My Dividend Growth Portfolio - Q2 2016 Summary

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Includes: AAPL, ABT, AFL, AMP, AVA, BAC, BBL, BDX, BHP, BP, C, CAT, CCL, CVX, DIS, DLR, EMR, GE, GIS, GOOG, IBM, JNJ, JPM, KMB, KO, LC, MCD, MDT, MMM, MMP, MO, NKE, NOV, NSC, O, OHI, PEP, PFE, PG, PM, POT, QCOM, RCL, SBUX, T, TGT, TROW, UNP, UTX, V, VFC, VLO, VZ, WEC, WFC, WMT, WPC, XOM
by: Khen Elazar

Summary

In December 2015, I started publishing quarterly updates regarding my dividend growth portfolio.

I also share other investments I own.

In this article, I will update my goals, holdings and watchlist.

Introduction

I started sharing my dividend growth portfolio in December 2015. Since then, I made it through a very volatile Q1 in 2016. Q2 was much less volatile as my portfolio showed positive returns in all three months. However, it could have been much more volatile, if the markets believed that the Brexit is really going to happen. So far we already know that it will not happen in 2016. I believe that a Brexit will not happen, and the worst can be some negotiations between the European Union and the United Kingdom. As the Brexit fears faded, the markets gave investors a very high return.

My dividend income kept growing, as companies raised their annual payments, while none of my holdings cut its dividend. I must note that Chevron (NYSE:CVX) is still freezing its annual payment at $4.28. The total return of my portfolio in Q2 was 5.2% which is almost the same as I got in Q1 with 5.17%. I am still worried about the dividends in the energy sector. I don't hold any basic materials companies in my portfolio after I sold BHP Billiton (BBL, BHP). I used the lesson that I learned from BHP, and I avoided Potash (NYSE:POT).

Investment Allocation

I still divide my investments between medium term and long term. In October I will be able to use the deposit that I have in my bank, and I will allocate half to my brokerage account and the second half to my medium term managed account. I am also very happy with my Lending Club (NYSE:LC) account, and I believe that I found a filter that suites me very well. So far my annual return is above 8%.

Over the second quarter, I allocated capital to every account besides my bank deposit. I saved money for my trip next month, and I even extend it to four weeks. As you can see in the chart below, there is almost no difference in the allocation between now and three months ago. As I make sure to allocate capital to every account, there will be no major change until I reallocate the money in my bank deposit in October.

My Goals

My long-term goals haven't changed since Q1. I am still looking to be a financially responsible individual. I save and invest money, minimize debts and use the rest of my salary for consumption. I try to accumulate assets in order to have more freedom and less dependence on others.

After I return from the U.S, I will make a larger effort to repay my car loan, and I will obviously find a new short term goal to save for. It is possible that this goal will be another trip, as one of my dreams is to watch the Northern Lights. Maybe I will travel to Lapland.

Sector Allocation

Since I learned a few lessons in Q1 after seeing risky energy stocks cutting their dividends, I changed my portfolio optimal allocation. It was a fantastic lesson, that cost me some money, but I believe it was worth it for the long term. The Brexit also taught me several lessons about investing, mainly why to avoid stop losses.

However, there was no significant change in my portfolio, that made me change my optimal sector allocation. I still believe that the current allocation will be great for my goals, and I hope I don't have to change it in the near future. Sector allocation shouldn't be changed a lot, as it means that investors will have to rebalance their portfolio. Balancing means taxes and commissions, two things I am trying to avoid.

Here is my current sector allocation:

Sector Current Allocation Optimal Allocation
Consumer Staple 24% 20%
Health Care 11% 12.5%
Industrials 13% 12.5%
Financials 13% 12.5%
Consumer Discretionary 10% 10%
Energy and Materials 8% 10%
Information Technology 6% 8%
REITs 8% 7%
Telecommunications 4% 5%
Utilities 2% 2.5%
Click to enlarge

Changes to my portfolio in the past quarter

Over the past quarter, I sold only one position- National Oilwell Varco (NYSE:NOV) because of the dividend cut. I already wrote about it in the previous article, so there is nothing to add. I automatically sell positions when the company cuts the dividend. It is the best way for me to know that something is wrong, and when something is wrong I want to be far away. On the other hand, I used my monthly contribution to buy more companies together with the dividends I received.

