Green on the Screen
Friday afternoon after the market closed, I clicked Seeking Alpha's "My Portfolio" tab and for a few moments I just stared at the green screen. I said, "Wow!"
I checked to see if the S&P 500 index hit an all-time high, and saw this Reuters headline: "S&P 500 brushes record high after blowout jobs report." Two weeks ago, I felt like the market wanted to take out the May, 2015 high of 2134.72, but the Brexit vote slowed it down. The market hit an inter-day high of 2131.71 on Friday, just short of the all-time high. The all-time closing high was 2130.82, set in May, 2015. The index closed Friday at 2129.90, less than one point below the record close.
Graph from MarketWatch
The market is at an important juncture. Last fall, the S&P 500 index tried and failed to surpass the May, 2015 high. Some market analysts believe we have been in a bear market since that 2015 high. If the S&P fails to make a new high, those analysts will continue to see current market action as a bear market rally. If the S&P 500 is able to break out above the May, 2015 high, then it will confirm for many people that the bull market that began in March, 2009 continues to march on.
No transactions this week
There were no buys or sells this week in the Retirement Portfolio, but the market's continued rise caused me to ask whether some trimming might be in order. I decided that earlier steps to trim and diversify had brought the portfolio close to "core positions" in almost all the holdings, so I decided nothing was so overvalued as to merit a sale. I might consider trimming some recently added closed-end funds if they continue to appreciate at their present pace.
The market's action since the January-February lows has made me look for ways to reduce risk by
- adding some lower-beta holdings like preferred stocks;
- adding some diversification through closed end funds and exchange traded funds;
- taking advantage of sector rotations to pick up relatively undervalued companies, thus adding more diversification by increasing the number of holdings to 52; and by
- looking for opportunities to improve the quality of the portfolio.
The portfolio is up 19.1% year-to-date, and up 28.0% since the portfolio low on January 20, 2016. Below, the portfolio is presented in the way it appears on my spread sheet. I think this is the best way to communicate the intended design of the portfolio. I'll say more about the design and the shopping list that I've created as a way of working toward the desired design.
|Schwab Div||SCHD||5*||0||41.95||0||0||0||1.17||2.8|| |
|Pub Stor Pfd||PSA.B||A/BBB+||400||26.89||10756||2.9||3.0||1.35||5.0||45.00||3.6||25.00||25.38|
|State St Pfd||STT.G||A/BBB||200||27.64||5528||1.5||1.5||1.34||4.8||22.29||1.8||25.00||26.58|
S&P = Credit rating by Standard & Poor's, where available
Preferreds show the company rating and the issue rating
ENO is a bond; all preferreds and ENO have a $25 par value
M* = Morningstar rating
CM = From Michael Weber, Canadian Dividend All-Stars
VOD = From Trevor Witten, UK Dividend Champions
Designing the Portfolio
In previous articles I've mentioned the importance of having a portfolio design in mind before launching into purchases. Earlier in my life, I seemed to move from one "hot idea" to another, without the end result in mind. When I bought shares of Merck (NYSE:MRK) during the early 90s healthcare sector swoon, I thought, "Wow! I own a blue chip." At that point, I could not imagine having a portfolio that included numerous blue chips. I wasn't thinking big enough and I wasn't looking out far enough into the future.
It helps me to organize the portfolio by fives and tens. The "Target" column above indicates the portfolio percentage goal allocated for each holding. They generally are in groups of five or ten. In the portfolio's present configuration, I've allowed room for 60 holdings. That's about the capacity of my brain, and I don't think I can make the print any smaller on my spread sheet (and still be able to read it), so 60 is about the maximum I can fit on one page.
I've been operating with 35 individual companies, 5 CEFs, 4 ETFs, 7 preferred stocks and one "baby bond" (which trades like a preferred stock, but appears on the Entergy New Orleans balance sheet as debt rather than equity). That's a total of 52 holdings. My previous design called for adding 6 more ETFs, and 2 more preferred stocks.
For now, I'm reducing the ETF goal from 10 to 5. So, I have one "slot" in the portfolio for an ETF fund, and I want to add a diversified S&P 500-type fund. I'll mention several on the shopping list that follows, but the one I have "plugged in" to the slot above is the Schwab US Dividend Equity ETF (NYSEARCA:SCHD). At some point in the future I may add several more ETFs. This would provide a framework for me or my successors to move from a portfolio focused on individual equities to a portfolio of funds.
