Happy New Year!
Hard to believe we’ve come to the end of another year, and even more remarkably, another decade. Doesn’t seem that long ago that I was a college student looking forward to “Y2K,” and now suddenly I’m in my 40s, married with three kids, and writing quarterly updates on a portfolio that just turned seven years old itself.
I couldn’t be happier with how it all has turned out, as I feel blessed to have the faith, family, and home that I enjoy today. But looking back is a good reminder of how quick time goes by, and how important it is to keep saving for a retirement that will be here before I know it.
This portfolio started in late 2012 with around $25,000 when I sold the mutual funds in the Simple IRA that I had with my employer and used the proceeds to buy a group of fifty dividend growth stocks. The portfolio has seen plenty of changes over the years as I’ve learned more and grown as an investor, not only in composition, but also how it is managed.
In 2017, the company I worked for was acquired by a larger engineering firm and I was moved onto their new 401k program, meaning the end of cash contributions to this account. However, while this account is no longer receiving cash contributions, it still remains a significant part of my future retirement goals.
If you’d like to read up on the history of the portfolio, you can find links to all previous quarterly updates on my blog. There you will also find an embedded spreadsheet with the current portfolio holdings.
With this being a dividend growth portfolio, its main goal is to produce a growing stream of dividend income. This is accomplished by buying companies that grow dividends over time, or by harvesting capital gains and investing them into higher-yielding companies.
As my investing approach has evolved, I’ve established guidelines that help me stay focused on meeting that goal of consistent and reliably increasing dividend income.
- Buy companies that consistently show positive growth in earnings and translate those earnings into increasing dividend payouts to shareholders.
- Focus on companies that are investment grade, with S&P credit ratings of BBB or higher.
- Maintain a diversified portfolio spread across multiple industries.
- Reinvest all dividends back into the companies that pay them.
- Consider for sale any company that cuts or freezes its dividend.
As mentioned, the purpose of this portfolio is to produce a passive income stream that will fund a portion of my future retirement. Being forty-one years old, I now have roughly twenty-five years before I’ll reach that milestone.
Before I switched to dividend growth investing, the question was: How big of a nest egg do I need for retirement? Now my focus has instead shifted to: How much income will I need at retirement?
Changing the perspective from portfolio size to portfolio income has been helpful because it gives me an easier way to benchmark my goals. Rather than focusing on the daily swings in portfolio value, I can instead concentrate on the steadily increasing dividend income that it provides. Not only is income easier to plan for, but it is also less volatile, which helps make market volatility much easier to stomach.
I switched to dividend growth investing back in 2013, but it was in the end of 2017 that I also established a goal of 10% annual income growth for the portfolio. I finished that year with $2,005 in dividend income, and calculated that with a 10% annual income growth rate; this portfolio could produce over $26,000 in dividend income in 2044, the year in which I turn sixty-six years old.
With 2019 now complete, I’m able to fill in the actual income column to show $2,531 for the year. This is $111 above my targeted goal, and a 10.1% increase over 2018’s income of $2,299. This income growth came from organic dividend growth and reinvestment of dividends, as there are no longer any cash contributions being made into this account.
This still seems like small potatoes in the grand scheme of things, but I can see the snowball rolling and getting bigger. In two years, my dividend income has already increased by over 25%, and I finished 4.6% ahead of my targeted number for the year.
2019 was an incredible year for the market, as all major indices saw gains of more than 22%. The returns were especially good during Q1 and Q4, as most of the gains came during those two quarters.
For those worried about this rally being unsustainable, I’ll point out that the gains came on the heels of a big correction in Q4 of 2018. Frame of reference is an important factor when looking at history, and if you look at five quarters worth of data rather than just the last four, the market returns aren’t nearly as remarkable.
I hear all the time about people being scared to invest because they are worried about a market top.
“The market was up 25% last year, we must be due for a down year” was a comment from a younger co-worker, afraid to buy stocks in his IRA because he’s certain we are due for a big crash.
