June 2017 Portfolio Update: Summer Sale

Includes: HD, KR, SKT, UNP, WSM
by: New Div on the Block

June saw the retail sector continue to struggle, which created several opportunities for savvy buys.

I had more cash than usual to (re)deploy this month, so I am happy to add names that looked oversold.

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

The second quarter is in the books, and that means we're now also halfway through 2017. June saw the continuation of trends seen throughout the quarter, including the struggle of retail to compete with the likes of Amazon (AMZN). This was especially the case when Amazon announced on June 16th that it plans to acquire upscale urban grocer Whole Foods (WFM). Big names like Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR) plummeted on the news (more on that later). In other trends, the sector rotation effect we've seen building all year seemed to sputter a bit, as the tech sector cooled slightly from its highs, and healthcare began to lead the way. As we move into July, look to financials to settle higher after all 34 financial institutions successfully cleared the Fed's CCAR process, paving the way for increased buybacks and dividends which will likely spark more investor interest.

June ended up being a busier month than I anticipated for my portfolio, partially because I ended up with an infusion of cash from an old retirement plan. It's easy to worry about the dangers putting new money to work right now given the market's valuation, but I combat this in two ways: first, I take advantage of commission-free trades to diversify my holdings and build into positions slowly, minimizing my exposure to any one name and allowing me to dollar-cost average; second, I focus on names that present good value, regardless of overall market conditions. Yes, any stock is in danger of falling in with its sector or the market as a whole on a bad day but should be relatively less risky for a big fall than an overvalued peer. And, of course, dividend growth investing is a strategy for good markets and bad, so sticking to your investing convictions and tuning out the noise (good or bad) is key. So, let's take a closer look at what happened in June in the New Div on the Block portfolio.

Portfolio Snapshot

Company Sector Shares % Portfolio % Income Sector Weight Global BMI
Staples 13.7% 8.7%
CVS Health (NYSE:CVS) 21.2349 6.52% 4.91%
Archer Daniels Midland (ADM) 25.3717 4.01% 3.76%
Kroger (KR) 35 3.12% 2.02%
Materials 3.2% 5.6%
Eastman Chem (EMN) 10 3.21% 2.36%
Telecoms 6.3% 2.8%
AT&T (T) 43.5383 6.27% 9.87%
Tech 2.2% 16.2%
Qualcomm (QCOM) 10.1949 2.15% 2.69%
Industrials 8.6% 12.2%
Southwest Airlines (LUV) 36.1397 8.57% 2.09%
Cyclical 16.5% 12.4%
General Motors (GM) 52.1365 6.95% 9.17%
Magna Int'l (MGA) 38.3987 6.79% 4.89%
Williams-Sonoma (WSM) 15 2.78% 2.71%
Health 19.0% 11.0%
AbbVie (ABBV) 25.2402 6.99% 7.48%
Pfizer (PFE) 45.8599 5.88% 6.79%
Johnson & Johnson (JNJ) 12.0759 6.10% 4.69%
Energy 6.6% 5.7%
Valero (VLO) 25.5499 6.58% 8.28%
Financials 18.6% 18.1%
Toronto-Dominion (TD) 35.2824 6.79% 7.56%
Bank of Nova Scotia (BNS) 25.2162 5.79% 6.84%
T. Rowe Price (TROW) 21.2195 6.01% 5.60%
Utilities & REITs 5.5% 7.3%
Realty Income (O) 12.0443 2.54% 3.54%
Tanger Factory Outlets (SKT) 30 2.98% 4.76%

As I am still very much in the building stages of my portfolio construction, I'm not too worried about the levels of variance from my targets as represented by the Global BMI breakdown. As I continue to add holdings, these numbers will even out and better reflect a diversified portfolio and one that includes holdings across all 11 GICS sectors.

At the end of the month, my current yield is 3.30% with a yield on cost of 3.53%.

Purchases and Sales

6/16 - BUY 15 shares of Williams-Sonoma @ $48.00

The day of the Amazon-Whole Foods shocker ended up being a busy day as I had a couple limit orders that triggered amongst the chaos. WSM has been in and out of my watch list for some time, based on its strong balance sheet, attractive valuation, and above-average dividend yield. Fellow DGI-er Derek Getz wrote a nice article on the company early in the month (found here), emphasizing the solid quarterly results and the company's proactive approach to embracing e-commerce while brick and mortar remains out of favor. WSM's most recent dividend increase was 5.4%, respectable but below its recent growth rates of higher single digits. If the company can continue to deliver moving forward, it would be nice to see a bit meatier of an increase, but with shares already yielding 3.2%, I won't complain too loudly.

