July Portfolio Update - There's Growth In Health

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Includes: CVS, LUV, QCOM, TD, VFC
by: New Div on the Block

Summary

Building on last month's introduction to the portfolio, here's my first monthly update.

I go through my purchases, sales, and dividends collected for the month.

I also put out a few names I'll be watching closely in August for establishing new positions.

Last month, I introduced my New Div on the Block portfolio to the Seeking Alpha community. Many other contributors responded with very kind comments and suggestions, and I hope to take many of them in stride moving forward on my newly refined path of Dividend Growth investing.

As the portfolio continues to grow, I hope to provide monthly updates detailing my dividend income, any purchases or sales, and any stocks I will be watching particularly close in the month ahead.

Without further ado, here's a snapshot of my "New Div on the Block" Portfolio as of 8/1.

*Note: Italicized dividends were reinvested.

Ticker Shares Value (8/1/16) Cost Basis Gain/Loss Realized Gain YTD Dividends
KO 5 $217.25 $223.20 -2.66% $3.50
PFE 10.0863 $376.32 $306.95 22.60% $3.00
GE 15.1095 $470.66 $484.90 -2.94% $3.45
GM 50.6567 $1,585.55 $1,534.80 3.31% $19.00
VLO 25.2859 $1,305.51 $1,476.63 -11.59% $15.00
LUV 36.0645 $1,335.83 $1,531.80 -12.79% $2.50
CVS 16 $1,495.84 $1,559.67 -4.09% $0.00
DPS 3 $2.64 $3.18
VZ 5 $12.44 $5.66
TOTAL: $6,786.96 $7,117.95 -4.65% $15.08 $55.29
Click to enlarge

As you can see, money both entered and exited the portfolio this month, but slightly improved performance in some lagging stocks brought my return on cost basis from -5.2% to -4.65%. As I mentioned last month, I am not overly worried about the current losses as I now have a solidified DGI strategy and a plenty long time horizon to allow these gains to appreciate. Now, let's take a closer look at the moves of the month.

Purchases: 2

7/18 - 16 shares of CVS Health @ $96.92

CVS is a name that's been floating around a lot lately. Widely seen by analysts as undervalued, CVS seems to be better positioned than its main competitor Walgreens (NASDAQ:WBA), which has struggled with expensive acquisitions. I also think CVS is an intriguing play for tangential exposure to Target (NYSE:TGT), as CVS pharmacies are being integrated into Target stores across the US. CVS's business model will continue to benefit from the U.S.'s aging population.

In addition to these merits, CVS is also a strong dividend growth play. A very safe payout ratio of 31.56% and sky-high 3YR, 5YR, and 10YR compound annual growth rates of 29.1%, 32.0% and 25.5%, respectively, guarantee that CVS's current 1.74% dividend yield has nowhere to go but up, and fast. Its reasonable PE ratio and attractive valuation were also factors in my decision to initiate a position.

7/22 - 11 shares of Southwest Airlines @ $37.15

Despite its status as the premier low-cost U.S.-based carrier, Southwest's stock has not been feeling much "luv" lately. When I bought my initial position of shares back in April, I hoped that the price I paid was representative of a temporary pullback, however the price has continued to decline since then. This accelerated dramatically (to the tune of a nearly 11% price drop!) after Southwest issued a disappointing earnings report with cautious comments from leadership about challenging conditions ahead.

While I understand that airlines have not traditionally been the most profitable of companies, a company like Southwest that stands head and shoulders above its competitors and continues to deliver record profits quarter after quarter deserves a close watch. So, my decision to buy was two-fold: 1) given that the price has continued to fall since my original purchase, and the temporary sell-off after earnings was from my point of view an overreaction, I felt averaging down my cost-basis would be beneficial and 2) despite the tough conditions, I don't think anything has fundamentally changed for the worse about Southwest's business model. Yes, the remainder of the year might see more short-term pain, but I think with my time horizon, Southwest will be a good investment over the long haul.

