February Portfolio Update - One Missed Opportunity Opens Another Door

Includes: ADM, BNS, EMN, SPG, XOM
by: New Div on the Block


Sometimes our best-laid plans don't quite work out.

Nevertheless, we all invest with a strategy in mind. Stick to it to reach success!

A look at sales, purchases, and dividends collected since the last update, and what's ahead for March.

February has drawn to a close, so you know what that means - the books have closed on another month and it's time for a monthly portfolio review. February was another positive month for the market - Dow 20,000 seems like an eon ago as all three major indexes recorded multi-day streaks of previously uncharted highs. The month's final day of trading finally broke the double-digit days of run up, and was also my busiest day of the month.

When I wrote about my portfolio last month, the biggest news was the growing pains related to account transfer. It took until the middle of February to sort everything out, but the transfer is now fully complete. It meant I once again missed the opportunity to reinvest all of my dividends, but moving forward this will no longer be an issue. All I have to do is keep telling myself that I will never have to pay commissions again to be reminded that the temporary frustrations are worth it in the long run, much like any part of a solid DGI strategy.

Speaking of, the market run-up we experienced as February wore on also left me feeling a bit frustrated, as I feel I missed out on a few golden opportunities to open positions in key names. As I wrote last month, I ended January with a limit order on Johnson & Johnson (NYSE:JNJ) @ $112.43. JNJ ended up bottoming out at $112.47 before rebounding, and now sits at $122.21! It's a perennial dividend stalwart that's as solid as they come, but with a yield now down over 20 bps from where I intended to pick up shares, I'll have to wait to start my position. Another particularly irksome part of this story is that the reason I set my limit price at that number was to lock in a yield on cost of 2.85%. So how silly do I feel that with rounding, $112.47 is where I actually should have set the limit as the highest price that rounds to that yield.

Another stock that looked tempting moving into February was Dominion Resources (NYSE:D). This high-yielding utility released a less-than-exciting outlook for 2017 along with its earnings call on February 1st, causing a brief sell-off. The company's long-term guidance and upside was still very much evident, as was its commitment to raise dividends by around 8% through the end of the decade, a mark that easily beats dividend growth rates of other comparable utility names. With most of my free capital tied up in the limit order on JNJ, I wasn't able to grab any shares of D at the prices I was hoping for, just under $72 (for a 3.9% yield).

You'll see in a moment where I parked these funds instead, but my overall comment here is that sometimes our intentions don't quite work out exactly as we planned. But as long as we have a long-term strategy, and don't sacrifice the overall vision for a short-term setback, opportunities will arise in other ways.

Portfolio Snapshot

So, having said all that, how did my portfolio fare this month? Let's take a closer look:

Sector Ticker Shares Value Change from Jan Yield on Cost % of Portfolio % of Income
Staples (NYSE:CVS) 16.1062 1.94% 2.05% 6.84% 5.14%
Staples (NYSE:ADM) 25 8.08%* 2.95% 6.19% 5.10%
Telecom (NYSE:T) 43 -1.01% 5.36% 9.48% 13.44%
Tech (NASDAQ:QCOM) 10 5.76% 4.00% 2.98% 3.38%
Industrials (NYSE:LUV) 36 12.93% 0.94% 10.97% 2.30%
Cyclical (NYSE:GM) 51 0.76% 5.01% 9.91% 12.36%
Cyclical (NYSE:MGA) 38 -1.03% 2.69% 8.59% 6.66%
Health (NYSE:ABBV) 25 1.15% 4.04% 8.15% 10.20%
Health (NYSE:PFE) 45 6.97% 3.73% 8.10% 9.18%
Energy (NYSE:VLO) 25 3.74% 4.79% 8.96% 11.16%
Financials (NYSE:TD) 35 0.38% 3.75% 9.52% 9.37%
Financials (NYSE:BNS) 25 1.29%* 3.90% 7.67% 9.17%
Financials (NASDAQ:TROW) 7 5.60% 3.39% 2.63% 2.54%

Though capital appreciation is not the primary goal of my portfolio, it's always nice to see positive value change in things I already hold, led this month by the 12.93% jump in Southwest Airlines. Stocks purchased during February, which I will cover in a moment, are marked with an asterisk and compared to their value at time of purchase rather than to the closing price from the end of the previous month. Total yield on cost for the portfolio jumped again this month thanks to the new purchases and one sale, from 3.41% at the end of January to 3.59% at the end of February.

Purchases and Sales

2/14 - BUY 25 shares of Archer Daniels Midland @ $43.46

When it became clear that the steady tick up in JNJ wasn't going to turn around, I decided to shift gears. Archer Daniels Midland is a solid, if underfollowed, agricultural processing company. On February 7th, the company reported 4th quarter results. Though the numbers on both top and bottom lines came in under Street expectations, upbeat guidance and anticipation of better operating conditions and margins in the year ahead sent the stock higher after a brief dip. A nice 6.7% dividend bump also helped reassure investors. ADM is a quiet dividend champion, this latest increase pushing the streak to 42 consecutive years. While 6.7% dividend growth is not groundbreaking, it is quite solid for an aristocrat and the payout ratio is still very manageable below 40%.

