Hello and welcome! This article series documents my journey as a young father of two towards my eventual retirement. The goal of my portfolio is to generate a growing income stream for my wife and me during our golden years. In an ideal world, this will not require selling of assets to fund our desired lifestyle.
For anyone interested in seeing changes in real time, I have my portfolio and dividends tracked on Dividend Derek. I also have a trimmed version that you can freely take for yourself if you wish, found here.
June saw me focus on selling some of my smaller position and higher valuation positions. I wrote a length article detailing a portfolio switcheroo that I pulled off during the month. I sold four positions, replaced them with one and pocketed the change. With many stocks at all-time highs and a bull market long in the tooth, I am always reviewing my holdings.
I've received many comments in the past that my portfolio now has too many positions and I may fare better logistically by having fewer. This month was a step in that direction.
To recap my portfolio plan for this year:
- I want my holdings to have a weighted 1-year dividend growth rate of at least 5%. (CURRENTLY 9.53%)
- By the end of 2017, I want to have a projected dividend income of at least $5,800. (Adjusted to $6,000 to reflect employer matching contributions) (COMPLETE IN JUNE)
- I aim to suffer no dividend cuts. (0 so far)
For my second goal, I'm sitting at a projected income of $6,093.
I'm going to restate my second goal to $6,000 - I had an astute commenter "Mad Mary" point out that I had not included any employer match and the subsequent income that can generate.
To recap, here's how I came to $6,000:
|5% Organic Dividend Growth||$250|
|Maxing 401k New Money|| |
|Employer Match|| |
|End of 2017 Income||$5,930|
I started by rounding my starting income to $5,000 ($4,993 is close enough for me). From there, I added 5% average organic dividend growth.
Next is the money coming from maxing my 401k contributions. The cap was not changed for 2017, so I can contribute a maximum of $18,000. I have roughly added an additional layer of income that will be generated by employer matching contributions. I am also assuming the money buys an average of a current 3% yield.
That brings us to the $5,930 figure, which I am then rounding up to $6,000.
After accomplishing this goal in June, I'd like to see if I can hit $6,250 in my forward-looking income during the year.
These are the general guidelines I will review to see if something is worthy of adding to my portfolio or whether I will add to an existing position.
- Being a member of the CCC list - obviously a longer streak is preferred.
- No one individual holding should be weighted >7% of the portfolio's total cost or weighted >7% of the portfolio's total dividend income.
- Investment grade holdings >BBB+ should generate 95% of the portfolio's dividend income.
- I want to see steady earnings growth over time; this will generally remove commodity-based companies.
- I like cash cows. Good profit margins (> 10%) are appreciated, though not required, if the company has a wide moat due to its business.
- I like to see shareholder-friendly management, a healthy and rising dividend and willingness to buy back shares, though in practice, the buybacks aren't always done at opportune times.
- Though a small part of my portfolio, I do have some non-dividend-paying stocks like Facebook (FB), Google (GOOG) and Amazon (AMZN).
- Perhaps most importantly, the valuation needs to be right per F.A.S.T. Graphs. The stock should be trading at fair value or better for an appropriate timeline (12+ years if possible).
- I will also use Simply Safe Dividends and the information provided by Brian on his site. Amongst a plethora of information available, he has a dividend scorecard where companies are ranked in terms of dividend safety, growth and yield. I aim to pick companies that are in the 80+ safety range, though not always.
A lot of times, I will start to find candidates either through articles here or on a simple screener from Finviz. Basically, start with large dividend-paying companies, sort them by how close they are to a 52-week low and then start diving into some of the names left.
There are only a few reasons I'll sell a stock, though any of these events is not a guarantee I'll do so.
- Dividend cut.
- Company degradation - This could be things like deteriorating balance sheets, loss of competitive advantage, loss of credit ratings.
- Wild overvaluation - This becomes a bigger factor if there is something at a fair valuation that I wish to purchase with the proceeds.
- Position size wildly outgrows the rest of the portfolio.
- Sale proceeds may be better indexed or in another name.
- I just don't want to own it.
Powershares S&P 500 High Dividend Low Volatility ETF (SPHD)
There have been several favorable articles written about SPHD lately, here and here. The fund tilts towards companies with a high dividend yield, secondly ranked by the lowest price volatility versus the S&P 500. There are a few additional rules about limiting maximum allocation by company and per sector.
Here are the current holdings post July rebalance, so this is hot off the presses.
