Managing a portfolio is all about choices. Once you decide what investing philosophy you are going to use (in my case it is dividend growth investing (DGI)), you have to select your stocks or bonds, decide your sector allocation, decide how you will weigh the investments in your portfolio, etc. And it is a never ending process. As dividends are collected and as new money is deposited into your account you have to decide how to allocate it. That is what I had to deal with in the past week as I prepared to do my quarterly portfolio update. My previous portfolio update, published in July, can be found here.
With this portfolio I am trying to demonstrate that by using relatively simple techniques, and spending a relatively small amount of time, someone can manage their own portfolio and still get acceptable returns. To try to take emotion out of my investment decisions I have set up rules for myself as to which stocks to buy, which to sell, and how to allocate dividends and new deposits. My screening criteria for buying and selling stocks will be discussed below, but my reinvestment of dividends has been based on valuation. Specifically, I use the Percentage Above Average Yield (PAAY) to determine which stocks will get the reinvestments and the new deposits.
I discussed PAAY in detail in this article, but briefly my theory is that the stocks that are the most above their usual yield are the most undervalued stocks, and therefore should have more money put into them. This is how I did my quarterly updates earlier in the year, and I was happy with the results. But as I reviewed my portfolio at the end of this past quarter I noticed some things. First of all the total yield of my portfolio was still not where I wanted it to be. I have been targeting a yield of 4%, but I was still only around 3.4%. I wanted to get that higher. Secondly, due previous reinvestments, and due to price appreciation of certain stocks, my portfolio had become relatively unbalanced. None of my stocks made up a ridiculously large portion of my portfolio, but where-as some stocks made up about 2.5% of the portfolio, others made up only about 1.5%. I preferred to keep the positions a little more closely aligned than they were.
When I looked at the stocks in my portfolio with the highest PAAY most of them were relatively low yielding stocks. If I bought more of them it would not have helped my portfolio yield. In fact it would have dropped it even more. And as I looked at the balance of my portfolio many of the smaller position stocks were some of the higher yielding ones. So if I abandoned PAAY for this particular update, and simply brought some of the higher yielding stocks up to a more equal weighting, I could both rebalance my portfolio and increase my yield. So that is what I decided to do.
But first things first.
I always carry out sales of positions first, then purchases of new positions second, and finally reinvestment of any remaining funds. I previously had only one criteria for selling a stock, and that was if it cut or froze its dividend. But as I reviewed my portfolio I noticed that due to its price increase this year the yield of Nike (NKE) had fallen to under 1.4%. And when I reviewed its chart on FAST Graphs I saw that it had become significantly overvalued. It was trading well over its True Worth line (the orange line), and its normalized PE line (the blue line).
I had not planned on selling any stocks just because they become overvalued. As long as they continued to raise their dividends at a growth rate I was happy with I was planning on keeping them, no matter what happened to the price. However, my criteria for selling is a work in progress, and in this case, since NKE's yield had fallen so low, and since I was already trying to raise the yield of my portfolio, I decided that I would sell NKE and put the proceeds into some higher yielding stocks.
I sold NKE, 143 shares at $72.39.
Next I turned to Phillips 66 (PSX). I received PSX when it was spun off from ConocoPhillips (COP). I had held onto it since that time because I wasn't quite sure what to do with it. Should I buy more shares to bring it up to a full position? Or should I just sell it and move on? I wanted to see what kind of dividend policy PSX would develop before I made a decision, and it did recently raise its dividend by 24.8%. When I saw that I thought about bringing PSX up to a full position, but I also knew that PSX, even with the dividend increase, would have a yield of only 2.70%. In the end my desire to increase my portfolio yield over-ruled my pleasure with the dividend increase, and I sold my small position in PSX.
I sold PSX, 39 shares at $58.67.
There were no other stocks to sell, so I turned to my purchases. I recently learned, through my readings on SA that, although my income is too high to contribute directly to a Roth IRA, I could still do a "back door Roth" by opening a traditional IRA, funding it, and then transferring the money into a Roth. I confirmed this with my accountant, went over the process, and created and funded two Roth IRAs, one for me and one for my wife. I funded each with $5,500, for a total of $11,000. I also received two quarterly profit sharing contributions of $12,750 into my 401k, one in mid July and one in the past week. With the dividends I collected in the last 3 months of $5,273.54, and the proceeds from the two stock sales, this brought the total cash available for purchases and reinvestments to $41,657.98.