I wonder if he’d have the same concerns if the second chart was the one shown on the daily news rather than the headlines of a hot market and new all-time highs.
Don’t get me wrong, I agree there are plenty of stocks that are overvalued, and the market as a whole is now on the upper range of historical valuation levels. However, there are still plenty of fairly priced stocks out there, and I think it would be a big mistake for younger investors to sit on the sidelines waiting for a correction that may not materialize any time soon.
Anyways, side rant over, let’s get back to the portfolio.
It too hit new highs in 2019, as it increased in value from $69,009 to $88,846, a gain of 28.75%.
Dividend income dipped during Q4, which it typically does every year. This is due to the timing of Digital Realty Trust’s fourth-quarter dividend payment, which is paid in January rather than December. Cracker Barrel (NASDAQ:CBRL) also pays a special dividend in Q3, which is not repeated in Q4.
These factors led to some bumpiness in the income chart, but what matters is the long-term trend, which is steadily increasing annual income.
Dividend Income Progress
The goal of this portfolio is ten percent annual income growth, and that goal was met again in 2019 as the final payment from Broadcom Inc. (NASDAQ:AVGO) pushed my income growth to 10.1% for the year.
As you can see, earnings for the S&P only increased by 5% in 2019, and are expected to grow by just 1% in 2020. Considering the fact that dividends are paid out of the cash flows that come from earnings, it makes sense that companies were conservative with dividend increases in the past year.
That wasn’t entirely the case during Q4 though, as there were some healthy dividend increases announced during the quarter:
|Announce Date||Company||Ticker||Previous Payout Rate||New Payout Rate||Sequential Increase||Year Ago Payout Rate||YoY Increase||Dividend Yield||Link|
|10/10/2019||Thor Industries, Inc.||(THO)||$0.3900||$0.4000||2.56%||$0.3900||2.56%||1.97%||LINK|
|10/14/2019||Omega Healthcare Investors Inc||(OHI)||$0.6600||$0.6700||1.52%||$0.6600||1.52%||6.19%||LINK|
|11/12/2019||Automatic Data Processing||(ADP)||$0.7900||$0.9100||15.19%||$0.7900||15.19%||2.05%||LINK|
|11/25/2019||Becton Dickinson and Co||(BDX)||$0.7700||$0.7900||2.60%||$0.7700||2.60%||1.14%||LINK|
|11/25/2019||Hormel Foods Corp||(HRL)||$0.2100||$0.2325||10.71%||$0.2100||10.71%||1.97%||LINK|
|11/26/2019||MCCORMICK & CO /SH NV||(MKC)||$0.5700||$0.6200||8.77%||$0.5700||8.77%||1.44%||LINK|
|12/5/2019||WEC Energy Group Inc||(WEC)||$0.5900||$0.6325||7.20%||$0.5900||7.20%||2.56%||LINK|
|12/10/2019||Realty Income Corp||(O)||$0.2270||$0.2275||0.22%||$0.2210||2.94%||3.54%||LINK|
|12/13/2019||Dominion Energy Inc||(D)||$0.9175||$0.9400||2.45%||$0.9175||2.45%||4.48%||LINK|
The seventeen announced increases averaged 9.81% on an annual basis, which is slightly higher than last quarter’s 9.5% average. There was a broad spectrum of increases, as they ranged from 1.52% to 22.64%.
The biggest increases came from Visa, Mastercard and Broadcom, which all raised payouts by more than 20%. Starbucks, AbbVie, Automatic Data Processing, Hormel Foods, Amgen and Abbott Labs were also impressive, as they all announced double-digit growth.
The other end of the spectrum were Omega Healthcare Investors, Becton Dickinson, Realty Income, Dominion Energy, and AT&T, which announced increases of less than 3%.
Overall, it was another positive quarter of announcements, which keeps me on pace to meet the ten percent income growth target for the upcoming year.
