It is that time of year again when investors look back on the previous twelve months and reflect on how their investments have performed, while also making plans for the New Year. Many investors measure their returns against some benchmark like the S&P 500 (SPX) or perhaps the Dow Industrials. Dividend Growth Investors may choose to reflect on how much additional income their portfolio is generating. In the past, I have always measured my portfolio performance against the S&P 500. If I could not beat the S&P 500 with my stock picking, than there was no reason to spend time picking stocks. It would be easier to put my money in an S&P 500 fund and be happy matching the overall market returns. In four out of the last five years I have beaten the S&P 500, but I won't this year. Fortunately, I learned this year that it does not matter.
A few months back I wrote an article titled "Buffett Agrees - Doing Nothing is the Path to Investment Success". The article generated quite a few page views and comments, one comment in particular resonated with me. The comment was made by Seeking Alpha member "Chowder" who said the following about beating the S&P 500
"I swear, every time I hear you can't beat the S&P 500 or how did you compare to the S&P 500, I want to scream! Stop being a lemming! Stop allowing the market to lead you by the nose.
My advice is to stop worrying about everyone else and what everyone else is doing. In my humble opinion, the first job of investing should be to acquire income replacement." Chowder went on to add "The only thing that matters to me is whether my portfolio and income are moving forward or not."
Chowder is right; beating the S&P 500 should not be your ultimate goal, making progress on whatever investment goal you have, should be how you judge your year. My goal is to create a self-sustaining portfolio of dividend growth stocks where I can watch my income grow every year and also generate some capital gain. I am not looking for rocket-ships; I am happy owning stocks that have a sustainable product, some competitive advantage, little down side, strong balance sheet, and generous growing dividends. With that as a goal, I feel good about how the year has turned out. I added two new holdings that I believe will provide nice steady returns for years to come, I minimized my trading, a weakness I have to work at controlling and I increased my expected yearly income by 23%. Most importantly, the portfolio I have now, which consists of Exxon Mobil (NYSE:XOM), McDonald's (NYSE:MCD), Coca-Cola (NYSE:KO), Kinder Morgan (NYSE:KMI) and Walgreen (WAG) are all solid companies that will grow their business and their dividend for years to come.
My portfolio at the start of 2012.
|Company||Cost Basis||Price as of 01/02/12|
In 2011, I bought and sold a number of stocks, an activity I do not like engaging in, so near the end of the year I sold several positions to get the portfolio down to my four best holdings and to create cash for opportunities in 2012. All of the stocks I held at the end of 2011 had big runs to close out the year, so I expected 2012 would be a less rewarding year and that is what has happened.
2012 Portfolio Activity
Sold Philip Morris (NYSE:PM) - In January I sold PM at $76.31, which was a 21% gain from the purchase price. I like the PM business and believe international tobacco has years of earnings growth in front of it, but as I have stated before, I am never comfortable owning tobacco stocks. I worry about government regulation, litigation, increased tobacco taxes and other issues. I do not like owning stocks that I worry about, so I sold PM.
Bought and Sold Enterprise Product Partners (NYSE:EPD) - Enterprise Product Partners is one of my favorite stocks, in my opinion, they manage the pipeline business better than anyone else. The assets they own, all of which connect to each other, allows EPD to generate significant income from the pipelines and the processing plants they own. In addition, because EPD has no General Partner, all the income they generate goes to the shareholders and are not shared with a General Partner.
I bought EPD at $46.39 with the funds I had from selling PM, unfortunately I had to sell EPD two weeks later at $49.05, about a 6% gain. Owning MLP's in tax deferred accounts is a tricky business, some articles I have read say it is fine, others say MLP's should not be owned in tax deferred accounts. I prefer to keep my investing simple and it became increasingly clear to me that owning EPD in my tax deferred account was going to require quite a bit of record keeping and could possibly result in my owing taxes if I held for a long time, based on that I decided to sell.
Began accumulating Kinder Morgan - Just because I could not own EPD, did not mean I could not own a pipeline company. As I stated in my article "Investment Ideas From the IEA's World Energy Outlook" I believe the pipeline business in North America will be a growing and lucrative business for many years to come. With fracking unleashing new oil and natural gas reserves, the infrastructure to get the product to refineries and then to customers will need to be expanded, as such, I believe pipelines will be rewarding investments.
Kinder Morgan is the General Partner for Kinder Morgan Energy Partners, (NYSE:KMP), Kinder Morgan Management (NYSE:KMR) and El Paso Pipeline Partners, . Being a general partner means KMI pays a dividend and not a distribution, thus KMI can be held in a tax deferred account without any additional paperwork or possible tax consequences. Kinder Morgan is the largest natural gas pipeline and storage operator in the United States, the largest independent transporter of refined product in the U.S., the largest independent terminal operator in the U.S. and the largest transporter of CO2 in the U.S.
Because KMI has a lot of moving parts, determining a fair valuation was rather difficult for me, so I decided to buy KMI in lots throughout the year. I now own a full position with a cost basis of $33.75.
