2013 Portfolio Review And 2014 Goals

by: Larry Smith

I occasionally review my portfolio to make sure the companies I own are performing well and ensure I am sticking to my plan. Although I review my portfolio several times a year, my most complete review occurs at the end of the year. I review every stock I own to make sure the business is performing well and that the future for the company still looks positive. I also check the portfolio to make sure my top goal of growing my income is moving forward. I am a dividend growth investor with a goal of growing my income, but I also want to have some capital gain.

With that brief introduction, lets take a look at how I did.

Pillars of the Portfolio

Chart below shows what I owned at the start of the year and how each stock performed. For point of reference, the S&P 500 as I write this is up 27.5%

Stock Price on 01/3/13 Current price % gain/loss current status
Exxon Mobil (NYSE:XOM) $86.55 $99.37 14.81% open
McDonald's (NYSE:MCD) $88.21 $95.00 7.70% open
Walgreen (WAG) $37.01 $56.82 53.53% open
Coca-Cola (NYSE:KO) $36.25 $39.80 9.79% open
Kinder Morgan (NYSE:KMI) $35.33 $32.91 -6.85% closed

As of today, I still own four of the five stocks I had at the start of the year. I recently sold KMI after two years of disappointing ownership. I understand and accept, the stocks I own, as the pillars of the portfolio, will not roar ahead every year. The example I always use is that they will move ahead like a glacier, slowly and steadily. I remain confident in all of them and expect to own all of them for a long time.

Short Term Trades

As I have stated before, besides my long term holds, what I call the pillars of my portfolio, I do buy stocks for short term trades, if I think the current price is offering an opportunity. The following stocks are companies I bought and sold during the year.

Stock Bought Sold Gain/loss
Canadian National Railway (NYSE:CNI) $95.10 $98.63 3.71%
American International Group (NYSE:AIG) $39.14 $41.14 5.01%
Procter & Gamble (NYSE:PG) $77.98 $79.48 1.92%
Realty Income (NYSE:O) $43.09 $39.12 -9.21%
Apple (NASDAQ:AAPL) $446.70 $483.50 8.24%

With the exception of O, which I intended to hold for a long time, my short term trades turned out relatively well. AAPL I owned for approximately a week, so an 8% gain in a week is nice. I intended to hold AIG longer, but saw opportunity elsewhere and sold. The fact that AIG did not pay a dividend is the reason AIG was a short term trade and not a long term hold. For the record, I think AIG has huge opportunity going forward and will be a rewarding investment.

I love the rails and thought CNI was underpriced, but all the rails pay relatively small dividends and have large capital expenses. Thus, for me, they do not qualify for long term holds.

Apple was way underpriced so I bought a few shares and sold them quickly. Apple is very volatile, which makes for great trading, not so much for long term holding. The article I wrote on AAPL is here, along with documentation of my trade at the end of the comments section.

Realty Income and P&G are two companies that I could hold for a long time, but I sold for different reasons. I sold P&G because I saw something I liked better and needed the money. Realty Income I sold because it was falling fast as Treasury Rates climbed. P&G at the moment is overpriced and I decided Health Care REIT's were a better REIT area to be in going forward, so O is on the back-burner for now.

Work Retirement Funds

At work I have three retirement funds I have contributed to for several decades. They are index funds, comprised of an International Fund, S&P 500 Fund and Small Cap Fund. For the year, the returns are as follows.

  • S&P 500 Fund - 30.34%
  • International Fund - 25.16%
  • Small Cap Fund - 38.02%
  • Overall return - 31.18%

I am a big believer of having index funds as the core of a portfolio. The fees are low, you get extreme diversification, it is easy to dollar cost average, and they routinely outperform managed funds. I can state from over 30 years of experience, that I am very happy with my index funds performance. I believe the key to index funds, is to dollar cost average and never try to market time. Routine contributions week in, week out, up markets and down markets. Over time it really adds up.

Two New Pillars

Within the last month I added two new positions, Microsoft (NASDAQ:MSFT) and Ventas (NYSE:VTR), both of which I intend to hold for a long time.

For more why I bought MSFT, see this article and for Ventas, see this article. In brief, I believe MSFT is the dominant software company in the enterprise and will remain so for many years. The move to the cloud will benefit them and their Office and Windows business will remain leaders in their field. MSFT is currently transforming the company to become more of a device a company and working on a "One Windows" product line. They also have a great balance sheet with over $9.00 a share cash and a 3% dividend which is well covered with a payout ratio of approximately 34%.

