It has now been three and a half years since I took control of my retirement portfolio and began my journey with dividend growth investing. I sold out of the mutual funds in my Simple IRA and went full bore into a diversified portfolio of dividend paying companies.
I did so after becoming frustrated by the high fees and lackluster performance offered by the mutual funds I owned, and also as a means to control my own destiny for retirement.
I've certainly made some mistakes along the way, but at this point couldn't be happier with the results. My portfolio has now more than doubled in size, and my dividend income has steadily increased. I hope my experience serves as an inspiration to others contemplating a similar switch, and helps foster discussion to make us all better investors.
Second Quarter Market Overview
The market continued its volatile ways during the quarter as the indices dropped 3-6% in June before rallying to finish around even during the period.
^SPX data by YCharts
The other big swings in the market came the way of currency and interest rates. The Brexit vote unexpectedly went the way of Britain leaving the EU, which shook the markets and led to a dollar rally. Additionally, continued low rates around the world and increased fear associated with the vote has caused investors to flee to safety, driving the 10 Year Treasury Yield to all-time lows.
10 Year Treasury Rate data by YCharts
The combination of "flight to safety" and search for yield has spilled over to the equity markets, driving up the share price of many Utility, Consumer Staple and REIT companies. This is quite evident when looking at the respective ETFs for those sectors, the (NYSEARCA:XLU), (NYSEARCA:XLP) and (NYSEARCA:VNQ).
XLU data by YCharts
With those three sectors representing roughly 40% of my holdings, the portfolio also did pretty well in the second quarter. After taking out the cash contributions of $1,092, the portfolio saw an increase of $2,327, good for a 4.53% gain over the Q1 ending value. Even more impressive, the portfolio has grown by 11% since the beginning of the year.
A big driver for these returns has been the performance of Digital Realty Trust (NYSE:DLR) and Realty Income (NYSE:O). Both stocks are now trading near all-time highs, and combined are now worth roughly 9% of the portfolio. I've never been one to rebalance or trim positions, but I admit it is beginning to look attractive to do so, as they are both now trading well above fair value. However, both companies are performing exactly how I'd like them to: they are growing earnings and dividends. Considering I am investing for the long term and not the short term, I am resisting the urge to touch them, as these are the types of companies I want working for me.
Dividend Income Also Sets New Record
Capital appreciation is great, but growing dividends are the focus of the portfolio, and it was another good quarter for dividend growth. Dividend income in the second quarter was 15.2% higher than Q2 of 2015 and was also 4.8% higher than Q1.
As dividend increases take effect in coming quarters, I think there is an outside chance at seeing $1700 in dividends for the year, which would be a 20% increase over 2015's total.
This increasing income is driven by three factors: dividend growth, dividend reinvestment, and new capital being added to the portfolio.
With a portfolio yield of around 3% and new capital of around 8% being added throughout the year, roughly half of the income growth comes from those two sources. The rest comes from dividend growth, and it was another good quarter of increases for my holdings.
|Date||Company||Ticker||Previous Quarterly Rate||New Quarterly Rate||Sequential Increase||Year Ago Dividend||YoY Increase||Dividend Yield||LINK|
|4/14/2016||Omega Healthcare Investors Inc||(NYSE:OHI)||$0.5700||$0.5800||1.75%||$0.540||7.41%||7.09%||LINK|
|4/26/2016||International Business Machines Corp.||(NYSE:IBM)||$1.3000||$1.4000||7.69%||$1.300||7.69%||3.57%||LINK|
|4/26/2016||Wells Fargo & Co||(NYSE:WFC)||$0.3750||$0.3800||1.33%||$0.375||1.33%||3.14%||LINK|
|4/27/2016||Exxon Mobil Corporation||(NYSE:XOM)||$0.7300||$0.7500||2.74%||$0.730||2.74%||3.16%||LINK|
|4/27/2016||Ameriprise Financial, Inc.||(NYSE:AMP)||$0.6700||$0.7500||11.94%||$0.670||11.94%||3.17%||LINK|
|5/26/2016||Flowers Foods, Inc.||(NYSE:FLO)||$0.1450||$0.1600||10.34%||$0.145||10.34%||3.41%||LINK|
|6/15/2016||Realty Income Corp||O||$0.1990||$0.1995||0.25%||$0.190||5.00%||3.42%||LINK|
|6/29/2016||General Mills, Inc.||(NYSE:GIS)||$0.4600||$0.4800||4.35%||$0.440||9.09%||2.69%||LINK|
Ameriprise and Flowers Foods led the way, as both announced double-digit increases. Meanwhile, Wells Fargo announced just a 1.33% increase and Exxon Mobil just 2.74%. The low raise for Exxon was expected, but I was a bit surprised at the paltry increase from Wells Fargo. I'm hoping it was a temporary boost and we will get a bigger one next quarter now that it has passed its stress test.