Sales: 2

7/14 - 3 shares of Dr. Pepper Snapple @ $97.50

7/22 - 5 shares of Verizon Communications @ $55.92

Both Dr. Pepper Snapple and Verizon made up miniscule percentages of my portfolio and as I mentioned in last month's article, I am looking to exit these small positions when convenient and at a price where I can take a small gain (after broker fees). In this case I needed a bit of cash anyway and decided to liquidate these two positions. I like both companies as long-term investments, but with a rather high cost-basis and both companies' share prices far from what I would consider attractive valuations for buying, I opted not to pursue trying to average down costs while pursuing more shares.

Dividends Collected

July was a pretty quiet month on the dividend front. I received additional quarterly dividends (in line with previous) from both Dr. Pepper Snapple and Verizon, which I kept as cash. I also received my first dividend payment from GE, which I reinvested to gain an additional .1095 shares. Including both reinvested and non-reinvested dividends, my yearly dividend income now sits at $55.29. Once I have more time under my belt, I'll begin to present these numbers on a monthly basis as compared to the same month in the previous year, as many DGI portfolio gurus here on SA do.

One final note here: I opted to purchase CVS the day before its ex-date, so my first dividend payment (which was received after 8/1 but before I wrote this article) will be covered in the next update.

Stocks on my Watch List in August

The market remains at or near all-time highs, which makes finding attractive valuations somewhat akin to finding hay in a needlestack. Though the temptation to buy when everyone else is doing it too may be strong, it's important to make a strategy and stick with it to keep yourself disciplined in finding stocks that best fit what you want to get out of your portfolio.

As a reminder, the basic criteria I use when evaluating new stock purchases are:

  • Dividend yield above the S&P 500 average of just over 2%;
  • PE ratio below the S&P 500 average of around 24;
  • Sustainable payout ratio for dividends no greater than 50%; and
  • Three- and five-year dividend growth rates of at least 20% among companies with relatively young dividend histories OR three-, five-, and ten-year growth rates of at least 8% among companies that have paid dividends for at least several decades.

As evidenced by my CVS purchase, stocks do not have to meet ALL criteria to be eligible for purchase, but the more criteria they meet, the more likely I am to consider them. Here are a few intriguing options I'm keeping a close eye on:

Toronto-Dominion Bank (NYSE:TD): I think the Canadian banks are more insulated from uncertainty than the U.S. banks are, plus big American banks like Wells Fargo (NYSE:WFC) and J.P. Morgan Chase (NYSE:JPM) are subject to CCAR. Last month I mentioned I was following Royal Bank of Canada (NYSE:RY), and I still am, but TD is hovering just below 5% from where I would be most comfortable initiating a buy at around $41, whereas RY is closer to 10% above my target buy price. Both banks offer compelling dividend yields of around or above 4% and boast sustainable payout ratios and very solid three-, five-, and ten-year growth rates.

Qualcomm (NASDAQ:QCOM): After smashing expectations in its latest earnings report, QCOM's share price jumped from the mid-$50s to low $60s, causing many analysts to reassess its valuation. While QCOM clearly has upward momentum right now and still has room for further appreciation, I would be more comfortable buying on a slight pull back to the $57-58 range. QCOM also offers a compelling yield of 3.47% and has strong growth history, though its payout ratio slightly higher than I would like at around 58.03%.

VF Corp (NYSE:VFC): Clothing maker VFC disappointed in its latest earnings on falling revenues, citing the bankruptcy of retailer Sports Authority and North American sales weakness in one of its key brands, Timberland, as the primary culprits. VFC also cut its full-year guidance, which has sent the stock price south ever since. These headwinds are likely short-term and do not reflect any change to the underlying strength of VFC's iconic brands, which continue to sell well in online markets even as brick-and-mortar retailers struggle through a sluggish cycle. For a long term investor like me, pullbacks like this open the door to attractive buying opportunities, coupled with VFC's respectable 2.47% yield, low payout ratio, and impressive dividend growth rate over the last three, five, and ten years.

What companies are you watching this month? Do you agree with my purchases? Leave a comment below, and thanks for stopping by!

Disclosure: I am/we are long KO, GM, GE, LUV, VLO, PFE, CVS.

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.