Review In May, Buy In October

|
Includes: AAPL, BNS, CNI, HP, KO, LMT, NTR, SNCAF, TU, WMT
by: The Dividend Guy

As the second earnings season is over, it's now time to review my portfolio and see how the first part of the year has progressed. As the old sayings goes… "sell in May and go away," I would rather say review in May and buy in October. After all, if I were to sell now, I would not cash in the dividends, right?

Asset Allocation Review

The first thing I do when I look at my portfolio is an asset allocation review. I want to make sure I'm not too concentrated in a specific industry. Too often, we get lost while building our portfolios and find plenty of great companies evolving in the same sector. When a sector is strong, most companies evolving in this micro-environment will benefit from "the high tide" phenomenon. It is only normal to find great revenue, EPS and dividend growth during a great period for a specific sector. The best example I can think of are the financials prior to 2008 and the oil industry prior to mid-2014. Here's my asset allocation as of the end of May:

Source: author table

As you can see, the biggest part of my portfolio is invested in industrials. This may seem concentrated as it is a quarter of my portfolio in the same sector. However, these companies have very little links between them: Lockheed Martin (NYSE:LMT) is providing aerospace and defense products/services, SNC Lavalin (OTCPK:SNCAF) (SNC.TO) is an engineering firm and Canadian National (NYSE:CNI) (CNR.TO) is a railroad company. Therefore, if the defense industry goes down, there is very little chances it will affect the transportation of goods or infrastructure constructions.

Then again, my two holdings in the consumer defensive sectors are not linked either: Coca-Cola (NYSE:KO) and Wal-Mart (NYSE:WMT). I must say that now that I'm on the road in a motorhome, I'm beginning to become the biggest Wal-Mart fan.

My most speculative plays constitute a very small portion of my portfolio: Gluskin & Scheff (GS.TO) in the financial sector (4%), Helmerich & Payne (NYSE:HP) in the energy sector (4%) and Agrium (AGU) (AGU.TO) in basic materials for 3% of my portfolio. I could also add SNC to the speculative group but now that I'm sitting on a nice 25% paper profit, I'm not too worried about this one.

This portfolio was built using my 7 dividend investing principles, all based on academic studies. At this time, I don't see the need for any major asset allocation movements. I will keep in mind that 2 other companies are highly linked even though they are not part of the same sector on paper. Telus (NYSE:TU) (T.TO) in the telecom sector and Apple (NASDAQ:AAPL) in the techno sector represent another 24% of my portfolio altogether. The problem is that both companies are highly dependent on their mobile business. The first one provides network services and the second one makes smartphones. If one goes down, chances are the other one will follow. This is is probably the weaknesses of my asset allocation at the moment. Then again, I'm sitting on strong paper profits for these two holdings and they are set for a 10%+ dividend growth per year for the next 2-3 years. It's hard to say no to such high dividend growth!

Best Moves

My best move over the past 12 months was definitely to sell ScotiaBank (NYSE:BNS) (BNS.TO) and buy SNC Lavalin. As with all other Canadian banks, BNS will not benefit from a strong economic market in the upcoming years. The Canadian economy is not going anywhere as long as the oil industry struggles and their strong position in Latin America was once a strength, but it is currently just another weakness as several socio-political problems rise.

On the other hand, I decided to buy SNC Lavalin, an engineering firm on the edge of getting kicked out of all Government's contracts for 10 years due to bribery charges and other legal issues. This is nothing to get too inspired about if you are a conservative investor. But if you have a growth portfolio like I do, there was an amazing opportunity to buy an undervalued company. Since I purchased SNC, the company is getting closer to an out of court settlement, won its bid on the new Champlain Bridge in Montreal (the biggest bridge to be built in Canada in the years to come) and had shown positive quarters.

Worst Moves

I have two poor performing holdings in my portfolio right now. The first one is Gluskin & Scheff (GS.TO) and the second one is Helmerich & Payne (HP). GS.TO has been suffering for a while basically due to the fact that the investing party is over. A few years ago, it was pretty easy to make money. The market was up and there wasn't any sign of volatility. When this phenomenon happens, most people tend to invest even more money. This is why GS.TO assets under management skyrocketed. Unfortunately, with volatility comes lesser performance on the stock market and withdrawals by scared clients. This is why GS.TO is now my worst performing holding in my portfolio. However, the backbone of this company is still intact and they would always be a good fit for a merger or acquisition by a bigger fish (a Canadian bank looking for a growth vector).

The case of HP is relatively simple: as long as oil prices stay low, companies will not need additional rigs to dig more holes.

Dividend Growth

At the beginning of the year, I tried to look at my capital growth apart from my dividend growth rate. Each year, I add new money to my portfolio. Since I purchased only dividend paying stocks, it's only normal that my dividend income increases year after year. What is more important to me is to know if the payout has increased because I bought more stocks or because companies increased them. I obviously focus on dividend growth coming from companies. Here's how my dividend and capital grew for the past 4 years (capital growth rate is calculated on the amount I add each year):

2012 2013 2014 2015
Dividend Growth Rate N/A 28.48% 28.35% 15.32%
Capital Growth Rate N/A 17.81% 12.51% 1.90%

As you can see, the dividend growth rate in 2015 was quite solid at 15.32%, while I only added merely 2% more in cash. Further analysis shows me that all my companies other than SNC increased their dividend payout in 2015.

Investing Goal for the Rest of the Year

My portfolio return for the first half of the year is not incredible. I'm between -1% and +2% depending on the week. The main reason was because of currency headwinds (yeah… I sound like a CFO now). More seriously, back in 2012, I moved 65% of my portfolio into US stocks. This was an amazing move since then as I'm Canadian and my holdings are converted in Canadian dollars before calculating my return. The thing is that since the beginning of the year, the USD is losing steam:

exchange rate US CDN 2016 Source: Ycharts

Assume I make the market return, the S&P 500 is about +2% this year but the currency conversion makes it -5% in my portfolio. Since 65% of my portfolio is in USD, this affects my portfolio by -3.25%. Therefore, I'm not making much money this year, but I can't complain either.

I don't have any specific goals for the rest of 2016. I'll continue to follow my holdings to make sure they continue to fit my investment strategy. I may put a stop sell on SNC to protect my gain (after all, this transaction was made with a short term horizon). I hope I will have more money to invest towards the end of the year, but this will all depends on how my trip and my websites are going!

Do you have any thoughts about my asset allocation? What would you do differently?

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.