The Perfect Portfolio: What We Are Buying Right Now

Includes: CSCO, GE, JPM, WFC
by: David Crosetti


Stock market volatility has many investors heading for the sidelines.

Some investors are "going to cash" as fear of further market declines become more commonplace.

Pundits suggest that we are heading for a worldwide recession and it's time to focus on safety.


I have to tell you that this has really been an interesting year in the stock market and if my suspicions are correct, it's going to be a bumpy ride all year long. For some investors, this kind of market is not something that they are familiar with. For most of the old timers here, I think this is nothing we haven't seen before. Depending on your experience, you might find this market to be very scary and you know what? You might be completely right in feeling that way.

When we look at the year-to-date S&P 500 Index Chart, it looks like this:

While there are other indexes beside the S&P 500, the results, year to date, with other indexes is not very promising, either. That doesn't mean that I'm being critical of the market or the index. It means that I am showing the reality of the market so far this year. It's not pretty out there, folks.

Things You Should Know:

I've written about a portfolio of stocks called The Perfect Portfolio. You can find a recent article that discusses the portfolio here.

The Perfect Portfolio is a Dividend Growth portfolio that is a collection of 16 companies that were purchased over a three-year time period, 2009-2011 and the portfolio represents my attempt to replace interest income from CDs with dividend income from dividend growth stocks. The stocks were purchased in three increments, where I invested $100k, each year, and this is held in a taxable account.

Now, for those of you who may be new to this, there are basically three types of stocks.

First, there are stocks that pay no dividends at all. There is nothing wrong with companies that do not pay a dividend. I've owned companies that don't pay any dividend. For whatever reason, these companies have chosen not to pay dividends and "it is what it is."

Second, there are stocks that pay a dividend, but that dividend is variable. Sometimes it's the same as last year, sometimes it's increased, sometimes it's decreased. These are called "dividend paying stocks."

Third, then there are companies that pay a dividend and increase that dividend annually. These stocks are known as "dividend growth stocks" because the dividend grows year over year. As some critical folks like to say, "They increase their dividend until they don't."

When that happens, they either become "dividend paying stocks" or they become a "stock that does not pay a dividend."

That's a brief and basic description of stock types, relative to dividends. Not all that complicated, but it seems to cause a lot of consternation with some people.

There is nothing that makes one type of stock any better or worse than another type of stock. Whether it does not pay a dividend, whether it pays a dividend, or whether it increases the dividend every year is almost irrelevant in and of itself.

What is relevant to stocks is the valuation of each company, relative to the price of the stock at a given point in time. When we look at The Perfect Portfolio, in this table, we can see a very important column and that column is the one labeled "Cost Basis."

As you can see, the portfolio has grown and the rate of growth has been different for each holding. Normally, that would be "fixed" with an annual balancing of the positions that are held, through the process known as "rebalancing.

But, this portfolio has been left "as is" and "where is" since it was created. Dividend income has been increasing year-over-year due to the Dividend Growth Rates for the stocks held in the portfolio, but dividends have been taken in the form of cash, as opposed to reinvesting them, ever since the portfolio began.

What You Should Know:

The portfolio could use a bit of a rebalancing here. My intentions are to go ahead and trim the positions that are overweight in the portfolio. Here's how the weighting stacks up presently:

It is our intention to discuss any changes that we plan on making (sales/buys) before we make them. Unfortunately, we have had two limit orders filled in the last couple of days.

We had a limit order for 200 shares of Cisco (NASDAQ:CSCO) at a price of $22.50 per share that was filled on 2/11/2016.

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Cisco recently increased its dividend from .84 a share annually to $1.04 a share annually, which is an increase of 23.8%. This increase was a pleasant surprise, it was not anticipated (the size of the increase) as the intention was to own the shares with a 3.75% yield (or close to that). Instead, we are going to be receiving a yield point of 4.6% which will give us an additional $208 in dividend income over the next 12 months.

A second limit order that was filled was for 100 shares of JPMorgan (NYSE:JPM) at a price of $53.20 on 2/11/2016.

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Our intention with JPM was to purchase shares with a 3.3% yield point, which we did. JPM pays a current dividend of $1.76 a share annually which was an increase from the previous dividend of $1.60, which represents a 10% increase. We did not anticipate, nor did we have any knowledge that the CEO of the company was going to make a $26M stock purchase of JPM shares. It was a coincidence.

JPM will add an additional $176 in dividend income to the portfolio this coming year.

Conclusion and Summary:

It is my intention to keep you informed in real time as to what we are doing with this portfolio. Any stock selections that I make are not a recommendation for you to purchase, nor is it an endorsement of any company. What you decide to do is your business, but I want to try and be as transparent as possible with this portfolio moving forward.

We believe that the market is going to be a rocky one this year and that there will be plenty of opportunities to invest in stocks at fantastic points of value.

Whether you see that value in the stocks that we intend to purchase or not is almost irrelevant. One of the stocks we are considering in General Electric (NYSE:GE). I know that there are people in the SA community that think GE is nothing more than "satanic" and would not touch the stock under any circumstances.

We are looking at additional financial stocks. Wells Fargo (NYSE:WFC) is one on our radar, but again, there are people who just won't and don't purchase bank stocks. That's fine and dandy. Whatever you do is ok with me.

We are also looking at a group of stocks that are in the dividend growth "sweet spot" yield point of 3% or larger. We are not looking at MLPs, REITs, BDCs, ETFs, CEFs, or anything other than dividend growth stocks. If you want to know more about those particular investment vehicles, there are people that do an excellent job of analyzing those investments.

Again, since I am not making recommendations for you to purchase or sell, there won't be a lot of charts, graphs, bells or whistles. There will be statements like, "this is what we have decided to buy, we want to purchase it at this price, this is the limit order that we have placed, the price we set will give us this yield and this projected income."

No other rationale or discourse as to why I think the stock I'm buying is a value or a buy. You need to form your own decisions and make your own purchases and sales with your own due diligence in place.

There will be no need for some very astute mathematician to run the numbers on the performance of the portfolio and then suggest that an investment in some obscure index fund would have been "better."

The Perfect Portfolio is set up to provide income first and capital gains second. A distant second. Hope that you will follow along and I promise to get ahead of the curve with telling you what we are doing and where this portfolio is going to go.

Disclosure: I am/we are long CSCO, JPM, WFC, GE, ABT, ABBV, CL, CVX, JNJ, KMB MCD PG RAI T VZ XOM MO.

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.