6/16 - BUY 30 shares of Tanger Factor Outlets @ $25.85

Tanger appeared on my watch list from last month's portfolio update, and I wrote about how with the company's shares down 20% in a month and yielding a historically high rate of over 5%, the valuation was certainly compelling. But what about fundamentals? As Brad Thomas wrote recently, Tanger is unique in connecting shoppers with discounted products from brands they know and trust, and that business model has proven effective through all kinds of business environments. It's incredibly cheap compared to its peers on a P/FFO basis and has a strong margin of safety on the generous dividend, which has been raised for 24 consecutive years. Still, Tanger has absolutely been a victim of "throwing out the baby with the bathwater", and that makes me cautious about diving headlong into a full investment. So, I'm starting small, and I'll monitor moving forward. If I can lock in my starting yield of 5.30% with future purchases as well, I'll be a very happy camper indeed.

6/19 - BUY 35 shares of Kroger @ $22.33

The biggest loser by far out of the Amazon-Whole Foods news was Kroger, which lost about one-third of its market cap in two days between negative reaction to its quarterly results and fears of obsolescence in the "Amazon-rules-the-world" era. Never mind the fact we're not there yet, and Kroger remains (by far) the largest grocer in the United States, with a much larger physical footprint and differentiated core customer base than Whole Foods. Low food prices mean thin margins and less profit for companies like Kroger, but even with the lowered guidance out of its last earnings report, KR is on track for full-year EPS of $2.00-2.05. This means the payout ratio is less than 25%, even on the dividend increase. That's very conservative and leaves plenty of room for Kroger to aggressively buyback shares at these rock-bottom prices, which is exactly what the company is doing. As with Tanger, I'm starting small and monitoring but will be happy to continue adding to Kroger as price and available cash allows.

Dividends Received

The final quarter of the month is always the busiest on the dividend front, and this month's haul was my largest yet (and first of over $100!). I wrote back in March that I was anticipating $164.80 in dividends this quarter, and I ended up exceeding that mark through increases and new positions to end up with an actual total of $181.36 for the quarter, beating my expectations by 10% and my Q1 total by 24%.

Stock April 17 May 17 June 17
CVS $10.55
ADM $8.06
Eastman $5.10
AT&T $21.07
Qualcomm $5.75
Southwest $4.51
GM $19.59
Magna Int'l $8.92
AbbVie $16.00
Pfizer $14.53
JNJ $10.08
VLO $17.69
TD $13.06
BNS $11.91
T. Rowe $12.00
O $2.53
Month Total $17.01 $60.68 $103.67
Quarter Total $181.36

Looking ahead to Q3, based on my new holdings, declared dividend increases, and dividend momentum calculations, I expect to receive $209.84 in dividends, which would be another 15.7% increase. Check back in September to compare this projection to the actual results!

July Preview

Three new buys in June bring my portfolio up to 19 positions, and no holding is greater than 10% in terms of value or income, which is a great thing to see in terms of diversification. That being said, now that I have seven positions of less than 5% overall value (ADM, QCOM, EMN, O, SKT, WSM, KR), I'm definitely on the lookout for chances to do some dollar-cost averaging. If I were to look at one more position to add this month to reach a nice, even 20 positions, here's where I might look:

Home Depot (HD)

With its duopoly on the retail home improvement segment and incredible commitment to shareholder returns through dividend increases and buybacks, Home Depot seems like a potential investment worth a closer look. HD has defied the odds in the retail space, and its stock price has remained quite elevated, though if you take into account its continuing growth potential, the company doesn't seem all that overvalued. Part of that has to do with its enduring business model - homeowners will always need the products and materials Home Depot sells, regardless of economic conditions. This means it's less exposed to cyclical headwinds than many of its discretionary peers.

Union Pacific (UNP)

Speaking of duopolies, American Class I railroads have some of the widest business moats possible, thanks to the capital-intensive nature of having thousands of miles of track. West of the Mississippi, UNP pretty much only has to compete with Berkshire Hathaway's (BRK.A) BNSF, which means the company is well-insulated from direct competition. Of course, rail isn't the only way to move things around, but it's still a highly profitable business, especially when the economy is strong. UNP's valuation is a touch high right now, but you could do far worse in the Industrial sector, and the company's respectable 2.2% dividend is quite safe.

Which companies are you watching this month? Do you agree with my purchases? Add your ideas to my watch list, leave a comment below, and thanks for stopping by!

Disclosure: I am/we are long MGA, TROW, ADM, GM, CVS, BNS, T, LUV, TD, QCOM, VLO, ABBV, PFE, EMN, JNJ, O, SKT, WSM, KR. 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.