As I explained in my portfolio update 63, I'm now focused on paying down margin and thus won't be making changes to my portfolio for the foreseeable future. In fact, I've now realized the wisdom of Buffett's warning against using margin.

"My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage...Now the truth is - the first two he just added because they started with L - it's leverage... It is crazy in my view to borrow money on securities... It's insane to risk what you have and need for something you don't really need... You will not be way happier if you double your net worth." 

- Warren Buffett (emphasis added)

The worst December for stocks since 1931 (and that record might still be broken) has shown me that it's not enough to minimize the risk of being wiped out (via a margin call). The risk of a total loss of capital must be zero. After all, even if the odds of losing 100% of your money is 1/1000, eventually, you'll still get wiped out. Thus, even decades of painstaking saving and smart investing could be lost, which is indeed insane.

Because while I'm unlikely to face disaster this time (I'm still a portfolio decline of 44% away from a margin call and have a $30,000 emergency fund I can tap if need be), the core of my investing strategy stems from being able to "be greedy when others are fearful" and take advantage of the market becoming insanely stupid and provide quality companies at obscene discounts to fair value.

“You’re neither right nor wrong because other people (the market) agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.

- Warren Buffett (emphasis added)

With margin, you absolutely have to worry about other people. If our leaders (specifically President Trump or Fed Chairman Jerome Powell) mess up badly enough, the economy and stock market could be sent spiraling into a crash that could make even the smartest long-term strategy fail catastrophically.

Thus, my new plan is to pay off all the margin as quickly as possible ($9K per month in savings and net dividends) and then initiate a new capital allocation strategy. This should be accomplished by the end of Q1 2020.

  • Only buy deeply undervalued blue chips (off my watchlists) during a market decline.
  • Save up all weekly cash and wait for pullbacks/corrections/bear markets.
  • During a pullback (average one every six months since WWII), deploy 50% of cash in stages.
  • If the pullback becomes a correction, deploy 50% of remaining cash (in stages).
  • If the correction becomes a non-recessionary bear market (what we might be facing now), deploy the remaining 50%.

This approach ensures that I'll be able to avoid hoarding cash for years on end (because 5-9.9% pullbacks are frequent) but avoid situations like now when I'm forced to sit back and watch the best bargains in a decade (or ever in some cases) pass me by.

But while I may be suffering from my foolish and risky use of leverage, that doesn't mean I can't help others cash in on the golden opportunities now raining down all around us. This is why I've launched a new series, the "best dividend stocks you can buy today". This is my collection of watchlists for Grade A quality dividend growth blue chips that make fantastic buys right now. If you've wondered "where should I put my money today?" this list is it. The goal is to highlight stocks that can realistically deliver 13+% long-term total returns (over the next decade) via a combination of yield, long-term cash flow/dividend growth, and valuation returning to fair value. Every single stock on these watchlists is one I consider a sleep well at night, or SWAN, stock.

I use the same valuation-adjusted total return model that Brookfield Asset Management (BAM) uses, and they have a great track record of delivering 12-15% CAGR total returns (in fact, it's their official goal as a company, and they usually exceed that target).

There are four carefully curated lists designed to focus on:

  • Quality companies
  • Safe dividends (they are all low-risk stocks)
  • Strong long-term growth potential
  • The maximum margin of safety (dirt-cheap valuations)

And to show the power of long-term, deep value dividend growth investing (and live vicariously through this new portfolio while I pay off margin on my real money one), I'm also going to be tracking these recommendations going forward. That's in my Deep Value Dividend Growth Portfolio, or DVDGP. Note that when my margin paydown is complete in 2020, the approach I'm using in these articles will become my official policy for deploying all of my own real money.

This is currently a paper portfolio I'll be maintaining on Morningstar and Simply Safe Dividends to not just provide in-depth portfolio stats but also the total returns over time. The rules for the portfolio are:

  • Each month, I buy $500 worth (rounded up to the nearest whole share) of any existing portfolio positions that remain on the buy list (still insanely undervalued).
  • Each week, I buy $500 worth of any new stocks that make it onto the list (stocks rotate on and off).
  • Dividends are reinvested.
  • Stocks are only sold if the thesis breaks or a stock becomes 25% overvalued (then sell half) or 50% overvalued (sell all of it), and the capital is reinvested into new recommendations.

Again, this is purely a tracking (paper) portfolio. I'm not yet putting real money into it until the first pullback of 2020, once I've eliminated all risk from my actual portfolio (margin hits zero and cash starts piling up). The purpose of this series is to try to show the power of this approach, which I've adapted from Investment Quality Trends, who has been using it to sensational effect since 1966.

Also, note that I've eliminated all overlap between the three main watchlists. This allows for more stocks on the list to help investors see a great number of quality names to consider.

