Checking In On Our Dividend Growth Portfolio In A Volatile Environment

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Includes: CSCO, SHPG, T, V, VZ
by: The Dividend Bro

Summary

How did our portfolio hold up during this volitile investing environment in January?

We'll take a look at our purchases of Visa and Cisco.

We'll also compare our dividend performance from previous years.

January Portfolio Update

Well, January was an interesting month for investors. The S&P 500 came into 2016 trying to stay about the 2000 level, but quickly took a nose dive. The index hit a low of 1814 on January 20th, almost a 9% loss in the first few weeks of the year. Since that day, the index has recovered slightly. Oil has gained more than 17% since that day, and earnings season is upon us. While the strong U.S. dollar has hurt multinational companies, some companies have had strong earnings reports. The S&P 500 has recovered a good portion of the losses, though it is still down more than 5% for the year. In addition, the Fed may or may not raise interest rates this year, and there still seems to be a lot of bad news out of China. Volatility seems to be the theme for the market.

January Results

With that being said, let's see how our portfolio did in the month of January. Compared to the major indexes, my wife and I's portfolio performed rather well in the first month of the year. Including dividends, our portfolio is down 2.43% in January. This is a stronger performance than the S&P 500, Dow Jones Industrial Average or the Nasdaq. Gilead (NASDAQ:GILD), Boeing (NYSE:BA) and ConocoPhillips (NYSE:COP) were our worst performers for the month, with losses of 18.27%, 16.92% and 16.67% respectively. Gilead and the rest of the biotech companies have been hurt by politicians questioning the pricing of their drugs. ConocoPhillips dividend may be at risk due to the low price of oil, and Boeing issued much softer forward guidance, sending the shares plummeting.

On the positive side, telecommunication companies Verizon (NYSE:VZ) and AT&T (NYSE:T) performed well in January with gains of 8.02% and 4.74% respectively. Monthly dividend payer Realty Income (NYSE:O) was our second best performer, with a return of just under 8%. So much for interest rate hikes hurting the Real Estate Investment Trusts! Investors seem to be favoring steady income payers to the more growth orientated names in the market and that suits us just fine. We want to own shares in companies that are steadily raising and paying dividends. In retirement, we will live off those dividends.

Current Positions

Our total portfolio now consists of twenty-nine companies: 3M (NYSE:MMM), AbbVie (NYSE:ABBV), Aflac (NYSE:AFL), Altria (NYSE:MO), Apple (NASDAQ:AAPL), AT&T, Boeing, Chevron (NYSE:CVX), Cisco (NASDAQ:CSCO), Coca-Cola (NYSE:KO), ConocoPhillips, CVS Health (NYSE:CVS), Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE), General Mills (NYSE:GIS), Gilead, Johnson & Johnson (NYSE:JNJ), JPMorgan Chase (NYSE:JPM), MasterCard (NYSE:MA), Microsoft (NASDAQ:MSFT), Philip Morris (NYSE:PM), Procter & Gamble (NYSE:PG), Realty Income, Southwest Airlines (NYSE:LUV), Starbucks (NASDAQ:SBUX), Target (NYSE:TGT), Ventas (NYSE:VTR) Verizon and Visa (NYSE:V).

January Purchases/Sells

Before we get to the buys and sells for the month, just a reminder of what our criteria is for purchasing a stock:

The first group of stocks are what we consider the Core Holdings. For Core Holdings, we want companies that:

  1. Have at least 10 consecutive years of dividend growth.
  2. Are considered by S&P Capital/Morningstar to be at least fair value.
  3. Have a dividend yield above 2.0%.
  4. Dominate their sector of the economy.

The next group of stocks is considered to be Supporting Holdings. For Supporting Holdings, we want companies that:

  1. Have 5 years of dividend growth or 10 years of paying uninterrupted dividends.
  2. Are considered by S&P Capital/Morningstar to be at least 5% undervalued.
  3. Have a dividend yield above 1.0%.

The last group of stocks is the Speculative Holdings. For Speculative Holdings, we want companies that:

  1. Have recently initiated a dividend.
  2. Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  3. Are considered by S&P Capital/Morningstar to be at least 10% undervalued.

In January, we sold one position and initiated new positions. We don't often sell a position, but we did sell Baxalta (BXLT). Baxalta split from Baxter (NYSE:BAX) in July, 2015. The reasons for the sell were discussed in a previous article (you can read it here). It boiled down to not wanting to wait till the deal with Shire (NASDAQ:SHPG) closed for an extra few dollars. Between Baxalta and Baxter we had a combined 14% gain in the position. Not bad for a company that had cut its dividend after the split. Due to the dividend cut, the company no longer had a spot in our portfolio.