Here is a quick summary of my purchase criteria for "regular" stocks:
- Stock is on the CCC list
- Yield >2.5% (It used to be > 2.0%)
- Payout ratio < 60%
- Chowder Rule >12%
- Quality Rating of A- or better from S&P
- FAST Graph shows a 10 year uptrend in earnings and that the stock is not overvalued.
Here is the list of passing stocks:
Lockheed Martin (LMT)
Raytheon Company (RTN)
First of Long Island (FLIC)
Baxter International (BAX)
Deere & Company (DE)
General Mills (GIS)
AFLAC Inc. (AFL)
Norfolk Southern (NSC)
CSX Corp. (CSX)
McDonald's Corp. (MCD)
Target Corp. (TGT)
Microsoft Corp. (MSFT)
Qualcomm Inc. (QCOM)
Owens & Minor (OMI)
Exxon Mobil (XOM)
Northrop Grumman (NOC)
I already own all these stocks except for BAX, GIS, XOM, NOC and OMI
For MLPs, REITs and Utilities I use different criteria:
- On CCC list
- Yield > 3%
- Chowder Rule > 8%
- DGR for all time periods (1yr, 3yr, 5yr and 10yr) at least 4%, but also consistent over all time periods.
- FAST Graph shows a 10 year uptrend (or the life of the company, if less than 10 years) in Funds From Operations (FFO), and shows that the stock is not presently overvalued.
The REITs and Utilities that passed my screen were:
Omega Healthcare (OHI)
Digital Realty Trust (DLR)
Realty Income Corp. (O)
Wisconsin Energy (WEC)
Alliant Energy (LNT)
Dominion Resources (D)
Northeast Utilities (NU)
New Jersey Resources (NJR)
Since I wanted to increase the yield of my portfolio, I decided to look at just the REITs and Utilities for my new purchases, and not the "regular" stocks. I avoided MLPs due to the tax issues (which will be discussed later). I already own OHI, DLR, O, AVA and D. So I decided to buy DX, the only REIT I didn't already own, and WEC, the utility which had the highest, and most consistent dividend growth rate.
I purchased DX, 1567 shares at $8.74.
(OK, OK. I know. The day after I purchased it DX announced a dividend cut. DAMN!!! But I don't like churning in my portfolio, or trading (and I really like the dividend!), so I decided to hold onto it for now and see what happens the rest of the year. If it cuts again I will dump it.)
I purchased WEC, 336 shares at $40.08.
Once I bought these new positions, I decided to use the rest of the funds in my account for reinvestment, focusing on some of the higher yielding stocks in my portfolio that were not yet full positions. Looking over my holdings, I decided to make the following purchases:
Alliance Resource Partners (ARLP), 26 shares at $75.12.
Avista, 98 shares at $26.18.
Digital Realty Trust, 54 shares at $54.63.
Omega Healthcare, 66 shares at $30.41.
Williams Partners (WPZ), 38 shares at $52.73.
Finally, I had to make some adjustments to my portfolio due to an unexpected tax issue. Through the comments section in response to an article I wrote about some MLPs that passed my criteria, I learned that there are extra tax implications to holding MLPs in a tax deferred retirement portfolio. With this new knowledge I decided to change some of my holdings:
I sold Kinder Morgan Energy Partners (KMP), 168 shares at $80.38, and I replaced it with Kinder Morgan Management (KMR), 264 shares at $75.39. KMR pays its quarterly distribution in extra shares, rather than in cash, as KMP does. For some (crazy) reason this makes it okay to hold it in a retirement account without the tax implications.
I sold AmeriGas Partners (APU), 339 shares at $43.78, and replaced it with UGI Corp, which is the general partner for APU, 379 shares at $39.29.
Although I have removed these three MLPs from my portfolio, I am still holding ARLP, Buckeye Partners (BPL), Plains All American (PAA), and Williams Partners. I am going to continue to hold these until I receive the K-1 forms next year, so that I can more carefully analyze the tax implications, and decide what to do with these other positions. I may decide that the higher yield of the MLPs might make it worth holding on to them, even though I would eventually have to pay some extra taxes. I will have more to say about this when I see the K-1 forms. Perhaps people with have some comments on this issue?