If I add a fifth ETF and two more preferred stocks, it would bring the portfolio to 55. The design is that I've replaced the five ETF "slots" with five new single company holdings. In keeping with my preference for higher credit qualities, I went back to the "old reliable" lists of companies with S&P credit ratings ranging from AA- to AA+, and to David Fish's list of Dividend Champions.
The Shopping List
When bargains seem rare, I like to take a step back and look at the big picture of the portfolio and the market. In recent months, I have added some low-beta yield-producers and some CEFs and ETFs. I've diversified by increasing the number of holdings to 52. Now I want to return to the theme of increasing the quality of the portfolio.
Sometimes, at both market tops and market bottoms, one can find relatively good values with high quality stocks. In a bear market, virtually everything is on sale - including high quality stocks. A bear market can create a scenario where the price difference between high/low quality stocks is compressed and one can pick up higher quality stocks at a relatively good value.
In a market with very strong breadth, virtually everything rises--including lower quality stocks. In this scenario, occasionally one can find a high quality laggard at a relatively good value. Of course, these stocks may have had disappointing earnings or some other company-specific event that has depressed the price. A current example is Apple. The 52-week price range for AAPL is $89.47 to $132.97.
I'm not going into the details of any of the candidates, but I'll explain why each one is on the shopping list. The list is divided into two groups. One has 15 common stocks and two partnerships. The other list has seven ETFs and one preferred stock.
Top Five on the Shopping List
- Apple (NASDAQ:AAPL), $96.68, intrigues me because it is over 27% off its 52-week high price. Is it the pre-eminent consumer technology company in the world, or is it a "one trick pony" (iPhone) that is vulnerable to a shrinking moat of due to commoditization? It has an AA+ credit rating and it has raised the dividend for five consecutive years. David Fish gives AAPL a 3-year dividend growth rate of 38.9%. Orange Peel Investments says Apple will hit $83 before it hits $103.
- Exxon Mobil (NYSE:XOM), $93.54, is a previous holding that I liked when it was yielding around 4%. The current yield is 3.2%. The company's credit rating is one casualty of the oil bear market, moving from AAA to AA+. Nicholas Ward recently argued that XOM is grossly overvalued. The 52-week price range is $66.55 (remember the "good old days"?) to $94.49.
- Automatic Data Processing (NASDAQ:ADP), $94.47, has an AA credit rating. They've raised the dividend for 41 consecutive years. David Fish shows a 5-year dividend growth rate of 10.5%, which has accelerated to 12.4% for 3 years and 16.3% for one year. ADP tends to receive a premium valuation by the market. ADP is at the top of its 52-week price range of $64.29 to $94.59. Willow Street Investments says ADP is a star, but overpriced.
- Coca-Cola (NYSE:KO), $45.38, has an AA- credit rating. The dividend has been raised for 54 consecutive years. The 5-year dividend growth rate has been 8.4%. The 52-week price range has been $36.56 to $47.13. Chris Katje sees KO moving more into non-carbonated beverages.
- Colgate-Palmolive (NYSE:CL), $74.25, has an AA- credit rating and has increased the dividend for 53 consecutive years. The 5-year dividend growth rate has been 8.1%, but it has slowed to 7.1 for 3 years and 5.6% for one year. CL sits atop its 53-week price range of $50.84 to $74.27. Christopher De Sousa recommends buying CL with a $78 price target.
As one who likes to buy near the bottom of a stock's 52-week price range, AAPL and KO would be more attractive at present than XOM, ADP or CL.
My preferred buy price for APPL is $81.43 (2.8% yield), for XOM is $75.00 (4.0% yield), for ADP is $70.67 (3.0% yield), for KO is $40.00 (3.5% yield), and for CL is $52.00 (3.0% yield). I'm looking at the following prices for "layering into" these holdings in this "Green On The Screen" market.
The top row for each holding indicates a target price for initiating a position and targets for adding to the position. The bold price is the target price for a full position. If the prices were to go lower, I would be willing to overweight the stocks as indicated above in italics.
The bottom row for each holding indicates the cumulative amount that would be invested if one added to each position at the target prices.
KO is near the price I would be willing to initiate a position by beginning to "nibble." The others would need to see considerable pullbacks from present levels, with AAPL being the next nearest to a price to initiate a position.
Shopping list places 6 through 17
- Northwest Natural Gas (NYSE:NWN), $64.83, has an A+ credit rating, which is strong for a utility. The dividend has been raised for 60 consecutive years. The 52-week price range has been $42.00 to $65.75. The annual dividend is $1.87 and the current yield is 2.9%. I would like to add this utility to the portfolio, but I would rather pay something closer to the 52-week low. My target buy price is $46.75. William Stamm says NWN's safety is offset by its slow growth. This is a good example of a "Green on the Screen" shopping list stock--a great company, but I want to wait until it goes on sale.