Added to McDonald's - McDonald's has been the best stock I ever owned, having owned it twice and having doubled my money in it both times. In May, I added to my MCD, buying shares at $92.13. In hindsight, I was a little early and wish I had waiting until it broke under $90.00. However, in the long run I believe those shares will reward me.
Bought Walgreen - On June 22nd I bought a full position in WAG at $29.80, a price I am very happy with. I had followed Walgreen for years, impressed by its dominance in the drug store business and aware that the aging population would create additional opportunities for Walgreen's business. After WAG announced the purchase of a 45% stake in Alliance Boots, the stock fell precipitously and I moved quickly to buy shares while they were under $30.00. Many observers felt Walgreen overpaid for Alliance Boots, but I don't think so. Alliance Boots runs the largest drugstore chain in the United Kingdom, where the company brought in $10.5 billion in revenue during the fiscal year that ended March 31. It has more than 2,400 health and beauty stores there, most of which include a pharmacy. Walgreen management has stated they expect the Alliance Boots purchase to be accretive to earnings in the first year. I am very happy owning WAG and expect to own it for a very long time.
|Companies||Cost basis||Price as of 01/02/12 or purchase date||Price as of 12/11/12||2012 % Gain/Loss|
Note - (1) Coca-Cola price is split adjusted (2) Percentage gain/loss for the year does not include dividends paid.
Work Retirement Account - The largest sum of money I have invested is in my retirement account at work. Due to the lack of investment choices available, I have retirement funds split evenly between an S&P 500 Fund, a Small Cap Fund and an International Fund. All three funds have performed well and as of this writing my work retirement account is up 14.83% for the year. Breaking it down by fund, the S&P 500 Fund has returned 15.03%, the Small-Cap Fund 15.46% and the International Fund 14.04%.
Although the majority of work retirement choices consist of vanilla market tracking funds, they can be rewarding investments. In my opinion, the key to these funds is the dollar cost averaging a person employs when contributing every two weeks. When approached with discipline, dollar cost averaging can lead to nice returns. The market does not move in a straight line, thus investing every two weeks (or whatever your pay schedule is) allows an investor to buy shares at various price points, which over time results in a nice cost basis. The key is, you cannot market time, commit to your investment plan and stick to it through thick and thin. The shares you buy when the market is down will be the most rewarding shares you buy.
A Look to 2013
Having looked back at 2012, what are my goals for 2013? To start with, unlike last year, I expect solid returns from my long-term holdings. I happen to think everyone of them is cheap and I expect the world economy to improve in 2013. I am also confident all of my long term holdings will increase their dividends next year, thus increasing my income. Let's take a brief look why I think all five holdings will have good years.
Exxon Mobil - Exxon's production numbers have been down the last few years as some mature fields have had production declines and in some countries, Exxon has bumped up against production limits. Starting in 2013 and continuing through 2016, Exxon has a number of large projects that will be coming online which should lead to production increases. In addition, rising natural gas prices in the United States should help alleviate some of the loses they were taking on natural gas production. Lastly, XOM will likely buy back $20 billion in shares this year, reducing the share count and increasing earnings per share.
McDonald's - MCD had a tough year in 2012, down about 11% for the year; however, investors should keep in mind that MCD was up over 30% in 2011. Same store sales comps in 2013 will be much easier than they were in 2012 and MCD will continue to add stores in China and elsewhere. McDonald's currently sells at a P/E of 16 with a yield of 3.5%, making it a very compelling investment.
Coca-Cola - In 2013 I expect KO to do what it always does, sell more beverages to more people throughout the world. Coca-Cola has been taking market share from other beverage companies and I expect that to continue too.
Kinder Morgan - Kinder Morgan along with other companies in the MLP universe have sold off recently, which I believe is related to all the tax change talk occurring in Washington. Once the talks get resolved and it becomes clear MLP's will not be affected, I believe Kinder along with the other MLP's will see a nice jump in price. I have not seen any discussion from either party about doing away with the Limited Partnership tax laws and highly doubt any change would occur as the nation needs the energy infrastructure build-out. As KMI continues the rapid increase in its dividend, I expect the share price to more fully value the dividend growth investors will receive.
Walgreen - I was very fortunate to pick this stock up at $29.80, however, I believe even at $36.00 this stock is inexpensive. At a P/E of 14 and with a P.E.G. (Price to Earnings Growth) of 0.88, WAG is cheap. With the Express Scripts (NASDAQ:ESRX) dispute in the past, same store sales comparisons should be easier next year and with the Alliance Boots investment adding to earnings, 2013 should be good year for Walgreen investors.
Summary - Although my individual stock returns were less this year than I would like, I still feel good about the advancement I made toward my retirement goal. I believe the companies I added were at reasonable valuation and will be solid long term performers. All the businesses in the portfolio continue to perform well and I expect them to continue to perform well. I increased my yearly income by 23%, thanks to some healthy dividend increases, as well as adding two companies that pay a nice dividend. I do have cash available and have been eyeing a stock for some time now which I may buy in the next week or two, if the valuation does not get away from me. Investing is a marathon and although I am still a ways from the finish line, I feel I made nice strides this year toward a great finish.
Disclosure: I am long KO, XOM, WAG, MCD, KMI. 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.