In contrast to my purchases last month, which were about 1/3 of my usual starting position given that both QCOM and TROW had sold off significantly on earnings, I felt more comfortable opening a larger position in ADM given its more stable positioning. I anticipate ADM will continue to be a "slow and steady" stock that will help form a very solid foundation to my portfolio.

2/28 - SELL 18 shares of Orbital ATK @ $93.50

Orbital ATK was what I like to call my "D'oh!" stock. I bought in last August before quarterly earnings, which precipitated a 20% sell-off due to disclosure of accounting irregularities on one of its largest government contracts. In addition to this unpleasant surprise, OA has never really fit the profile of a dividend growth stock that I am typically interested in, especially when compared to its aerospace/defense counterparts like Lockheed Martin (NYSE:LMT) or Northrop Grumman (NYSE:NOC).

On the morning of 2/28, OA announced a dividend increase of 6.7%. While an increase is always welcome, I was really hoping for more as an excuse to continue holding this name. The company has a payout ratio of around 20% and its aforementioned peers have grown their dividends at much more impressive rates with even higher (but still manageable) ratios and more established track records. Since OA has run all the way back up from its late-summer sell-off, I'm more concerned with the opportunity cost of continuing to hold this portfolio outlier over rotating this investment into something better. I want to avoid selling as much as possible, only doing so in cases of extreme overvaluation, dividend cuts or freezes, or companies that no longer fit my long-term strategy or original investment thesis. As OA falls under the third category, I decided to sell.

2/28 - BUY 25 shares of Bank of Nova Scotia @ $58.95

Meanwhile, north of the border, two more of Canada's "big five" banks reported earnings on the morning of 2/28. Bank of Nova Scotia was the first of the five to report an in-line quarter instead of topping analyst estimates, but these numbers are still nothing to sneeze at. Revenue for the quarter came in nearly 8% higher than the same period last year, and the dividend was increased by 3%. Given their solid performance year after year, the oligopoly that they operate in, and their shareholder-friendly management teams, I've been eagerly following the big Canadian banks since I started my investing journey last year. My holding in TD has performed very well since I initiated the position, and I've been watching for any opportunity to jump into Royal Bank of Canada (NYSE:RY) and BNS too. I think this sell-off after earnings presented just such an opportunity, and jumped on the chance to start a position under $60. It's also much easier to justify buying into these stalwart Canadian financial institutions with reasonable P/E ratios after so many banks (both big and small) here in the U.S. have run up in valuation since November.

Dividends Received

As I mentioned in the introduction, I was still having some account transfer issues this month so only one of my dividend payments was reinvested (CVS Health). I also received payouts from AT&T and AbbVie, bringing my total dividend income for the month to $45.22. Most of the stocks I own follow the MJSD (third month of the quarter) payout schedule, so next month will be much busier.

March Preview

I'm sure we all sound like a broken record at this point, but it bears repeating: it's getting harder and harder to find real bargains in this frothy market. I expect to continue making a maximum of 1-2 moves per month, and I continue to focus on only a select number of names with potential value. Here's a few of the stocks on my watchlist:

Eastman Chemical (NYSE:EMN): I've hesitated to pull the trigger on Eastman before while distracted by its more well-known sector peer Dow (DOW), but every time I think I'm close to pulling the trigger on Dow, some news breaks and it jumps higher. I've convinced myself to back off - the valuation has gotten too high and I'm concerned about what the merger with DuPont will look like once it's finally approved. So, with my full attention on Eastman, I'm still targeting the 2.65-2.7% yield zone as a good initiation point.

Simon Property Group (NYSE:SPG): I still have no REIT exposure and I know SPG is a best-in-breed with its solid credit rating and clear growth runway. It's also one of the few REITs I notice that isn't steeply overvalued at this point, perhaps because its dividend yield is only 3.8%. Retail may be struggling these days, but Simon is rising to the challenge by diversifying its tenant base to include restaurants, entertainment venues, and more, and continuing to expand in urban and suburban areas with growing populations, both in the U.S. and abroad.

Exxon Mobil (NYSE:XOM): Exxon wasn't even on my radar until I saw several articles here on SA pointing out the stock is adrift near 52-week lows as a bonafide "Dog of the Dow." But is Exxon really cheap? Its current P/E is an unsightly 43.33, and the payout ratio is currently well in excess of 100%. Exxon, like all oil companies, has had a rough few years with bottom-barrel oil prices that have been slow to recover, but some seem to think the worst has generally passed and the company's reputation as a cash machine will return very soon. While not as generous with its dividend yield as rival Chevron (NYSE:CVX), Exxon's dividend appears more sustainable moving forward for continued increases. An investment in Exxon feels a little too much like blind betting - will oil prices really recover this year or just stay in their current range? I'm not convinced yet that this is the right investment for me, but I'm keeping an eye on it.

What companies are you watching this month? Do you agree with my purchases? Leave a comment below, and thanks for stopping by!

Disclosure: I am/we are long T, ABBV, PFE, GM, MGA, TD, BNS, TROW, VLO, LUV, CVS, ADM, QCOM.

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.