There were a handful of trades made during the quarter, as I took some profits on a couple tech giants in November, and then finally decided to drop Gilead Sciences (GILD) from the portfolio in December.
The first group of trades involved the sale of some shares in Apple Inc. (AAPL) and Microsoft Corp. (MSFT), which was then used to fill out my positions in Automatic Data Processing, Johnson & Johnson (JNJ), and UnitedHealth Group Inc. (UNH).
Apple and Microsoft have been two of the best performers in the portfolio, and I still believe in the long-term future of both companies, but last year’s price surge in both dropped their yields to the low one-percent range, and moved them up to valuation levels that looked stretched to me.
I thought this presented a nice opportunity to trim both stocks back to equal weight in the portfolio, fill out three other high-quality positions, and increase my future dividend income in the process.
If you’d like a more in-depth look into my reason for trimming those shares, check out “Trimming My Tech Titans,” which generated plenty of discussion in the comments that followed.
Here is the information on the share sales, and the price change in those shares since the sale:
With the way the market has been going, it’s no surprise that all five companies have moved higher since the trade. So far on a price basis, the Apple and Microsoft side have seen bigger gains, but two months is much too short amount of time to say whether the move was right or wrong for the long run.
One thing I do know is that I’m more comfortable with Microsoft and Apple being brought back down in portfolio weighting. I’m also ecstatic to have high quality companies ADP, Johnson & Johnson, and UnitedHealth as full positions, and I’m happy that the trade boosted my dividend income going forward in the process.
The other trade made during the quarter was swapping out my shares of Gilead Sciences Inc. for Bristol-Myers Squibb Co. (BMY).
Gilead is a company that’s been on the chopping block for a few years now, as it’s struggled to return to growth after the collapse in revenues following increased competition for its Hepatitis C franchise.
I first purchased the stock in early 2015, and made one add-on buy in mid-October of that year. As you can see in the F.A.S.T. Graph, these buys were made during the ramp in earnings when its cure for Hepatitis C, Sovaldi, was first released and had a monopoly on the market.
It’s now nearly five years later, and Gilead still hasn’t found a way to recover from the loss in sales when competition arrived and caused ‘Hep C’ drug prices to fall. The company has continued to raise the dividend, and has made a couple smaller acquisitions in a quest to find growth, but that hasn’t moved the needle, and analysts are still expecting flat earnings growth going forward.
I’ve long believed that hope isn’t a very good investing strategy, and after four years of hoping that Gilead would start growing again, I decided to cut ties and move the funds to a new idea.
That idea is Bristol-Myers Squibb, which is a U.S. based pharmaceutical company that specializes in drugs for oncology, hematology, immunology, and cardiovascular diseases.
The company recently expanded its product diversification and growth prospects with the acquisition of Celgene in 2019. This merger significantly added to Bristol-Myers’ research pipeline, as Celgene had five assets that were in late-stage trials.
As you can see below, analysts are bullish on growth picking up speed, as they are forecasting 42% growth in 2020, followed by 17% growth in 2021.
Another positive is that the company finally broke out from a long stretch of low dividend growth with a 9.8% dividend increase announcement in December.
This is encouraging news, because it’s the biggest dividend increase since 2001, and is a good hint from management that a ~40% payout ratio may be somewhere close to the long-range target for the company.
With earnings expected to grow by 42% in 2020 and another 17% in 2021, I think Bristol-Myers could end up being an above-average dividend grower in the coming years.
Following those moves, this is how the portfolio stood at year’s end:
The portfolio value of $88,846 was an incredible 9.44% increase over the third quarter, and a 28.75% increase year over year. This was driven by some huge gains from Apple and Thor Industries, which both increased in value by more than 30% during the quarter. Amgen, Target, and Altria Group also had nice gains as they all returned at least 19%.
There weren’t many laggards in the portfolio, but I did find three that were down for the quarter, as Digital Realty Trust, Home Depot, and Occidental Petroleum all lost more than 5%.