- GlaxoSmithKline (NYSE:GSK), $43.38, has an A+ credit rating. I thought Brexit might provide an opportunity to buy GSK, but not so. My buy target is $39.64. GSK briefly spiked down to $39.66 on June 27. Currency translation and a variable dividend make this one difficult. I place the dividend at $2.22, for a current yield of 5.1%. Dividend Drive sums it up nicely: "GlaxoSmithKline has been, it must be said, an easy hold for me over the years. A high-yielding, low volatility healthcare business with a robust pipeline carries a wide range of appeals. Nonetheless, patiently waiting for growth, which seems perpetually elusive can often strain your relationship with any investment."
- American States Water (NYSE:AWR), $43.37, has an A+ credit rating and the dividend has been increased for 61 consecutive years. AWR is #1 on David Fish's list of Dividend Champions. The dividend is $.90, for a yield of 2.1%. My target buy price is $31.03, which represents a 2.9% yield. I once bought AWR at a 3.0% yield, but those opportunities are rare. So, it remains distantly on the shopping list. The 5-year dividend growth rate has been 10.9%, and the most recent increase was 5.3%. Brad Kenagy spotted a buying opportunity in March. The 52-week price range has been $35.80 to $47.24.
- WGL Holdings (NYSE:WGL), $70.81, has an A+ credit rating and the dividend has been raised for 40 consecutive years. The dividend is $1.95, for a current yield of 2.8%. This is a diversified utility in Washington, DC. This one has been hot, now sitting near the top of its 52-week price range of $51.86 to $70.92. WGL is rarely on sale, but I believe this is the kind of stock one should note during a strong market like the present. My target buy price is $55.71, which seems impossible now, but it is within the 52-week price range. The last non-pro article on SA about WGL was by Harvesting Dividends in March, 2015.
- Target (NYSE:TGT), $71.31, has an A credit rating and has increased the dividend for 49 consecutive years. The dividend is $2.40, which equates to a 3.4% yield. Big box sentiment has recently shifted away from TGT to WMT. The 52-week price range has been $65.50 to $85.31. My price to consider initiating a position is $68.57 (a 3.5% yield). TGT looks attractive to Eli Inkrot.
- Wells Fargo (NYSE:WFC), $47.79, has an A credit rating and has increased the dividend for six consecutive years. The stock made it on my shopping list when it broke below $50. The annual dividend is $1.52, for a 3.2% yield. The 52-week price range has been $44.50 to $58.76. WFC is my favorite big US bank. My target buy price is $43.43, but one mitigating factor for me is that a WFC preferred issue is 2.9% of the portfolio. Another mitigating factor is that I would need to satisfy myself that WFC would be preferable to one of the Canadian banks. I already own shares of Canadian Imperial Bank of Commerce (NYSE:CM), and I am impressed with Royal Bank of Canada (NYSE:RY), Toronto Dominion (NYSE:TD), and Bank of Nova Scotia (NYSE:BNS).
- Magellan Midstream Partners (NYSE:MMP), $74.14, is a master limited partnership with a BBB+ credit rating (the same as EPD), which is as good as it gets in that sector. The annual distribution is $3.21, making for a current yield of 4.3%. The distribution has been raised for 16 consecutive years. Factoids has an amazing grasp of this sector, and he is long MMP. The 52-week price range has been $54.51 to $77.45. My target buy price is $67.58.
- BCE Inc. (NYSE:BCE), $46.95, a Canadian telephone company, has a credit rating of BBB+ and has increased the dividend for the past seven years. The annual dividend (according to my calculation) is US$2.10 at an exchange rate of US$.77/C$1.00, for a yield of 4.5%. The 52-week price range has been $31.49 to $47.94. All figures are US$. John Lawlor sees BCE as a "true widows and orphans" stock. My price target for BCE is $42.81. A limit order for this price came close to being filled a few weeks ago, but the price has moved up.
- Realty Income (NYSE:O), $69.91, has a credit rating of BBB+ and a dividend of $2.39, for a current yield of 3.4%. The dividend has been raised for 23 consecutive years. The 52-week price range has been $43.15 to $71.92. I would consider initiating a new position at $56.24, which would be a 4.25% yield. ColoradoWealthManagementFund offers a new way of valuing O.
