I Bought Union Pacific For An IRA That Continues To Beat The Market

| About: Union Pacific (UNP)

Summary

I bought Union Pacific and Ameriprise recently for this portfolio because I believe they offer value.

The portfolio has been crushing the market since 2016 started.

The portfolio currently yields about 4.24%.

A while ago I came to the decision of taking back my IRA from my financial advisor because he was underperforming the market. It was just his strategy that I was at odds with. He felt the best funds to put my money into were funds that would help me sleep at night. When in actuality the funds he had me in made me not sleep at night because I felt like I was losing out on capital gains when compared to the broader market. When I wasn't able to sleep because of it I thought to myself that if he wants to put me in those types of funds and take money from me for it, then why don't I just manage my own IRA with a bunch of sleep well at night dividend growth stocks?!?

I set out to find a core of five stocks that would be my core holdings with AT&T (NYSE: T) and Johnson & Johnson (NYSE:JNJ) as my sixth and seventh stocks acting as my cash cows. The goal was to start off with a 4% dividend yield; hence AT&T was going to be my largest holding followed by J&J. With the dividends generated I plan on putting them to work in the portfolio as opposed to reinvesting the dividend. That all depends at the time I get paid the dividend and doing the research on the stocks at the time.

Let us recount what I suggested back in early January when I last made a purchase in this portfolio. I recommended buying some Union Pacific (NYSE:UNP) on January 2nd and since that time the stock is up 11.6% versus the 1.1% gain the S&P 500 has produced. I also purchased shares of Ameriprise (NYSE:AMP) at the time but those shares are down 9.9%. Since I purchased equal amounts of each they pretty much canceled each other out.

I recently used the dividends I accumulated to purchase additional shares of Union Pacific and Ameriprise Financial . I will provided a brief update on the individual picks and a portfolio update since that time.

Union Pacific

Union Pacific Corp is a rail transporting company. Its operating company is Union Pacific Railroad Company. It links 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain. The company currently trades at a trailing 12-month P/E ratio of 16.33, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.02 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.43), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 11.38%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 11.38%. On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.52% with a payout ratio of 41% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.4%, 22.2%, and 14.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.52% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past nine years at a 5-year dividend growth rate of 29.7%. The reason I got in the stock was because I actually feel that the stock offers value as long as it remains below $88 (this is the midpoint of the 52-week range).

Ameriprise

Ameriprise Financial Inc through its subsidiaries is engaged in providing financial planning, products and services as solutions for its clients' cash and liquidity, asset accumulation, income, protection and estate and wealth transfer needs. The company currently trades at a trailing 12-month P/E ratio of 11.31, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 8.63 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $11.11 per share and I'd consider the stock inexpensive until about $167. The 1-year PEG ratio (0.67), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 16.95%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 16.95%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 12.95%. On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.79% with a payout ratio of 32% of trailing 12-month earnings while sporting return on assets, equity and investment values of 1.1%, 20.2%, and 7.9%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.79% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past eleven years at a 5-year dividend growth rate of 29.5%. I also bought additional shares in this name because I felt that it offers great value below $103 (this is the midpoint of the 52-week range).

As of right now the dividend rate for the entire portfolio stands at around 4.23% from a prior 4.17%. This is while the portfolio has returned 11.9% in 2016 against an S&P 500 which has gained 1.1%. I call that a win.

Without further ado, here is the list of picks that I plan to use for now to get me to the retirement land:

Company

Ticker

incl. DIV

Portfolio

Johnson & Johnson

 

17.52%

32.60%

AT&T Inc

 

13.59%

49.06%

Union Pacific Corp

 

-4.68%

4.62%

Helmerich & Payne Inc

(NYSE:HP)

-14.48%

2.85%

Ameriprise Financial

 

-15.48%

4.06%

Cummins Inc

(NYSE:CMI)

-16.90%

3.94%

Caterpillar Inc

(NYSE:CAT)

-20.04%

2.68%

Cash

$

 

0.20%

This portfolio is aggressive. An asset mix such as mine normally generates high long-term returns but can be very volatile. Financial planners typically recommend these types of mixes for investors who have investment horizons longer than 10 years, need high returns, and are comfortable with a high level of risk.

I have a large value portfolio. I have a lot of exposure to the communication services and healthcare industries obviously with my heavy weightings in AT&T and J&J. I have very little exposure to the energy, technology, consumer defensive, consumer cyclical, and financial services industries.

You should take special note of your low exposure to technology. Granted, these stocks can be risky, but collectively they are a large segment of the market and represent some of the most promising growth opportunities for investors. The financial services sector represents a fairly large segment of the market, but I have very little exposure to it because I don't believe it is performing well enough right now. Compared with the broader market, my portfolio's stock exposure is biased toward large-cap value companies.

As I mentioned before, I have a large value portfolio. I have a lot of exposure to high yield and slow growth.

Most financial advisors would suggest that you diversify your stock exposure among a broader variety of stock types. I have very little exposure to hard assets, cyclical stocks, classic growth, and aggressive growth names.

I also recently just applied to trade with options in this account and I intend to get more aggressive by buying calls and puts.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long UNP, AMP, CAT, CMI, HP, JNJ, T.

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.

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