November Portfolio Results
At the end of each month, I assess my wife and I's portfolio performance. While I am primarily interested in acquiring dividend-paying stocks trading at reasonable valuations in order to produce a rising income stream that will cover expenses in retirement, I like to see how our portfolio stacks up against the broad market. By no means am I an investing expert, so knowing how we are doing against the S&P 500 offers me some insight into our strategy's short-term success. Through the end of November, our portfolio of Roth IRAs, 403(b) work plans and share builder accounts is up 9.89%. This includes only dividends received, not new money added to the account. The S&P 500 is up 9.11%, including dividends. This is actually the closest the performance of the S&P 500 has been to our own portfolio, and we have outperformed the index every month this year.
For each update, I like to highlight our top and bottom 5 performing stocks for the year. I feel this helps to give me an idea of which sectors or stocks are in favor and which are not. Like last month, I will only include stocks that we've owned for the entire year. While Cummins (NYSE:CMI) and Qualcomm (NASDAQ:QCOM) continue to be amongst the best-performing stocks that I follow, we haven't owned them for all of 2016, so we haven't received all of their gains. After being our second-best performing stock through the end of October, Chevron (NYSE:CVX) is now our top gainer through the end of November, having returned 24% year to date. As I write this, oil is over $50 a barrel, thanks to OPEC's decision to reduce output by 1.2 million barrels per day. JPMorgan (NYSE:JPM), which has been rather ho hum this year, has enjoyed a gain of over 21% for 2016. Much of this gain (almost 17%) has come since the results of the presidential election. Evidently, investors feel the banks will perform well under a Trump administration/Republican-controlled congress. Aflac (NYSE:AFL) remains a top 5 performer for us, with a share price appreciation of more than 19% for the year. 3M (NYSE:MMM) has returned 14% for 2016 and AT&T (NYSE:T) 12.26%.
Gilead Sciences (NASDAQ:GILD) continues to be an issue, with shares having lost more than 27% for the year. Ouch. I'm still holding onto shares, and I am taking comfort in the fact that the company has a lot of cash (more than $21 billion in cash according to Google finance), raised its dividend 9.3% last April and has such low expectations that the stock could rally hard if sentiment regarding the company changes. CVS Health (NYSE:CVS) has lost more than 21% year to date. We've purchased shares twice this year, and I am fairly confident the stock will be a good long-term hold based on the ever-increasing number of people who will need prescription medicines as they age. Dividend stalwart Coca-Cola (NYSE:KO) is our third-worst performer of stocks we have owned all year. The share price is down more than 6% this year. Since I've wanted to own more of the company for some time now, I don't mind the loss. In fact, this lackluster performance has given us an opportunity to add to the position (see below). Coke has raised dividends for 54 years. According to David Fish's U.S. Dividend Champions, only 10 other companies have a longer dividend growth track record. With a history like that, the streak is more than likely to stay intact. Starbucks (NASDAQ:SBUX) has also struggled this year, losing 3.41%. The company did gain nearly 50% in 2015, so a so-so 2016 might have always been in the cards. Starbucks' potential growth in China (6% last quarter) continues to pique my interest, as does the 25% dividend raise the company gave shareholders on 11/15/2016. The lag in share price might offer a good opportunity to add to our position. General Electric (NYSE:GE) rounds out our bottom 5, having lost 1.25% in 2016. Aside from really just Gilead and CVS, our portfolio has performed quite well this year.
Prior to the presidential election, I had an article published on Seeking Alpha listing some stocks I was hoping to purchase in case the market sold off based on the result. While we haven't gotten the drastic sell-off many predicted with a Trump victory, I was able to pick up shares of Qualcomm on 11/22/2016 at $66.73. You can read my previous article here, but I thought the chip maker was a good buy under $81 a share. On the day of purchase, F.A.S.T. Graphs had a current price-to-earnings ratio of 15. This was 1.33% above the average 5-year ratio of 14.8. S&P Capital had a 12-month price target of $80, meaning shares were about 19% undervalued. S&P Capital had a fair value of $76, which is 14% above the purchase price. Morningstar saw fair value at $72, offering a potential 7% of upside. Altogether, my guidelines told me Qualcomm was almost 10% undervalued. With 14 years of dividend growth, a 3%+ yield and an average dividend raise of more than 20% for the past 5 years, I'm happy to add to our position.