A pleasant surprise was the 4.35% boost from General Mills, which was actually the second increase seen in the last year.
Overall, these increases amounted to 7.23% on a year over year basis, which is slightly better than what was seen in the Q1 results.
It was another quiet quarter for transactions, as just two purchases were made in Q2. As I mentioned above, I have been resisting the urge to trade out of positions due to high valuations but have continued to make buys when I have new funds available.
I continued adding to my energy sector holdings with the purchase of EOG Resources (NYSE:EOG) and Exxon Mobil.
EOG has a 15-year streak of dividend increases, but with a yield of under 1%, it is one of the few stocks in the portfolio that was bought for capital gains potential rather than income. EOG is one of the top independent oil & gas operators in the U.S. and has large acreage positions in the Permian, Eagle Ford, and Bakken. It has been conservative in cutting its exploration budget by delaying completions and is well positioned to take advantage of increasing crude prices. This purchase bring EOG to a full weighting in the portfolio.
For my second purchase this quarter I added to my holdings in Exxon Mobil. This purchase bring Exxon to an overweight position, and I wanted to add to my position again while crude prices are still low. I remain bullish on crude prices rising in the second half of the year as U.S. production continues to decline and supply disruptions in Canada, Nigeria, Venezuela, etc. start to make an impact.
Exxon is the big dog in the sector and I expect them to begin making moves picking off weak operators before the next up-cycle gets into full gear. The purchase price provides a forward yield of around 3.3%. While this isn't as attractive as a few months ago, I think it is still a decent entry point for a long term investment in this blue chip company.
With those purchases complete, this is how the portfolio stood at the end of the quarter.
Here is a quick breakdown of the portfolio weightings by sector:
As you can see, the portfolio is pretty well balanced when looking at size of positions, as most sectors are generally in the 11-15% range. However, REITs have grown into a bigger piece of the pie due to the recent over-performance of Digital Realty and Realty Income. Also, due to the generally higher yields that REITs pay, this sector dominates the income generated, with 22.6% of the total.
Health Care remains low by both metrics, and now that I have filled out my energy holdings, I am inclined to move in this direction next.
On The Radar
As the market hits new highs, I feel there are still attractive opportunities for investment. Some of the names I am considering adding to my portfolio include: Cisco Systems (NASDAQ:CSCO), Cardinal Health (NYSE:CAH), Abbott Labs (NYSE:ABT), United Parcel Service (NYSE:UPS), Anthem (NYSE:ANTM), and CVS Health (NYSE:CVS). I also continue to watch the likes of 3M Company (NYSE:MMM), Honeywell (NYSE:HON), Home Depot (NYSE:HD) in the hopes they will drop a bit and offer an opportunity.
Additionally, companies I own that are trading near fair value include: AmerisourceBergen, AbbVie, Ameriprise Financial, Chatham Lodging Trust, Flowers Foods, Gilead Sciences, NXP Semiconductors, Omega Healthcare, Polaris Industries, Target, and Wells Fargo.
Needless to say, I have no problem finding places to put capital to work when it comes available!
The portfolio is continuing to perform quite well as it hits new highs in income generation and overall size. Dividend growth has slowed a bit compared with previous years, but remains at a >7% rate that should still allow a greater than 10% year over year increase with reinvestment of dividends.
Overall, I've now gotten to the point where I am comfortable with my holdings, which has resulted in less turnover and lower transaction costs. I still fight the urge to tinker with positions too much, especially of late due to bloated valuations in DLR, O, CHD, and the like. However, I am trying to keep focused on the long-term and how the companies are performing rather than on the price they are trading at.
I hope this update gives encouragement to others considering managing their own portfolio, and provides a positive example for them to follow. Not everyone has a million dollar portfolio, but even with just a few hundred dollars a month, you can still be successful in building your nest egg.
Finally, a reminder that if you would like future updates for this portfolio and my other writings, please click follow next to my profile at the top of the page.
Disclosure: I am/we are long ABBV, AAPL, ABC, AMGN, AMP, BDX, CBRL, CHD, CLDT, CMI, CVX D, DE, DLR, DPS, EOG, FLO, GE, GILD, GIS, GME, IBM, KMI, KO, LMT, MCD, MDU, MSFT, NSC, NXPI, O, OHI, OXY, PII, PM, QCOM, ROST, SBUX, STAG, T, TGT, THO, UNP, V, WBA, WEC, WFC, WSO, XEL, XOM.
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: I am an engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.