So, with that out of the way, here are the best-quality dividend growth stocks you can buy today.

The Best Dividend Growth Stocks You Can Buy Today

This group of dividend growth blue chips represents what I consider the best stocks you can buy today. They are presented in four categories, sorted by most undervalued (based on dividend yield theory using a 5-year average yield).

  • High yield (4+% yield)
  • Fast dividend growth
  • Dividend Aristocrats
  • My Bear Market Buy List

The goal is to allow readers to know what are the best low-risk dividend growth stocks to buy at any given time. You can think of these as my "highest-conviction" recommendations for conservative income investors. Note that these are not meant to represent a diversified or complete portfolio, but merely highlight the best opportunities for low-risk income investors available in the market today.

The valuations are determined by dividend yield theory, which Investment Quality Trends, or IQT, has proven works well for dividend stocks since 1966, generating market-crushing long-term returns with far less volatility.

That's because, for stable business income stocks, yields tend to mean-revert over time, meaning cycle around a relatively fixed value approximating fair value. If you buy a dividend stock when the yield is far above its historical average, then you'll likely outperform when its valuation returns to its normal level over time.

For the purposes of these valuation-adjusted total return potentials, I use the Gordon Dividend Growth Model, or GDGM (which is what Brookfield Asset Management uses). Since 1956, this has proven relatively accurate at modeling long-term total returns via the formula: Yield + Dividend growth. That's because, assuming no change in valuation, a stable business model (doesn't change much over time) and a constant payout ratio, dividend growth tracks cash flow growth.

The valuation adjustment assumes that a stock's yield will revert to its historical norm within 10 years (over that time period, stock prices are purely a function of fundamentals). Thus, these valuation total return models are based on the formula: Yield + Projected 10-year dividend growth (analyst consensus, confirmed by historical growth rate) + 10-year yield reversion return boost.

For example, if a stock with a historical average yield of 2% is trading at 3%, then the yield is 50% above its historical yield. This implies the stock is (3% current yield - 2% historical yield)/3% current yield = 33% undervalued. If the stock mean-reverts over 10 years, then this means the price will rise by 50% over 10 years just to correct the undervaluation.

That represents a 4.1% annual total return just from valuation mean regression. If the stock grows its cash flow (and dividend) at 10% over this time, then the total return one would expect from this stock would be 3% yield + 10% dividend (and FCF/share) growth + 4.1% valuation boost = 17.1%.

Top 5 High-Yield Blue Chips To Buy Today

Top 5 Fast-Growing Dividend Blue Chips To Buy Today

Top 5 Dividend Aristocrats To Buy Today

My Bear Market Buy List

These are the blue chips which I expect to generate 13+% total returns at their target yields. Note that all total return estimates are for a 10-year annualized basis. That's because total return models are most accurate over longer time frames (5+ years) when prices trade purely on fundamentals and not sentiment. This allows valuations to mean-revert and allows for relatively accurate (80% to 95%) modeling of returns.

The list itself is ranked by long-term CAGR total return potential from target yield. Bolded stocks are currently at my target yield and thus "Strong Buys."

CompanyCurrent YieldFair Value Yield/Share PriceTarget YieldHistorical Yield RangeLong-Term Expected EPS Growth (Analyst Consensus, Expected Dividend Growth)

Long-Term Valuation Adjusted Annualized Total Return Potential At Target Yield

BlackRock (BLK)3.4%2.5%3.0%1.2% to 3.5%13.7%19%
Energy Transfer LP(ET) (uses K1 form)10.0%6.4%9.0%2.2% to 18.3%7.0%19%
LeMaitre Vascular (LMAT)1.3%1.1%1.1%0.3% to 2.0%17.5%18%
Lazard (LAZ)5.1%2.8%4.0%0.8% to 4.8%10.1%18%
Texas Instruments (TXN)3.4%2.5%2.9%0.9% to 3.5%12.6%17%
NextEra Energy Partners (NEP)4.2%3.9%3.9%0.4% to 5.4%13.5%17%
Brookfield Renewable Partners (BEP) (uses K1)7.8%5.7%7.5%3.8% to 8.4%6.5%17%
Enterprise Products Partners (EPD) (uses K1)7.1%5.9%7.0%3.4% to 11.7%6.0%16%
Illinois Tool Works (ITW)3.2%2.2%3.0%1.6% to 4.5%10.0%16%
A.O. Smith (AOS)2.1%1.1%1.5%0.8% to 3.4%11.5%16%
Broadcom (AVGO)4.3%3.0%3.0%0.2% to 4.6%12.8%16%
Apple(AAPL)1.9%1.7%1.7%0.4% to 2.8%13.1%15%
Microsoft (MSFT)1.9%2.6%2.6%1.1% to 3.1%12.7%15%
3M (MMM)3.0%2.5%3.0%1.8% to 4.8%9.5%15%
Realty Income (O)4.2%4.6%5.5%3.3% to 11.2%5.9%13%

This week, I added NEP and ET to the BMBL. Note that the following stocks are at or above my target yield.