I took the proceeds from the four sales I am about to detail and applied enough to this fund to replace the lost income (and a little extra on top).
I added to my Williams-Sonoma holding after doing the research for a follow up article on the company found here.
After the most recent earnings announcement I wanted to follow-up with my thesis. While I encourage you to read the more detailed article, here are some bullet points that reiterated it as a compelling buy:
- Growth among their brands was mixed but overall trending up.
- Management has been on the forefront of the shift to e-commerce with online sales contributing over 50% of revenue.
- Management continues strong returns to shareholders in both dividends and buybacks. In fact, buybacks are more heavily funded than the hefty 3.2% dividend yield.
- ZERO DEBT!
- Lastly, the valuation today looks very compelling when viewing the picture as a whole.
I'll highlight it more below, but I learned a bit more about REITs over this month. One of my personal insights was to have a higher allocation to the healthcare REIT subsector. Within that, Brad Thomas had a very compelling article on Ventas.
Ventas was an existing holding, but after revisiting the breadth of their offerings and what should be a secular tailwind for a best of breed operator, it made sense to add some here. That was even with the stock not being at the best value it's been over the past year, but at a fair premium.
Horace Mann Educators (HMN)
Horace Mann is a small insurer specializing in providing insurance for educators and their families. One knock against the company was that I purchased them years ago, prior to having a more formal investment process. A concern that became clear was their BBB rating, lower than my desired BBB+ rating.
Earnings growth has been a bit erratic, and recently the stock has seen a large multiple expansion which may not be justified. Additionally they are not a consistent dividend grower with stale dividend policy during the early 2000s and cutting the dividend twice in the Great Recession.
Being over 20x earnings, which was down from its peak, I decided to reduce my exposure.
Microsoft has undergone a large turnaround since new CEO Satya Nadella took over in 2014. The stock has performed very well in the timeframe, a little too well one might say. The multiple has been rapidly growing away from earnings growth - a high PEG ratio in other words. I got out at $72, which for the moment appears to be a top.
There's plenty to like here, but it was another position that was of unfortunately small significance.
General Dynamics (GD)
General Dynamics was another sale for me during the month. Essentially since the election the stock has gone parabolically up, giving me a large paper gain. With the stock being a very small portion of my portfolio I decided to take the gain and cut out some of the homework of tracking this one. I have alerts set at Custom Stock Alerts to let me know if this one comes back down to earth.
BHP Billiton (BBL)
As part of the sales I finally cut this one loose. Billiton was a stock I made two buys in back when commodity prices were falling. Even with a dividend cut, I stuck with the company because they still had an A credit rating and a new plan to cap the dividend at 30% of profits.
Ultimately though this was not the steady ride I was looking for. I was able to offset some losses here with large gains in the others.
Charts and Graphs
While June brought me $760 in dividends, that figure was actually a little bit lower than what I did in March. This was due to BHP paying semi-annually (I received a March payment) and by missing the Horace Mann June payment.
On the plus side, that was almost entirely offset by compounding existing holdings, dividend increases from a few names, and new payments by SPHD and Public Storage.
With Q2 now complete, I have another entry in my top graph. That graph measures quarterly performance versus the year ago quarter. Q2 brought in $1333 in dividends vs $881 last year, or 51% growth.
The middle chart looks at individual month changes. June's income of $760 was 23% higher than the $615 received last year.
The third and final chart is my forward-looking income. This is the sum of the current known dividend rates multiplied by the number of shares owned. This is the benchmark for my third goal of the year, to be over $6000 in forward looking income. Currently at $6093, I set a stretch goal of $6250 for the year. Additionally, the current year over year growth is 53% in this measure.