After these transactions here is the present make-up of my portfolio:
Dividend per share
% of Port.
Air Products (APD)
Alliance Resource Partners
BHP Billiton (BBL)
Becton Dickson (BDX)
Cracker Barrel (CBRL)
Cincinnati Financial (CINF)
Digital realty trust
Darden Restaurants (DRI)
Emerson Electric (EMR)
First of Long Island
General Dynamics (GD)
General Electric (GE)
Harris Corp (HRS)
Illinois Tool Works (ITW)
Johnson & Johnson (JNJ)
Kinder Morgan Mgt
L-3 Communications (LLL)
Realty Income Corp
Plains All American
Procter & Gamble (PG)
Pimco Corporate & Inc (PTY)
UGI Corp (UGI)
United Technologies (UTX)
Wells Fargo (WFC)
And finally, some information about how the portfolio has done this year.
Here are the dividend increases since my last update:
ConocoPhillips declares $0.69/share quarterly dividend, 4.5% increase from prior dividend of $0.66.
Illinois Tool Works Inc. declares $0.42/share quarterly dividend, 10.5% increase from prior dividend of $0.38.
Cincinnati Financial Corporation declares $0.42/share quarterly dividend, 3.06% increase from prior dividend of $0.4075.
Harris Corporation declares $0.42/share quarterly dividend, 13.5% increase from prior dividend of $0.37.
Realty Income Corporation declares $0.18185/share monthly dividend, 0.2% increase from prior dividend of $0.18154.
Microsoft Corporation declares$0.28/share quarterly dividend, 22.0% increase from prior dividend of $0.23.
McDonald's declares $0.81/share quarterly dividend, 5% increase from prior dividend of $0.77.
Phillips 66 (PSA) declares $0.39/share quarterly dividend, 24.8% increase from prior dividend of $0.31.
The dividends I collected for the past three months are:
- April -- $1959.77
- May -- $ 2059.03
- June -- $ 2037.02
- July -- $517.25
- Aug -- $2312.7
- Sep -- $2443.57
Not included in these totals are 2.622 shares of GE, 2.263 shares of ARLP, 3.794 shares of OKS, 1.866 shares of WFC, and 4.755 shares of AVA, all received due to dividend reinvestment in my Optionsxpress account.
Year to date I have collected $15,498.76 in dividends. Since my last posting in July, my "expected dividends received in the next 12 months" (ED12) has increased from $23,906.79 to $27,577.87, an increase of 15.35%. This was helped by the purchase of DX, WEC and the additional shares of ARLP, AVA, DLR, OHI and WPZ, but was hurt somewhat by the conversion of OKS to OKE and APU to UGI. Of course the extra dividends coming from the stocks purchased with new deposits also helped. My ED12 has increased from $22,475.00 at the beginning of the year to $27,577.87 today, an increase of 22.7%.
My portfolio has increased by 4.12% since my last update on July 8th. In the same time period the S&P was up 0.91%. The YTD return for my portfolio is 20.45%. This is compared to the S&P's return of 18.53% (as of 10/4). Although beating any particular benchmark is not a specific goal of mine, I'm still going to keep track of the S&P, just to insure, for myself, that my portfolio is not performing ridiculously poorly. My goal and my focus is dividend income, but I still want my overall portfolio value to perform reasonably well.
Here are the YTD returns (not including reinvested dividends) for each of the stock I hold:
I am extremely happy with my portfolio's progress. Even if you take away the dividends generated by the new money deposited into my accounts, I seem to be on track for my goal of at least 10% DGR, and my overall portfolio return has been quite good. Out of 55 stocks I have owned in my portfolio this year, only two have cut their dividends. NLY was sold, and I already mentioned DX. At the time of my last update it appeared that COP had frozen its dividend, but soon after it increased it by 5% so I was not forced to sell it.
My portfolio yield is up to 3.77%. I would still like to get it up to 4%, but that would probably mean selling many of the lower yielding stocks I own, those that have higher DGRs, and/or buying some other high yield investments which at the present time don't meet my criteria. This might mean sacrificing dividend quality for dividend yield, and I am not willing to do that at this time.
Nine months into my conversion to being a strict DGIer, K.I.S.S.ing is working very well for me.
Thank you for reading my portfolio update. I welcome your comments and criticisms.