  • BLK
  • ET
  • LMAT
  • LAZ
  • TXN
  • NEP
  • BEP
  • EPD
  • ITW
  • AOS
  • AVGO
  • AAPL
  • MMM

That makes it a great time to either add them to your portfolio or add to an existing position.

New Buys/Sells This Week

$500 initial positions were purchased in each of these stocks:

  • Brookfield Renewable Partners
  • 3M
  • Leggett & Platt
  • Walgreens Boots Alliance
  • Enterprise Products Partners
  • Magellan Midstream Partners
  • Energy Transfer LP

In addition, because Brookfield Property Partners (BPY) and Brookfield Property REIT are economically identical, I swapped BPY for BPR. That avoids a K1 tax form which many investors dislike for the added tax complexity. Now I'm not avoiding K1s entirely in this portfolio (though you are free to), but since there is no benefit to owning BPY instead of BPR (other than some deferred taxes on the payout), I'll be using BPR as a proxy for BPY.

The Deep Value Dividend Growth Portfolio

Sector Concentration

Eventually, this portfolio is going to be diversified into every sector. However, since the goal is to buy the best bargains at any given time, it will take a while for new names to rotate off each week's list and into the portfolio. I'm imposing a firm 25% sector cap for diversification purposes. No matter how undervalued a sector, it's not wise to go above 25% (your personal sector cap may vary and could be lower).

Income Concentration

The portfolio's income is likely to be highly concentrated into the highest-yielding names, at least until it becomes more diversified over time.

Annual Dividends

Note that the 10-year dividend growth figures are artificially low because my tracking software doesn't average in anything that hasn't existed for those time periods. Some of these stocks have IPO-ed in the last five years, and so, the 1-year and 5-year growth rates are the most accurate. These figures are purely organic growth rates and assume no dividend reinvestment. The dividend declines during the Financial Crisis were due to REITs (Kimco) which cut their dividend (as 78 REITs did during the Great Recession). Fortunately, since then, the sector has deleveraged and enjoys the strongest sector balance sheet in history.

This means that during the next recession, most REITs will not cut their payouts, especially Kimco, which has a BBB+ credit rating and will be getting an upgrade to A- in 2019 or 2020.

There is no official dividend growth target, though I'd unofficially like to keep the long-term rate at 10+% or higher.

Fundamental Portfolio Stats

The quality of these stocks can be seen in the far-above-average returns on assets and equity of this portfolio. What's more, it's also far more undervalued, offers a much higher yield, and has projected long-term EPS (and thus, dividend growth) that's far superior to the broader market. As an added benefit, the average market cap is smaller, providing yet another alpha factor (smaller stocks tend to outperform). Note that the overall focus is on blue chips, which means that the average market cap is likely to rise over time (but remain far below the market's $100 billion average).

Portfolio Performance

  • CAGR Total Return Since Inception (December 12th, 2018): -6.1%
  • CAGR Total Return S&P 500: -7.0%
  • Long-Term Expected Total Return (assuming no valuation changes): 14.0%

Worst Performer

Cost Basis
% Loss

Best Performer

Cost Basis
% Gain

While the portfolio is still too young for any performance stats to be significant, I'm still proud of the first week's results. During the worst week for stocks in 10 years, and with energy (15% of the portfolio) and FedEx (4%) getting absolutely slaughtered, we still managed to outperform the market by 13%.

Meanwhile, new addition NEP managed to pull off a nice win for us despite being owned for just two days. Each week, I'll add one more stock to the worst/best performer list until each one shows the top 10.

Bottom Line: When It's Raining Gold, Reach For A Bucket Not A Thimble

I'll admit that I made a huge mistake with my use of margin with my real money portfolio. As a result, I am now forced to spend the next 15 months paying down that entirely and thus miss out on all the amazing opportunities I'm seeing currently (the best deals of the last decade).

However, life is not about avoiding mistakes but learning from them and constantly improving your long-term investing strategy. Thus, I'll continue to provide weekly "best dividend stocks to buy this week" articles that will be tracking my Deep Value Dividend Growth portfolio.

These are my strongest recommendations for new investors at any given time and what I will be using with my real money once my margin is gone (Q1 2020). In the meantime, I hope to help anyone with investable cash to benefit from the amazing opportunities we're seeing now.

The current market panic-selling means that even the best-quality dividend growth stocks are trading at fire-sale prices, which means that you can lock in not just safe and generous yield on cost but also long-term total returns that will allow you to achieve financial independence and your financial dreams.

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