Ventas is a Health Care REIT with a history of growing through acquisition. Their properties include assisted living, retirement communities, hospitals and medical office buildings. VTR has a solid balance sheet, recently receiving an upgrade from S&P on their debt to BBB+. Ventas pays a 5% dividend, which they recently raised by 8%. I believe the aging of America will increase the need for retirement communities, hospitals, medical office buildings and assisted care facilities. The Health Care REIT industry is only 10% controlled by public REITs, so I expect further growth from Ventas as well as a rising dividend.

Growing My Income

As I stated, my number one goal is to continue to grow my income. I am happy to say I succeeded on that point. My income from dividends year over year has grown by 24%. Every stock I owned increased their dividend during the year and I added shares in VTR a 5% yielder and MSFT a 3% yielder.

A Look at Each Pillar

Exxon Mobil - XOM was first purchased in October, 2008. I have added shares since and my cost basis is $66.64. Exxon is my biggest holding and I remain very confident in its future. No matter what study you look at, oil and natural gas remain the primary fuels for decades to come. Some analysts and contributors on Seeking Alpha have raised concerns about XOM's production. Exxon has 31 new project start-ups planned in the next few years and management has stated they expect to be producing an additional 1 million oil equivalent barrels a day by 2017.

A growing dividend, aggressive share buybacks, a product needed for decades to come and a AAA balance sheet, what's not to like.

McDonald's - MCD was first purchased in January, 2008. I have added shares since and have a cost basis of $62.00. McDonald's remains the dominant fast food restaurant chain in the world. MCD has 35,000 worldwide restaurants and serves 69 million people a day. MCD has suffered flat sales this year and management has announced a number of changes to improve service and sales. MCD will continue to feature beverages, especially coffee and may open separate McCafe outlets. MCD has also entered into an agreement with Kraft (KRFT) to sell branded packaged coffee. To improve drive-through service, MCD will continue to build dual drive-through lanes and will start adding a 3rd drive through window, so that larger more complicated orders can pull up at the 3rd window while faster orders continue to more through the other two windows. In foreign markets, MCD will continue to promote breakfast, where sales are not as large as in the United States.

MCD has been through slow sales periods before and I am confident they will overcome this brief rough patch. As MCD continues to expand and build sales I will continue to hold and collect the ever growing dividend

Coca-Cola - KO was first purchased in December 2009. I have added shares since and my cost basis is $28.63. Coca-Cola is the largest beverage company in the world, serving beverages in over 200 countries. Concerns have risen about the sugary soft drinks KO sells, but I feel that concern is overblown. KO is a beverage company, selling over 3,500 different products. KO sells soft drinks, water, teas, sports drinks, energy drinks, juices and dairy products. Sales continue to grow (2% in the 3rd quarter) and will continue to grow as a growing world population looks for refreshment. KO's 2020 Vision calls for worldwide servings to double to over 3 billion a day by 2020.

Coca-Cola is a simple business with as wide a moat as a company could have. I expect KO to be selling more beverages to more people for decades to come.

Walgreen - I purchased WAG in June 2012, I have not added shares and my cost basis is $29.80. I believe Walgreen is re-inventing the neighborhood pharmacy from a prescription filling store with some over-the-counter drugs on the shelf into a health/wellness center providing basic healthcare services, wellness products, beauty products and prescription. WAG will eventually complete the purchase of Alliance Boots (they currently own 45%), the leading European health & wellness store, making WAG an international operator with 12,000 stores. By 2017, when WAG is combined with Alliance Boots, WAG expects to grow revenue from its current $72.2 billion to $130 billion and operating cash flow from $4.3 to $8 billion.

WAG has had quite a run, since I bought it 18 months ago it has basically doubled. I am confident WAG will continue to grow and will benefit from the Affordable Care Act. However, I also realize stocks don't double every year, so I expect WAG could have a flat year next year, If WAG does have a flat year, that is alright by me as I intend to hold WAG for a long time. As the population ages, health and wellness needs will continue to grow and WAG with its massive footprint will be there to provide the services and products that are needed.


As I look at 2014, I expect the year to be another up year for the market. However, I do not see another 29% gain. If we get a 10% gain for the year I would be happy. I intend to add to my Ventas position as I believe I will be given ample time to add at what I consider good entry point prices. As interest rates rise, VTR and other REIT's could come under pressure. If VTR drifts lower I will add to what I own and dollar cost average down. I am convinced the Health Care REIT space will be a profitable place to be for decades.

As I always do, I will continue to look for short term opportunities, however, with the big run-up in prices I think those opportunities may be few.

As I look at my portfolio now, I believe VTR, XOM, WAG, MCD, KO and MSFT, along with my index funds gives me plenty of diversification. If at the end of 2014 all I have done is add to what I own, that will be fine with me.

May everyone have a prosperous New Year,

Disclosure: I am long KO, MCD, XOM, VTR, MSFT, WAG. 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.