Updates of Portfolio stages with value, dividend and allocation change.
2014 Q2 Portfolio transaction update: New position of PG and WFC.
Semi annual Portfolio comparison with the S&P500 index.
This article focuses on the progress and future plans for the 30 and Under portfolio that was introduced last year. (You can find the previous update here.) The portfolio consists of purely Dividend and Growth (DG) stocks and employs the Dividend and Growth Investing (DGI) strategy.
The approach and goal of this portfolio remains the same as outlined in the initial article: Invest in dividend growth stocks by employing the DGI strategy of dividend reinvestment and focus purchasing decisions on long-term growth opportunities. Stocks in this portfolio should ideally be held for at least twenty years.
There have only been a small amount of transactions in the past quarter due to the current market valuation and the plan to increase the cash reserve ratio. For personal reasons, the amount of cash contributions to the portfolio will decrease in the near future. The cash is currently allocated into the checking account, but if I decide the cash is not needed, the funds will be transferred into the 30 and Under portfolio.
In this portfolio update, instead of focusing on the addition of new positions, I will do a portfolio comparison to the index.
The portfolio is currently in the foundation stage mentioned in the last article. In this current stage, I am focusing on building a solid financial foundation with good defensive dividend stocks. The value of the portfolio is currently at $148k, which is still $52k from the next stage where investment selections will be more flexible with growth stocks. (Details of the stages was published in the last portfolio update)
Total Cash contribution during Q-2 $6,000
5/7 Transfers of $3,000
4/7 Transfers of $3,000
As mentioned above, the cash contribution to the portfolio will decrease in the next two quarters due to personal reasons. Because of the current asset level, a large portion of the portfolio value movement is determined by the market.
Portfolio Activity Update: 2 new positions
(Purchase of PG and WFC)
1. The Procter & Gamble Company (NYSE:PG)
The new positions start at $2,000 with the average down strategy, with each position completed with three purchases at $6,000. As mentioned in the last portfolio update, instead of outright purchase of $5,000 for each new investment, the portfolio will start utilizing the average down strategy.
By utilizing the average down strategy, the portfolio will add each new investment at $2,000 and complete each new holding with two additional purchases at $2,000 each when the stock price decreases. This will lower the base cost. This strategy helps reduce the risk, however, also give up potential gains. This strategy is suitable for this portfolio and might not be suitable for other investors.
27 shares of PG were purchased at $79.92. I want to increase the cash allocation, but do not want to sit on too much cash. In the current market, it is difficult to find dividend stocks at a good price, so I decided to pay a premium price for excellent DG stock such as PG.
PG is a dividend champion with over 25+ years of dividend increase and many investors view PG as a great pillar for an investment portfolio. Not only has PG been on the watch list, but also it is one of the must hold core holdings that I have been planning to add to the portfolio. One of the reasons I believe PG is currently overvalued is based on the average P/E, but the decision to add PG is justified by the resilience the stock provides during a recession.
PG was purchased at $79.92 on 6/12
2. Wells Fargo & Co. (NYSE:WFC)
The WFC position also started at $2,000. In the last portfolio update I went into stock allocation and mentioned the portfolio is missing allocations in the Financial Services industry. Even though WFC is not on the CCC list as it only has two years of dividend growth, I believe WFC is at fair value (current P/E at 13) and also provides the best resilience from the banking sector. WFC is also one of Warren Buffett's largest holdings.
As mentioned before, each stock is purchased with the thought that the stock will be held for a long term (20+ years). I believe WFC is the best option in the banking sector for long-term hold.
WFC was purchased at $49.26 on 5/6.
(I conduct my own stock valuations and I believe PG is currently overvalued just like the overall market. WFC is not on the CCC list and the dividend was cut recently during the last recession. Stocks such as WFC might not fit for some DG investor near retirement. This article is a portfolio update and not a stock analysis, and the details of the stock selection are not in this article. Readers please do your own research and don't invest solely on contributor's action)
Current Portfolio - Q2 2014
The portfolio value increased to $148,259 from $127,076, with a total increase of $21,183. $6,000 is from contributions for the month of April and May and $15,183 is from capital and dividend gains. Portfolio cash reserved increased to $4,218 from $1,791, the current market helps the decision to put cash aside. Current cash allocation is at 3% and the goal is to increase to 10%.