|Name||Shares Total||Annualized Return||Income||Yield On Cost||Sector||S&P Credit Rating|
|Cardinal Health Inc||65.99||3.15%||122.07||2.44%||Healthcare||A-|
|Diageo PLC||20.20||18.91%||61.42||3.06%||Consumer Discretionary||A-|
|Walt Disney||50.36||5.12%||78.56||1.60%||Consumer Discretionary||A|
|Duke Energy Corp||37.15||17.46%||127.07||5.31%||Utilities||A-|
|Home Depot||22.37||5.71%||79.65||2.69%||Consumer Discretionary||A|
|International Business Machines||28.74||9.85%||172.45||4.54%||Technology||AA-|
|Johnson & Johnson||25.50||20.94%||85.69||3.34%||Healthcare||AAA|
|Michael Kors||40.00||-11.26%||0.00||0.00%||Consumer Discretionary|
|Omega Healthcare Investors||107.24||8.97%||270.25||8.36%||REIT||BBB-|
|Schwab US Dividend Equity||516.94||13.81%||666.85||3.56%||ETF|
|J.M Smucker||32.00||-7.13%||96.00||2.38%||Consumer Staples||BBB|
|S&P 500 High Div Low Volatility||175.42||-0.70%||268.39||3.79%||ETF|
|Stanley Black & Decker||12.16||40.93%||28.22||2.58%||Industrials||A|
|T. Rowe Price||40.65||15.20%||92.68||3.49%||Financials||A+|
|Under Armour||50.00||-34.74%||0.00||0.00%||Consumer Discretionary||BB+|
|United Technologies Corporation||15.26||30.06%||40.30||3.08%||Industrials||A-|
|V.F. Corp||84.63||10.70%||142.18||3.26%||Consumer Staples||A|
Here is the full size snapshot of my portfolio:
- Purchased Shares: The shares I actually bought
- Shares Total: Total shares after dividend reinvestment / splits
- Cost: My transaction cost, including fees
- My Basis: "Cost" / Purchased Shares
- DRIP Basis: "Cost" / Shares Total
- Percent of Cost: "Cost" / sum(All Costs)
- Current Value: This will use Google Finance to get the price for the ticket * "Shares Total"
- Gain (Loss): "Current Value" - "Cost"
- Gain (Loss) Percent: "Gain (Loss)" represented as a percent
- Annualized Return: If (NOW - "Owned Since" > 365, ("Gain (Loss) Percent" * 365.25) / (NOW - "Owned Since"), "Gain (Loss) Percent". It won't be perfect because each tax lot will have a different return, but its close enough. Additionally, I fixed the calculation to show only the return percent if it has been held for less than a year. Otherwise, owning a stock for one day and showing a 1% return will turn into 365% annualized return which looks wrong.
- Current P/E (GAAP): This is another Google Finance call to pull the P/E. I haven't decided if I'll keep this, but it's interesting.
- Percent From 52-Week Low: Using all Google Finance calls, this subtracts the 52-week low from the current price to determine the percent away. This can make a stock more interesting to me if it's been hated by the market.
- Dividend: The annualized dividend - this is sourced dynamically from Yahoo Finance.
- Income: Dividend * Shares Total
- Percent of Income: Income / Sum(All Income)
- Yield On Cost: Income / Cost
- CCC Status: From David Fish's "CCC" list, what rank from the list?
The yellow indicators on the credit rating just keep me informed of the holdings I have that are below my desired threshold. Omega Healthcare Investors, STAG Industrial (STAG), Teva Pharmaceutical (TEVA) and W.P. Carey are all below. This is another field I would like to have automatically populated for when ratings change.
- Current Total Balance: $220,945(up from $216,778)
- Current Cash: $3,686 (upfrom $1,410)
Simplywall.st provides my infographics, which are very pretty and something I have been looking for.
You can check out my portfolio here.
The numbers are fairly accurate, there is some historical record keeping to clean up but it gives a nice overall snapshot.
I have a number of individual holdings that have returned quite nicely since my purchasing them. This whole list is above my favorite dividend ETF, the Schwab US Dividend Equity (SCHD), with a cumulative return of 25%.
Income by Sector
**This is my old version**
This month I completely recalculated my "Income By Sector." Firstly, if anyone wants excruciating detail how I did this, leave a comment. I can always get this posted to the shared version of my tracking spreadsheet.
Previously, my ETF component got its own section as seen above. It was easy to do this but frankly it doesn't tell me much. ETFs themselves can contain a variety of holdings either across sectors or within the same sector.
My concern here was whether I either have too many allocated to individual companies when including the effects of indexing or whether a whole sector may have too large of an allocation.
To keep this high level, here's what I did:
- Gathered up all of the holdings and their sector weightings for both SCHD and SPHD.
- Based on how the relative holding size of each ETF, multiplied that percentage by the percentage of each sector. For example, SCHD is about 10% of my income and Healthcare is about 10% of SCHD. Therefore, the weighted healthcare component of SCHD gives me 1% of my income.
- I added the weighted sector values of both ETFs to the aggregated sector values of my individual holdings
I hope that makes sense, instead of having that 10% ETF component, which has been properly divided into each sector.
