February Portfolio Update: Selling ConocoPhillips, Buying Visa, V.F. Corp And Starbucks

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Includes: AAPL, ABBV, AFL, BA, CMI, COP, CSCO, CVS, CVX, DIS, GE, GILD, GIS, HON, JNJ, JPM, KO, LMT, LUV, MA, MMM, MO, MSFT, NKE, O, PEP, PG, PM, QCOM, SBUX, T, TGT, V, VFC, VTR, VZ, XOM
by: The Dividend Bro

Summary

Portfolio is up 3.74% for the year. S&P 500 is up 5.57%.

We sold ConocoPhillips and added to our Visa, V.F. Corp and Starbucks holdings.

Dividend income is up more than 30% compared to 2016.

The stock market seems to be defying gravity these days. The Dow Jones Industrial Average closed above 21,000 for the first time on March 1 st, 2017. Seems like only yesterday that the index closed above 20,000. Actually, it wasn't that long ago, January 25 th to be exact, that we moved above this number. The march from 20,000 to 21,000 took just 24 trading days, matching the fastest 1,000 point gain in history. What other move shares the distinction as the fastest 1,000 point march? The move from 10,000 to 11,000 in May of 1999. Investors seem to be anticipating that a Republican held White House and Congress will be able to pass tax reform, cut regulations and allow companies to repatriate overseas cash at much lower tax rates. Earnings seem to be improving as well. Sure, there are always going to be companies like Target (NYSE:TGT) that tell a miserable story, but many other companies seem to be performing well.

Our portfolio, including dividends, is up 3.74% for the year. The S&P 500 has gained 5.57% since the start of 2017. While behind for 2017, we are still well above the market since the beginning of 2015. And I've always been more concerned with our dividend income and that has been performing very well (see below). Let's look at our top and bottom performers through the end of the February.

Philip Morris (NYSE:PM) has been our top performer so far this year, rising almost 20%. The company recently updated forward guidance for 2017. Previously, the company had guided towards earnings of $4.70-$4.85 per share. On 2/22/2017, the tobacco company raised that guidance to $4.80-$4.95 earnings per share for this year. Philip Morris also stated that they expect revenue growth to be above their annual growth range of 4%-6%. Investors have responded positively to this announcement. Apple (NASDAQ:AAPL) has gained more than 18% this year. Remember when the company traded in the low $90s and people seemed to believe their best days were behind them? This is a good reminder that if you shouldn't be scared off by short term noise if you like a company's prospects. With more than $200 billion overseas, the company would also be in a good position if taxes on this money were lowered. Southwest (NYSE:LUV) is our third best performer in 2017, rising almost 16% year to date. This is on top of a 15.75% gain in 2016. The discount airliner seems to be on a roll. Boeing (NYSE:BA), which has returned 15.77%, and Cisco (NASDAQ:CSCO), which has gained 13.10%, round out our top 5 through the end of the month. Of these top 5 performers, I consider Philip Morris and Boeing to be full positions. I would like to add to the others at some point.

Our bottom 5 performing stocks are the exact same as last month, only we have a new leader (loser?) in the clubhouse. The aforementioned Target issued what can only be described as a disastrous earnings report. The company missed on revenue and was done 4.3% year over year. Earnings per share came in 6 cents light. To make matters worse, the company lowered it's 2017 earnings per share guidance to $3.80-$4.20. Target made $5.01 in 2016. Ouch. That wide range in guidance tells me that the company doesn't have a clear view of this year's results. The stock got slammed when it reported and shares are down 18.62% since the start of 2017. Because we are concerned with our dividend income and not short term performance, we are going to hold onto our shares. I'm not rushing to add to the position either because I need to see some clarity in how the company plans to get through these weak numbers in the coming quarters. If the company maintains the dividend or is able to grow it, that will be a good sign. We shall see with this retailer. Qualcomm (NASDAQ:QCOM), while still down more than 13% for the year, is up since last month. Exxon Mobile (NYSE:XOM) has dropped almost 10% for the year. We invest $50 a month into the energy company through a share building website and have no plans to alter this investment. Verizon (NYSE:VZ) continues to lag the market, dropping 7% through February. Verizon sits at a 3/4ths position for us, so I wouldn't mind add the company when funds become available. General Electric (NYSE:GE) has lost 5.66% this year. The industrial conglomerate is above a full position for us, so I'm not adding at this time.

February Purchases and Sell

Let's start with the one sell we had in our portfolio. I almost never sell our stocks. If a company's long term prospects are solid and they pay and raise their dividends every year, then short term weakness in the company's fundamentals are usually not something that keeps me up at night. By targeting stocks with long track records of dividend payments that are dominate in the sector of the economy, you can often avoid painful dividend cuts. In fact, we've only had two stocks that have cut their dividends while we held them. Both times, I should have anticipated the dividend cut. Both companies, Kinder Morgan (NYSE:KMI) and Conoco Phillips (NYSE:COP), are in the energy sector. Both companies promised to maintain and grow their dividends right up until the moment that they slashed them. When Kinder Morgan cut their dividend, we immediately sold the stock. We decided to hold onto Conoco Phillips when they cut their dividend by 66% because Kinder Morgan's stock responded well after the cut. While holding onto our shares, I've come to the conclusion that I want to own just the integrated oil companies in our portfolio. While Exxon Mobile and Chevron (NYSE:CVX) didn't exactly have the sexiest of dividend growth while the price of oil dropped significantly, they also didn't cut their payments. Since increasing income is our primary goal, I don't want to hold companies who have a questionable ability to maintain their dividends in poor economic times. I want companies that can maintain and grow their payments even when things aren't at their best. For this reason, I decided to sell our Conoco Phillips shares on 2/3/2017 at a price of $50.28. This was almost 30% above the share price that the stock was trading on 2/4/2016, the day they cut their dividend. We still lost 15% on this position, but I am now more confident with our portfolio's income stream. Between the proceeds of this sale and our regular monthly contribution, we were able to make 3 purchases this month.