I find it interesting that the five big winners came from four different sectors: technology, healthcare, consumer discretionary, and consumer staples. It’s been true that the mega-cap tech companies have carried much of the load, but I’m happy to see others carrying their weight as well.
Here are the valuation and income weightings for the portfolio as the end of the quarter:
The trimming of shares in Apple and Microsoft dropped technology’s weighting from 16.8% to 15.8%. Meanwhile, the addition of shares in Johnson & Johnson and UnitedHealth Group, along with some out-sized price appreciation caused healthcare exposure to increase from 11.6% to 14.6%.
On the other hand, the price drop from Digital Realty Trust was enough to drop the REIT sector weighting by over one percent, from 12.9% to 11.8%.
On The Radar
After the handful of trades I made in Q4, I’m not expecting to make any big moves in the near future, but that doesn’t mean I’ve stopped watching the market.
Coronavirus fears are seemingly at the forefront of market concerns, and the selloff in the last week is starting to present some nice opportunities with stocks, especially for those willing to take on a little risk.
Crude oil prices have been hammered again on fears that the viral outbreak will cause a global slowdown, causing share prices to fall and dividend yields on some of the blue chip energy companies to reach multi-decade highs.
Exxon Mobil (XOM) dropped another 4% on Friday, and is now yielding 5.6%, which is its highest dividend yield since the mid-1990s.
Chevron announced a surprisingly large dividend increase of 8.4% on January 29th, and then followed that up by talking extensively about its intention to continue raising it on the quarterly conference call held Friday. That dividend increase pushed Chevron’s yield to 4.8%, well above recent historical levels.
Finally, Valero Energy announced an 8.9% dividend increase on January 23rd, and also spoke about its commitment to future dividend growth in its conference call on Thursday. This increase brings Valero’s dividend yield to 4.65%, which appears to be the highest in its history.
I don’t know where oil prices will be next week, next month, or even next year, but I do know that these are three quality companies that should be able to continue paying the dividend throughout the current down-cycle. For long-term investors, this is an awfully attractive time to lock in these out-sized dividend yields.
The next pick, International Business Machines (IBM), is my value pick. It recently announced earnings, and appears to finally be returning to growth after five years of declining earnings. It announced the departure of Ginni Rometty as CEO, and the promotion of the VP of Cloud and Cognitive Software, Arvind Krishna, to the position.
IBM has struggled mightily in recent years, and I think this could be the spark (much like Microsoft’s promotion of Satya Nadella in 2014) to get the business moving in the right direction.
Analysts are now expecting single-digit EPS growth going forward, and if IBM can somehow leverage the recent Red Hat acquisition and push growth to the double-digit level, this price level will be a big bargain.
IBM now yields 4.5%, and trades for just 10.2 times expected 2020 EPS of $13.36. If management can prove the company is back on the path to sustainable growth, it could easily rise 50% to a 15 PE multiple, which would still have it trading below many of its tech sector peers.
Year seven of the portfolio was another successful one, as the goal of ten percent income growth was reached once again. Valuation also hit a new all-time high, with the portfolio size now more than triple what it was when it was first built in 2013.
Trade wars, coronavirus, and Middle East wars may be keeping the market on edge, but recent trades and continued dividend increase announcements give me confidence that I’ll pass the income growth target yet again this year.
That certainty is a comfort for me in an uncertain market, which helps me to stay on track with my goals for the portfolio. I hope this update finds you well, and I wish you all happy investing in 2020!
Disclosure: I am/we are long AAPL, ABBV, ABT, ADP, AMGN, AMP, AVGO, AWK, BDX, CBRL, CMCSA, CMI, CVS, CVX, D, DLR, EOG, FLO, GILD, HD, HRL, IBM, JNJ, KMI, LMT, LOW, MA, MCD, MKC, MMM, MO, MSFT, NEE, NSC, O, OHI, OXY, PM, QCOM, ROST, SBUX, SKT, STAG, T, TGT, THO, UNH, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.