Here is the end result of that work, quick examples of the changes are REITs moved up from 18.11% to 18.40% (and subsequently to 19% with my Ventas purchase) and Healthcare moved to 16.29% from 15.14%. I don't have any direct holdings in either materials or energy but due to indexing they each contribute a tiny sliver to the overall pie.
The above mentioned process of digging into the individual components of my index holdings also led me down a natural path of wondering what sort of overlap I had.
Following a similar methodology, I wanted to know the answers to two questions.
- First, which individual holdings overlapped one or both ETFs?
- Secondly, what was the magnitude of the overlap?
Using additional Google Sheet functions, I could interrogate the data and discover quite easily, the answer to my first question. I asked which tickers exist in one, but not both ETFs. The first list in the above screenshot contains the 12 holdings that overlap.
I could then ask the question posed slightly differently, looking for where the ticket existed in both ETFs. Curiously enough IBM, Altria and Verizon were contained within both.
|Name||Ticker||Percent of Income||Income Boost From ETF|
|International Business Machines||IBM||2.83%||0.45%|
In the table above, the "Income Boost From ETF" is the added income exposure for the three companies that were featured in both ETF holdings. Based on the weighting within the ETF multiplied by the weighting that each ETF has in my portfolio, the overall impact is very, very small.
This should be intuitive, IBM for example is about 3.5% of SCHD, which in turn is 10% of my income. Multiplying that across, SCHD provides an additional 0.35% exposure to IBM with the other 10 basis points coming from SPHD.
During this process I was able to add hard some figures behind what would otherwise have been hunches regarding the impact of owning ETFs. I've learned that though there may be overlapping holdings, the additional exposure is quite low, assuming that ETFs remain a relatively small part of my portfolio.
Champion, Contender, Challenger View
My Dividend "Champions, Contenders and Challengers" list is also about where I want it to be. Generally speaking, most companies I own have a very long history of dividend increases, and over 90% have at least a 5-year history!
Intelligent REIT Investor
My read of the month was Brad Thomas' (and Stephanie Krewson-Kelly) book, The Intelligent REIT Investor. I bought the book because I wanted to fundamentally understand REITs better. I felt my knowledge was OK, not staggering, and it was important to better understand what I was investing in and also to find future opportunities.
I do have to say the book was precisely what I needed. I now understand each of these better:
- Each subsector
- The risks and rewards associated with each
- Tax implications
- Cost of capital and the associated spread between the WACC (weighted average cost of capital) and the cap rate (expected return rate of an investment)
My addition to Ventas this month was largely in part due to my better understanding of REITs and the perception that the healthcare REIT sector in particular has a very long tailwind coming with the Boomers retiring.
Another takeaway was having Real Estate accounting for about 20% of the portfolio. There had been numerous studies conducted showing the "optimal" allocation to real estate in terms of expected return versus price volatility. REITs tend to have low correlation with the broader market, so there are risk-adjusted gains to be made by having an allocation to them.
In addition to the linked tickers above, my portfolio contains the following tickers: (AAPL),(ABT),(AFL),(AMGN),(AMP),(AMZN),(ANTM),(BRK.B),(CAH),(CMI),(CSCO),(CVS),(DEO),(DIS),(DUK),(FB),(GILD),(GLW),(GOOG),(GWW),(HD),(IBM),(JNJ),(JPM),(KORS),(MDT),(MO),(NKE),(O),(OHI),(PRU),(PSA),(SBUX),(SCHD),(SJM),(SPHD),(STAG),(SWK),(T),(TEVA),(TGT),(TROW),(TRV),(UA),(UTX),(VFC),(VTR),(VZ),(WFC),(WPC),(WSM)
In June I slowly began reallocating some monies from higher valuation, smaller position companies into a broader high dividend, low volatility ETF. I collected $760 in dividends, which was just $4 short of my previous high set in March.
Let me know your thoughts on my portfolio!
If you find this content interesting or useful please comment and/or follow me. I love writing and being a part of this great community.
Disclosure: I am/we are long AAPL,ABT,AFL,AMGN,AMP,AMZN,ANTM,BRK.B,CAH,CMI,CSCO,CVS,DEO,DIS,DUK,FB,GILD,GLW,GOOG,GWW,HD,IBM,JNJ,JPM,KORS,MDT,MO,NKE,O,OHI,PRU,PSA,SBUX,SCHD,SJM,SPHD,STAG,SWK,T,TEVA,TGT,TROW,TRV,UA,UTX,VFC,VTR,VZ,WFC,WPC,WSM.
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.