Visa (NYSE:V) was purchased on 2/3/2017 at $86.39. The F.A.S.T. Graphs price to earnings multiple at the time was 28.5 and the 5-year average PE is 24.2. By this measure, shares were 15% overvalued at the time of purchase. Morningstar fair value is $101, which was a 17% above where we bought shares. S&P Capital 12-month price target is $87 or 0.71% above purchase price. At the time of purchase, they had a fair value of $81.30. By this measure, we overpaid for Visa by 6%. Average these numbers out and shares were less than 1% overvalued when we bought them. I don't have a problem overpaying for a quality company such as Visa, which is the largest credit card company in the world.

V.F. Corporation (NYSE:VFC) was our second purchase of the month. Shares were bought on 2/21/2017 at $52.32. At that time, F.A.S.T. Graphs said the current price to earnings ratio was 16.9. This is a 12.43% discount to the 5-year average PE of 19. S&P Capital has a 12-month price target of $52 and a fair value of $51.90. By these measures, shares were less than 1% overvalued at the time of purchase. Morningstar has a fair value of $73, meaning they believe shares are worth almost 40% more than they currently are (It should be noted that since purchase, Morningstar has lowered their fair value to $70). Average these numbers out and I find shares to be 12.63% undervalued. Considering V.F. Corp was one of the 6 stocks I wanted more of in 2017, I am happy to add the apparel company at this price.

Our third purchase of the month was Starbucks (NASDAQ:SBUX). Shares of the company were bought on 2/24/2017 at $57.34. At the time of purchase, F.A.S.T. Graphs had a PE of 28.8 and a 5-year average ratio of 30. By this measure, Starbucks shares were more than 4% undervalued. S&P Capital has a 12-month price target of $60, which would put shares at 4.38% undervalued. Their fair value for the stock, however, is $51.50 or 10.40% below our purchase price. Morningstar sees fair value is $66, which would offer almost 15% of upside from where we bought Starbucks. Average these numbers out and I find shares to be 3.34% undervalued. Happy to add to our position at this level.

Visa, V.F. Corp and Starbucks were on my list of " 6 stocks I want to buy more of in 2017". Starbucks is nearing a full position for us, but I would have no issue adding more Visa and V.F. Corp as time goes on.

Current Positions

After this month's activity, our portfolio now consists of the following 36 companies:

3M (NYSE:MMM), AbbVie (NYSE:ABBV), Aflac (NYSE:AFL), Altria (NYSE:MO), Apple, AT&T (NYSE:T), Boeing, Chevron, Cisco, Coca-Cola (NYSE:KO), Cummins (NYSE:CMI), CVS Health (NYSE:CVS), Disney (NYSE:DIS), Exxon Mobil, General Electric, General Mills (NYSE:GIS), Gilead Sciences (NASDAQ:GILD), Honeywell International (NYSE:HON), Johnson & Johnson (NYSE:JNJ), JPMorgan Chase (NYSE:JPM), Lockheed Martin (NYSE:LMT), MasterCard (NYSE:MA), Microsoft (NASDAQ:MSFT), Nike (NYSE:NKE), Pepsi (NYSE:PEP), Philip Morris, Procter & Gamble (NYSE:PG), Qualcomm, Realty Income (NYSE:O), Southwest Airlines, Starbucks, Target, Ventas (NYSE:VTR), Verizon, V. F. Corp and Visa.

February Dividends

I have been tracking our dividends every month since the start of 2014. And every month, except for one, our dividend growth portfolio has given us more income than the year before. February was no different. Compared to last year at this time, our dividend income is up 34.15%. Compared to February of 2015, our income is up 73.46%. Compared to February of 2014, our income is up a whopping 138.98%. Year to date, our portfolio's income is up 30.34% from 2016, up 64.93% from 2015 and up 105.80% since 2014. Our simple formula to reach these results is to buy shares of companies that raise their dividends every year and then reinvest those dividends back into positions. Rinse and repeat.

As I've said since the first time tracking our portfolio here on Seeking Alpha, I am not interested in chasing after pure growth stocks. I want our portfolio to provide a rising income stream. Looking back on my time as a dividend growth investor, the small amounts of income we received have grown to be rather sizeable. Dividend growth investing is a marathon, not a sprint. While capital gains are not my primary goal, I want to buy shares of what I think are undervalued companies. Regardless of what the market is doing, we will follow our game plan.

The 10 companies paid us simply for holding their shares: AT&T, Verizon, General Mills, CVS Health, MasterCard, Apple, Realty Income, AbbVie, Proctor & Gamble and Starbucks.

Conclusion

While our overall portfolio lags the S&P 500, we are still in the green year to date. More importantly, our income continues to rise. Adding to dividend paying stocks when they are undervalued and then reinvesting those dividends is leading to strong income growth. The goal, as always, is to have these dividends cover all of my wife and I's expenses in retirement. What do you think of our purchases this month? What are you looking to buy as the market appears to be heading higher?

Disclosure: I am/we are long ABBV, AFL, CMI,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, NKE, LMT.

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.