Creating A Mailbox Money Portfolio

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After years of being an active Seeking Alpha reader and recognizing the positive impact certain authors have had on my investing style and success, it’s my intent now to publish a series of articles that I hope will help other readers with their investing journey. Together we will build a diversified dividend growth portfolio that can serve as the foundation for our financial independence. For illustrative purposes, I will tell the story of Joe Lunchbox. Joe is a hard-working 25 year old who is just starting his investing journey. While Joe derives satisfaction from his job, he recognizes that, even at his young age, his work is physically taxing and likely not something he can depend on forever. Thus, after much research, Joe has decided to invest money into a dividend growth portfolio that he hopes in time will produce enough income to replace his current salary if need be.

What Success Looks Like to Joe

Before starting to invest, Joe took time to identify and then document his investment goals and objectives. Taking to heart the old adage that if he didn’t know where he was going he would never know when he got there, Joe set his sights on creating a diversified portfolio that produces $60K per year in passive income. Joe is starting the portfolio with $5K and is committed to investing an additional $1,000 per month. Based on his belief that he can create a portfolio that comfortably yields 3.5%, with an average dividend growth rate of 7% and average annual returns of 6%, Joe believes that he can attain his goal by the age of 52.5.

The Mailbox Money Investment Process

The Mailbox Money Portfolio (MMP) utilizes a fairly simple scoring system based on widely available data to identify quality companies trading at attractive values. To start, the MMP looks to identify companies that have grown their dividends for at least nine consecutive years and that yield at least 2%. There are several places an investor can find this information, but my go-to resource is the Dividend Champions spreadsheet maintained by Portfolio Insight.

As most readers likely know, Dividend Champions are companies that have increased their dividend every year for the past 25 years. Contenders have increased their dividend for at least 10 years, and Challengers have increased their dividend for at least five years. The downloadable report maintained by Portfolio Insight contains Champions, Contenders, and Challengers. This initial screen limits the number of companies we need to analyze and also provides a layer of quality control to the process as well.

For stocks that pass the initial screen, we then apply a fairly straightforward scoring system, utilizing data to assess both the quality of the company as well as whether or not the stock’s current price represents a fair value.

Quality Indicators

Morningstar’s Moat Ratings: Morningstar has developed moat ratings to indicate companies that, in their view, have a durable competitive advantage. Companies receiving a wide or narrow moat rating from Morningstar represent quality, durable business models in their view. In the MMP’s scoring system we assign zero points for companies with no Morningstar moat rating, three points for companies with a narrow Morningstar moat rating, and five points for companies with a wide Morningstar moat rating.

Simply Safe Dividends: Created by Brian Bollinger in 2015, Simply Safe Dividends has quickly become a key resource for many DIYers. Bollinger’s system for assessing and calculating the strength of a company’s dividend has, per the Simply Safe Dividends website, avoided 98% of dividend cuts since its inception. In the MMP scoring system, we assign zero points for dividends that according to the Simply Safe Dividends site are speculative, one point for those deemed borderline safe; three points for those deemed safe, and five points for those deemed very safe.

Value Indicators

With the quality reviews completed, we now begin to evaluate the relative value of each company based on its current stock price. As Warren Buffett once famously said, “Price is what you pay. Value is what you get.”

To do this, we again consult Morningstar analysis, this time using

Morningstar’s Star Ratings, which is their method to identify stocks trading at what they believe to be a discount or premium to their intrinsic worth. Per Morningstar, five-star stocks sell for the biggest risk-adjusted discount while one-star stocks trade at premiums to their intrinsic worth. For the MMP scoring system, we assign a point value to each company equal to the number of stars assigned by Morningstar.

Next we look to a company’s Chowder Number, made famous by fellow Seeking Alpha contributor Chowder. The Chowder Number is a rule-based system used to identify dividend growth stocks with strong total return potential. For the Mailbox Money Portfolio, we will assign zero points for a Chowder Number of nine or less, three points for those with a Chowder Number of between 10 and 19, and five points for those with a Chowder Number of 20 or greater.

Last, but certainly not least, we will look to FAST Graphs created by Chuck Carnevale (aka, Mr. Valuation) to identify companies trading at favorable valuations. For this test, our MMP scoring system simply awards five points for those companies that appear to be trading at favorable valuations and zero points for those that are not. That puts what we believe is more emphasis on valuation.

And that’s it: a definable, repeatable process for identifying quality dividend growers trading at reasonable valuations. Using this approach we have identified three inaugural additions to the MMP.

Celanese Corporation (CE) is a technology and specialty materials company that manufactures and sells high-performance engineered polymers in the U.S. and internationally. The company operates in three segments: engineered materials, acetate tow, and acetyl chain. As a member of the industrial sector, Celanese scores very well on our MMP scoring system. I view CE as buy under $120.

• Years of Dividend Growth: 14
• Chowder Number: 13
• Morningstar Moat: Narrow
• Morningstar Valuation Score: 5 Stars

NetApp, Inc. (NTAP) provides cloud-led and data-centric services to manage and share data on premises, as well as private and public clouds worldwide. It operates in two segments: hybrid cloud and public cloud. As a member of the information technology sector, NTAP scored very well on our MMP scoring system. I view NTAP as a buy under $70.

• Years of Dividend Growth: 10
• Chowder Number: 24
• Morningstar Moat: Wide
• Morningstar Valuation Score: 4 Stars

Altria Group, Inc. (MO) manufactures and sells smokeable and oral tobacco products in the U.S. The company provides cigarettes primarily under the Marlboro brand, cigars and pipe tobacco principally under the Black & Mild brand, and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands. As a member of the consumer staples sector, Altria scored very well on our MMP scoring system. I view Altria as a buy under $50.

• Years of Dividend Growth: 13
• Chowder Number: 16
• Morningstar Moat: Wide
• Morningstar Valuation Score: 4 Stars

In conclusion, I believe Celanese, Altria, and NetApp are three solid introductory additions to the MMP and will get Joe off and running toward his goal of financial independence. Collectively, these three investments yield more than 4% and are projected to throw off $223 of annual income, which has grown at a 10.5% clip over the past five years. Going forward, we will continue to update Joe’s progress.