility of the gain in terms of current yield.
• Dividend safety of the whole portfolio will stay the same at 78 out of 100 points, indicating a safe dividend stream.
• The beta (price variability) of the portfolio stays the same at 0.68, or 32% less variable than the market as a whole.
Yield on cost (YOC) is not shown on the dashboard, because I have not input the purchase prices for all my holdings. YOC is the yield calculated on the original cost of the portfolio when it was begun in 2008. That cost was $46,783. So the portfolio’s new YOC is $3926 / $46,783 = 8.4%. That’s a new record high for the portfolio.
Here is the tale of the tape for this purchase:
Furthering the Goals of the Portfolio
The purchase of Amgen advances the objectives of my Dividend Growth Portfolio. The main goal is to generate an increasing stream of income from high-quality companies.
Increases in the income stream come from two sources: (1) Companies increase their dividends; and (2) I reinvest the dividends to buy more shares, which then generate their own dividends.
This purchase is an example of the second source: The $26.40 per year is new money flowing into the portfolio that wasn’t there before the purchase.
Reinvesting dividends creates a self-reinforcing cycle, and the portfolio is sort of like a cash-generating machine. The machine doesn’t produce Fritos or plastic bags. It produces money.
[Please note that I did not have to add money to the portfolio to buy Amgen. The money needed for the purchase came from the dividends of other companies that I have been collecting since my last purchase.
That is the very definition of compounding: Making money on money already made. (See Dividend Growth Investing, Lesson 4: The Power of Compounding.)
• The money already made was the $1000 accumulated in dividends since the last reinvestment.
• The new money made is the increase in the dividend stream, not to mention capital gains that may also come from owning these shares.
As shown earlier, this purchase of 5 Amgen shares increases the portfolio’s annual dividend stream by about 0.7%. If you do something like that 4 times per year, you’re getting an annual income increase of almost 3% without adding new money to the portfolio.
The money for the purchases is generated organically by the portfolio itself. The annual income increase from dividend reinvestment is on top of increases declared by the companies.
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 Amgen or its suitability for any particular portfolio. My goal in this article is to explain what I did and why I did it.
— Dave Van Knapp
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