We then used some of that capital to initiate a position in Visa. While we already own MasterCard, we have been waiting for Visa to approach our target price. In a recent article, which you can find here, we discussed Visa as a potential purchase. The issue has always been that the company trades at a higher price then we felt comfortable with. When the market was at its lows for the month, Visa finally traded towards our price target. We weren't able to get shares at the fifty-two week low but did pick up a block of shares at just over our price target of $72. Visa released their quarterly earnings, and the world's largest credit card company was able to top estimates. Though the company did miss slightly on the revenue side, Visa did earn 5.6% more in the first quarter of 2016 than in the first quarter of 2015.

At purchase time, S&P Capital's twelve-month price target for Visa was $80 and fair value was $70. Morningstar's fair value was $104. This averaged out to almost $85 per share. At the purchase price of just over $72, we were able to get Visa at 16% discount to what we feel is fair value. Though the company has raised dividends for the past eight years, it currently yields less than 1%. This makes

Visa a Speculative Holding in our portfolio. While some investors might think owning two credit card companies could have a negative impact on the portfolio's diversification, the total combined position of Visa and MasterCard is only 4.3%. We were able to add one of the best run credit card companies in the world without hurting our diversification. Visa is the second smallest position in our IRAs. As such, we will be looking to add shares of Visa anytime there is a broad market selloff.

For our second position, we choose to again expand our portfolio holdings and initiated a position in the technology giant Cisco Systems. Like Visa, Cisco was on our shopping list of companies we don't yet own. Prior to this purchase, our only other technology holdings were Apple and Microsoft. We were looking to add another technology company to increase our foot print in this sector. Cisco has come a long way since the wild valuations the company had during the Tech Bubble. The company is the world's largest producer of networking systems. Cisco produces the routers and switchers that allow networks around the world to connect to each other. That is a sector of the economy that is probably not going anywhere and one we want to have in our portfolio.

Cisco has a dividend growth rate of more than 31% over the last three years. Morningstar values the company at $27 per share while S&P Capital has a fair value of $30 with a twelve-month price target of $34. We were able to purchase shares at $23.42, making Cisco almost 29% undervalued to our numbers. Due to the company's yield being above 1% and five years of dividend growth, Cisco is considered a Supporting Holding in our portfolio. As with Visa, Cisco is a very small part of our portfolio. If the company continues to trade below what we feel is fair market value, we will purchase additional shares.

Dividends

While purchasing shares in new companies is always exciting, the whole mission behind our portfolio is to build a steady stream of dividends that will cover our expenses in retirement. For whatever reason, January always seems to have the least amount of companies paying dividends of any month of the year. As such, January has historically the lowest amount of dividend income produced. Still, it was a fairly successful month in terms of dividends for us.

Dividend payers in January included: Altria, Philip Morris, Realty Income, General Electric and JPMorgan. We even received a tiny dividend from Baxalta prior to closing the position. We did not own Southwest Airlines or Cisco prior to the ex-dividend date, so we did not receive dividends from those companies. We received 24.03% more income in January 2016 than the same month in 2015 and 42.58% more income than in 2014, a solid improvement overall. None of the companies that paid a dividend this month have raised their dividends for 2016. After this month's trading activity, we estimate that we will receive 13.18% more income in 2016 than we did in 2015. Even more impressive, we estimate we will receive 42.58% more income in January of 2016 than in same month in 2014. That is a fairly sizable pay raise. Current yield for the portfolio is 3.42%.

Conclusion

We are looking forward to steadily raising the dividend income available to us. We are still sitting on some extra capital due to the selling of Baxalta, so we will most likely be able to make two purchases in February. We will continue to use the shopping list we created in previous articles to help guide our selections. For reasons stated at the beginning of this article, there will undoubtedly be more market turmoil this year so we should have opportunities to buy stocks in companies that are being unfairly punished in a broad sell off.

Disclosure: I am/we are long ABBV, AFL, COP, COP, CVX, GILD,GIS,JPM, KO, XOM, MA, MMM, MO, MSFT, PG, PM, T, TGT, V, VTR, AAPL, BA, CSCO, CVS, GE, JNJ, LUV, O, SBUX, , VZ.

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: We are not investment professionals. Please do your own research before making an investment decision.