It has been a prosperous quarter. I did not realize the size of portfolio gain until I started this portfolio update. In the current market, growth stock portfolios probably perform better than DG portfolios, however the short-term market movement does not affect the DG portfolio strategy.
The only stock that lost value in last quarter is Target (NYSE:TGT) with a loss of 0.3% excluding dividend.
30 Under vs. S&P 500 Semi-annual review
When the portfolio was first constructed, the intention was never to "Beat the market." However, there are readers in the SeekingAlpha community that like to see portfolio updates with comparison to the SP index.
Above is comparison information directly from E*TRADE. I do not pay too much attention to a portfolio comparison because it does not factor in the dividend payout and reinvestment. It is not a difficult task to perform well during the current market, however, having the portfolio show resilience during a recession is exactly what the portfolio was built for and what I hope to see.
In the month of January when both the index and the portfolio were exposed to a slightly pull back (Index -3.56% vs. Portfolio -2.71%), the portfolio showed resilience. However, only one month of data is insufficient to make any claim. The idea of building a defensive dividend portfolio is to prepare for a recession where the market experiences a long period of downturn.
The total twelve month estimated dividend income increased from $5,262 to $5,569. A sizeable increase of $307 yearly estimated dividend, $125 of the dividend comes from new addition of PG and WFC, and this portfolio generated $182 of organic annual dividend increase in Q2 from reinvested dividend and dividend growth. The average estimated monthly dividend is at $464.
The monthly dividend is still far from the final goal for the portfolio of generating a monthly dividend of $2,500.
Estimated dividend income is a function provided by E*Trade. It does not factor in future dividend growth and dividend reinvestment, is a conservative calculation, therefore the average estimated dividend is the same amount to the average dividend received from Q2.
Dividend received in Q2:
During Q2 the portfolio generated $1,393 of dividend, which is a slight increase from the dividend received from Q1 of $1,198.
Dividends are important but currently producing income is not the main focus of the portfolio, the portfolio is at the stage of fortifying with defensive dividend stocks that can provide resilience during a recession.
Every stock in the portfolio is participating in dividend reinvestment plan with the exception of PBA and BP.
(The portfolio is constructed of "defensive dividend stocks" that have showed resilience during previous market downturns with good track record of continued and increased dividend payments. Previous results do not always equal to same result in the future.)
PFE - PFE is one of the biggest health care companies and the health care related industry will be in high demand in the future. With the low P/E (9.5), payout ratio (38%) and high yield (3.46), PFE might be the next company to add to the portfolio. PFE had a dividend cut in 2009 due to acquisition and they are in the process of attempting to acquire AstraZeneca.
COH - COH probably should not be on the portfolio watch list based on the fact that the company is a luxury brand, but the stock is at a good value in the current market. COH is currently near the 52 wk low, with payout ratio 44% and yield near the 4% mark. The 5 years dividend growth is a concern because it does not overlap the 2008 recession period. 5 years of dividend growth is not impressive for a DG stock since there was not any downturn during the past 5 years. If the dividend growth period were longer (10+ years), COH would be a strong candidate for the portfolio.
One of the benefits of being a Dividend Growth Investor is to watch the portfolio grow while waiting for the market downturn as an opportunity to purchase more shares of good dividend stocks. I feel confident and comfortable with the current stage and progress of the portfolio. In the current market it is difficult to enter the market especially with a large amounts funds or for investors close to retirement age. Fortunately, the portfolio was constructed two years ago and the time frame for my own retirement is still long. I will still keep searching for good DG stocks, but I believe now it is a good time to increase the portfolio cash reserve for later opportunities.
I am not claiming to be a knowledgeable investor. I write to learn by sharing my thoughts and actions, and expect knowledgeable feedback from the SeekingAlpha community. I hope my articles attract new investors to explore and research the world of dividend and growth investing.
It is truly an amazing experience being a contributor. Publishing the first portfolio update has had a positive impact for me as an investor. In addition to the knowledgeable and informative comments, being a contributor has helped me become more disciplined and focused on the fundamental of dividend and growth investing.
Not every detail of planning and action are listed in the portfolio update. Readers please do your own research if you plan to invest. Once again do not make investment decision solely on contributions' action. All investments with return associate with risk. Readers please do your own research and invest at your own risk.
Disclosure: The author is long PBA, WFC, CLX, CVX, XOM, KO, MCD, BP, PM, O, AGNC, TGT, WMT, AAPL, JNJ, T, CHL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.