I bought shares in healthcare companies and information technology companies in order to balance my exposure to the different sectors. I make sure to analyze each company, and I won't buy it just because it fits the sector I am looking for.

If there is an opportunity, I will buy shares in companies even if I am over allocated to the sector. I did it this quarter with the consumer discretionary sector and the financial sector, which usually trades for higher valuation. I took advantage of the fears about China and Europe to buy some more shares. On the other hand, I didn't buy a lot of IT companies, as most of them are pretty expensive in my opinion.

I also bought some energy sector companies to replace the ones I sold. I didn't manage to find suitable candidates for all my capital so my exposure to the sector declined from 14% to 8%. I must admit that I am much more comfortable with 8%. However, the decline in the exposure also led to a decline in dividend income. It was, as I said before, a great lesson for me.

Companies that I bought in Q2

Healthcare: In this sector I bought both Pfizer (NYSE:PFE) and Abbot (NYSE:ABT). Both companies offer higher than average growth, and both were trading for a convenient valuation during parts of the past quarter. While I am still looking for more companies in this sector, the current valuations make it harder for me to find them.

Information Technology: I also bought two companies in this sector. I bought Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) None of them was new to my portfolio, but I took advantage of the valuations and averaged down. Both company showed fantastic Q2 reports, which caused them both to rally. Right now, they still trade for fair valuation in my opinion, but the margin of safety isn't large enough for me at the moment.

Energy: As I stated before in my article form April, I bought Chevron, Exxon Mobil (NYSE:XOM) and Magellan Midstream (NYSE:MMP) in order to replace National Oilwell Varco. Moreover, I bought more shares of Magellan and I initiated a new position with Valero Energy (NYSE:VLO). VLO offers high yield, and it a refiner which is less sensitive to the price of oil. It lacks a long dividend growth history, so my position is small.

Financials: This sector suffered a lot because of two main things: Brexit and the fact that the Fed didn't raise the interest rate. Therefore, several financial companies were trading for really attractive valuations. I bought Citigroup (NYSE:C) and Ameriprise Financial (NYSE:AMP). Both of them still trade for attractive valuation.

Industrials: The only stock I bought in this sector was United Technologies (NYSE:UTX). It is a stock that I wanted to own for a long time, and I finally found a good opportunity. The stock dipped just a little bit, and I took advantage of it and initiated a small position. I hope that I will be able to buy more UTX in the future.

REIT: Well, this is interesting, I have more REITs than I want to have in terms of allocation. However, I bought some more shares of Omega Healthcare (NYSE:OHI), because I just couldn't resist the great valuation, as well as the fantastic yield. I believe that the company can cope with the risks in its business model. Investors were just rewarded by another dividend raise, and the current yield is still close to 7%.

Consumer Discretionary: I bought more stocks of V.F. Corp (NYSE:VFC), a fantastic dividend aristocrat with a very long streak of dividend growth. However, I also initiated two new different positions. I bought shares in two major cruise lines companies. I bought some shares of Royal Caribbean (NYSE:RCL) and Carnival Cruise (NYSE:CCL). While RCL raised its dividend every year for the past five years, CCL doesn't have a streak of dividend raises at the moment. It only raised dividend payments in the past two years, but I believe that both companies can become reliable dividend payers. They enjoy the cheaper fuel, and the fact that more people around the world become wealthier, especially in China.

Over the past quarter I kept selling put options, and used to premiums for my investments. I sold mainly options for financial companies as well as consumer staples. I took advantage of volatile days to sell some puts with strike price that is far from the current price. I only do that with companies I would like to buy, so I don't mind if the options are exercised.

The portfolio

Here is my current portfolio:

Sector Company Ticker % of portfolio % of income
Information Technology Apple Inc. AAPL 1.60% 1.10%
Health Care Abbott Laboratories ABT 2.27% 1.68%
Financials Aflac Incorporated AFL 3.00% 2.11%
Financials Ameriprise Financial AMP 0.78% 0.77%
Utilities Avista Corp AVA 0.98% 0.97%
Financials Bank of America Corporation BAC 1.80% 1.16%
Health Care Becton, Dickinson and Company BDX 0.54% 0.26%
Energy BP plc BP 1.74% 3.87%
Financials Citigroup 1.13% 0.52%
Industrials Caterpillar CAT 2.29% 2.68%
Consumer Discretionary Carnival Corporation CCL 0.48% 0.45%
Energy Chevron Corporation CVX 2.60% 3.45%
Consumer Discretionary The Walt Disney Company DIS 1.96% 0.91%
REIT Digital Realty Trust, Inc DLR 2.85% 2.95%
Industrials Emerson Electric Co. EMR 2.69% 2.88%
Industrials General Electric Company GE 2.88% 2.67%
Consumer Staples General Mills, Inc. GIS 1.82% 1.55%
Information Technology Alphabet Inc. GOOG 0.76% 0.00%
Information Technology International Business Machines Corporation IBM 0.99% 1.08%
Health Care Johnson & Johnson JNJ 6.37% 5.15%
Financials JPMorgan Chase JPM 1.64% 1.55%
Consumer Staples Kimberly-Clark Corporation KMB 2.00% 1.78%
Consumer Staples The Coca-Cola Company KO 3.12% 3.16%
Consumer Discretionary McDonald's Corporation MCD 3.66% 3.44%
Health Care Medtronic plc MDT 0.72% 0.44%
Industrials 3M Company MMM 1.09% 0.86%
Energy Magellan Midstream Partners MMP 0.74% 1.03%
Consumer Staples Altria Group Inc MO 4.12% 4.37%
Industrials Norfolk Southern Corporation NSC 1.75% 1.44%
REIT Realty Income Corp O 2.03% 2.16%
REIT Omega Healthcare Investors Inc OHI 1.84% 3.87%
Consumer Staples PepsiCo, Inc PEP 3.87% 3.39%
Health Care Pfizer Inc. 0.75% 0.77%
Consumer Staples The Procter & Gamble Company PG 1.73% 1.73%
Consumer Staples Philip Morris International Inc PM 6.08% 7.89%
Information Technology Qualcomm Incorporated QCOM 1.28% 1.37%
Consumer Discretionary Royal Caribbean Cruises Ltd RCL 0.51% 0.34%
Telecom AT&T Inc T 3.05% 4.33%
Consumer Discretionary Target Corporation TGT 2.14% 2.16%
Financials T. Rowe Price Group TROW 0.72% 0.70%
Industrials Union Pacific Corporation UNP 1.33% 0.99%
Industrials United Technologies Corporation UTX 0.66% 0.51%
Information Technology Visa Inc V 1.62% 0.36%
Consumer Discretionary V.F. Corporation VFC 1.26% 0.95%
Energy Valero Energy Corporation VLO 0.53% 0.77%
Telecom Verizon Communications Inc VZ 1.35% 1.75%
Utilities Wisconsin Energy Corp WEC 1.31% 1.28%
Financials Wells Fargo & Co WFC 3.60% 3.57%
Consumer Staples Wal-Mart Stores, Inc WMT 1.20% 1.03%
REIT W. P. Carey Inc. WPC 1.69% 2.90%
Energy Exxon Mobil Corporation XOM 2.77% 2.90%
Click to enlarge

Q2 brought significant expansion of the portfolio's net worth as well as dividend income. I am still worried about BP and CVX, but I have some confidence in both companies. If they cut their dividends, I will consider buying more VLO and MMP.

What am I looking for?

I am still looking for companies in the healthcare sector and the information technology sector. However, the current valuation of both sectors is pretty high, so it is hard to find many appropriate companies in these sectors to add to my portfolio.

As I mentioned in the previous articles, I divide the dividend stocks into three main types. I mainly look right now for type 2 and type 1 stocks. I am looking for growth possibilities that hopefully will bring excessive returns in the future.

Other stocks to consider

While healthcare and information technology are the sectors I am lacking in my portfolio, I will not ignore any deal as long as I believe there is value there. I am still looking at Disney , and I would also like to buy some Nike (NYSE:NKE) and Starbucks (NASDAQ:SBUX). If I can buy some more UTX, I will be glad.

Conclusion

These kind of articles are probably among the most important I published. Together with articles about lessons that I learned, they contribute the most to me. Hopefully they also contribute to my readers. These articles allow me to keep track of my progress as the time goes by. It also shows my readers that I follow my own advice, and I don't just analyze stocks and tell people to buy or sell them

Disclosure: I am/we are long ALL STOCKS IN MY PORTFOLIO.

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.