Coca-Cola was our second purchase this month and wasn't even on my radar at the time I bought the stock. Aside from the lowered share price for 2016, I found the yield pretty attractive. We purchased a batch of shares on 11/22/2016 at $41.49. At that price, shares were yielding 3.37%. According to F.A.S.T. Graphs, the last time shares yielded this high was during 2008. That wasn't exactly the greatest of times for investors. Shares of Coke are rarely on sale, so opportunities to pick up a quality company with 5+ decades of dividend growth don't often come around. At the time of purchase, F.A.S.T. Graphs had a current P/E ratio of 21.3 for KO. This is 6% higher than the 5-year average. S&P Capital has a 12-month price target of $48, which would be 15.69% upside potential based on purchase price. Their fair value is just $27.20, meaning S&P Capital sees shares as 34% overvalued. Morningstar has a fair value of $44.50. Reaching this mark would result in a 7.25% gain in share price. Averaged out, I see shares at 4.4% overvalued. As noted in previous updates, I am willing to overpay 5% for companies with at least 10 years of dividend growth. Even though I find shares slightly overvalued as of today, I am comfortable buying shares of this Dividend Champion at a high dividend yield. Even with this purchase, KO represents just 3% of our overall portfolio. 5% of the portfolio is the highest I am willing to make an individual stock, so if the share price slides more, I will consider adding again.
After this month's purchases, our portfolio now consists of the following 35 companies:
3M, AbbVie (NYSE:ABBV), Aflac, Altria (NYSE:MO), Apple (OTC:APPL), AT&T, Boeing (NYSE:BA), Chevron, Cisco (NASDAQ:CSCO), Coca-Cola, Conoco Phillips (NYSE:COP), Cummins, CVS Health, Disney (NYSE:DIS), Exxon Mobil (NYSE:XOM), General Electric, General Mills (NYSE:GIS), Gilead Sciences, Honeywell International (NYSE:HON), Johnson & Johnson (NYSE:JNJ), JPMorgan, MasterCard (NYSE:MA), Microsoft (NASDAQ:MSFT), Pepsi (NYSE:PEP), Philip Morris (NYSE:PM), Procter & Gamble (NYSE:PG), Qualcomm, Realty Income (NYSE:O), Southwest Airlines (NYSE:LUV), Starbucks, Target (NYSE:TGT), Ventas (NYSE:VTR), Verizon (NYSE:VZ), V. F. Corp (NYSE:VFC) and Visa (NYSE:V).
Every month this year, we have received more dividend income than we did the previous year. This makes sense, as we automatically reinvest dividends, and all but two of the stocks we owned raised their dividends this year. This month, dividend income is down 4.5% when compared to November 2015. The reason for this decline? Starbucks, which normally pays its last dividend of the year in November, will instead pay it on 12/2/2106. Had Starbucks followed the previous year's schedule and paid this month, dividend income would've increased slightly year over year. Regardless of this slight decrease for the month, our dividend income through the end of November is up almost 22% compared to the same time period of 2015 and up 85% compared to 2014. As I usually note, we weren't able to put much money away for retirement in 2014 because we were saving for a wedding.
By fully funding our Roth IRAs for just the last two years and putting small amounts away in share builder accounts, we have almost doubled our income stream from two years ago. And this was without having to juice our returns by investing in high-yielding/high-risk stocks. Sure, we have some high-yielding stocks like Ventas and AT&T, but we also have many lower-yielding/higher-growth names like Apple and Visa. I don't claim to be an investing guru. I've followed a simple formula: buy stocks that regularly increase their dividends at prices I want. Let others chase the Amazons and Facebooks of the investing world. I'll keep my money in dividend-paying stocks, as I strongly believe that if you're able to put money aside for retirement and pick quality companies trading at reasonable valuations, you can have capital gains and income that can meet your retirement goals.
The 9 companies paid us simply for holding their shares: AT&T, General Mills, Verizon, CVS Health, MasterCard, Apple, AbbVie, Realty Income and Procter & Gamble.
With one month to go in 2016, I am very pleased with our portfolio's performance. Almost 10% return this year is pretty solid, and our dividend income continues to rise. This still outpaces the S&P 500. Since we hope to use dividends to fund our retirement, this is especially satisfying. Feel free to leave a comment on our purchases or strategy.
Disclosure: I am/we are long ABBV, AFL, CMI,COP, CVX, GILD, GIS, HON, JPM, KO, XOM,MA, MMM,MO, MSFT,PG, PM, QCOM, T, TGT, V, VFC, VTR, AAPL, BA, CSCO, CVS, DIS, GE, JNJ, LUV, O, PEP, 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 investing professionals. Please do your own research prior to making an investment decision.