- National Retail Properties (NYSE:NNN), $51.78, has a credit rating of BBB+ and a dividend of $1.74, which has been raised for 26 consecutive years. The current yield is 3.4%. The 52-week price range has been $33.62 to $53.13. My target price for initiating a new position is $40.94, which would be a 4.25% yield. ColoradoWealthManagementFund would be a buyer if interest rates rise and REIT prices are hurt.
- Dominion Resources (NYSE:D), $78.19, has a credit rating of BBB+ and has raised the dividend for 13 consecutive years. The dividend is $2.80, for a yield of 3.6%. The 52-week price range has been $64.54 to $78.97. My target price for initiating a position is $66.67, which would be a 4.2% yield. I concur with Bull's Run that natural gas and solar may be catalysts for D.
- Lazard (NYSE:LAZ), $30.54, was brought to my attention by two recent SA articles, one by Cash-Centered Creep and one by Income Surfer, who bought at $29. LAZ is a limited partnership domiciled in Bermeuda. It has raised the distribution for 9 consecutive years. The payout is $1.52, for a current yield of 5.0%. LAZ is not rated by S&P. My target buy price is $29.23, which equates to a 5.2% yield.
Seven ETFs and one preferred stock
Here are seven exchange traded funds and one preferred stock that are on my shopping list:
- Schwab US Dividend Equity ETF, $41.97, with an estimated payout of $1.17, yields 2.8%. This ETF has been recommended by David Van Knapp. I've looked at several, and for now it is in the top position due to its general makeup and the low .07% annual expense ratio. It has a 5 star rating by Morningstar.
- PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (NYSEARCA:SPHD), $38.73, with an estimated payout of $1.16, yields 3.0%. If you are considering an ETF based on the S&P 500, you owe it to yourself to read Joseph Porter's compelling argument for this ETF. It has a 5 star rating by Morningstar.
- iShares Core High Dividend ETF (NYSEARCA:HDV), $63.01, with an estimated payout of $2.84, yields 4.5%. It has a 5 star rating by Morningstar. I was helped by Adam Aloisi's article about HDV. He says it may be "the" ETF for dividend growth investors, but he wants to see a longer track record.
- iShares Residential Real Estate Capped ETF (NYSEARCA:REZ), $68.29, with an estimated payout of $2.53, yields 3.7%. It has a 5 star rating by Morningstar. Brad Thomas offers a nice 2015 review of REZ.
- Vanguard High Dividend Yield ETF (NYSEARCA:VYM), $72.22, with an estimated payout of $2.17, yields 3.0%. It has a 3 star rating by Morningstar. Investing Doc offers a comparison of 10 dividend ETFs, including VYM.
- Vanguard Utilities ETF (NYSEARCA:VPU), $114.38, with an estimated payout of $3.31, yields 2.9%. It has a 4 star rating by Morningstar. ColoradoWealthManagementFund has written several articles about VPU.
- Putnam Master Intermediate Income Trust (NYSE:PIM), $4.39, with an estimated payout of $.31, yields 7.1%. My portfolio contains a small position in a long-term corporate bond fund (NASDAQ:VCLT). At some point, I may want to add an intermediate term bond fund. Today, PIM would be my first choice. If you are looking to add bond exposure, you would benefit from John Dowdee's comparative look at several investment grade bond CEFs.
- Allstate Corp Preferred B (ALL.B), $27.17, with a dividend of $1.285, yields 4.7%. This is the only preferred stock currently on my shopping list. It can be called anytime after January 15, 2023. The company has an A- credit rating by S&P, but S&P does not rate the preferred issue. Two resources for preferred stocks that you might find helpful are QuantumOnline.com and the monthly update of recent preferred IPOs by SA contributor Doug K. Le Du.
This is my "Green on the Screen" Shopping List, which is homework during an expensive market. The market won't always be expensive. When opportunities present themselves, these will be among my candidates for further study.
So, what's on your shopping list? I would love to hear your ideas!
I'm not advocating the purchase or sale of any security. I offer this update as the journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.
Disclosure: I am/we are long JNJ, CSCO, GE, MRK, CMI, MSFT, PFE, QCOM, PEP, SO, MMM, PG, GPC, UNP, DUK, CM, CNP, IBM, WMT, DOV, WPC, WEC, TXN, EPD, EMR, ADM, T, HCP, VOC, BPY, BIP, BEP, HASI, PEGI, EVA, RFI, BUI, THW, BGY, ETY, VCLT, VNQ, VWO, DEM, SCHW.D, CHSCM, ENO, AGM.C, KKR.A, PSA.B, STT.G, WFC.Q.
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.