Sand In My Shoes - July Update

by: Brian Soule
Summary

July was a very boring month for dividends. Nevertheless, I will detail what was collected in the month.

Once again, there were a number of dividend hikes announced and I will tell you what those were.

I’ll give a report on the current sector weightings and asset allocation for the new and improved (and much larger) Sand in Shoes IRA.

Given my influx of capital, I will discuss a number of stocks one or more of which I will likely purchase sometime in the coming weeks.

The Sand in Shoes portfolio continues to transform into a respectable dividend growth portfolio. July, just like April and January, is less than exciting as far as dividends collected go. However, in case you missed my last update, there were plenty of changes that took place and we will look at where the portfolio stands today, especially regarding the asset allocation of the entire portfolio.

July Activity

In July the Sand in Shoes portfolio collected $20.25 in dividends, all from Coach (COH), which was as expected when in the June update we projected a third quarter total of dividends collected of $237.12, which would top Q2 by almost $7. With a disappointing July performance from Omega Healthcare Investors Inc. (OHI) - (down 4.3%) and a strong performance from AT&T (T) - (up 3.4%) the portfolio was mostly flat, only down 0.45% for the month. I would much rather the total portfolio value be up for the month, but all things considered I am happy with the results. As you can see below, the value of my Southern Copper Corp. (SCCO) covered call is $470, because SCCO is trading almost that much over the strike price of $35. ($4.34 x 100). So in all likelihood I will get called out on or before the expiration date of August 18th. The reason I say before is because SCCO goes ex-dividend August 7th and someone might want to collect that dividend and will therefore call the stock away from me before the 18th. So this time next week I could very easily be writing about how I’m going to invest the $3,500 I will receive from the sale of this position I determined did not fit into my portfolio anyway. It will be nice to not have that 1% yield in the portfolio any longer.

Below you can see my projected dividends for the remainder of the quarter if nothing else changes. Something of a milestone: I’m projecting the dividend income to be over $250 for the quarter, which was my initial goal for an average month. As I mentioned before, it is possible I won’t see that $14 from SCCO, which would drop me just below the $250 mark. Also, I am sort of “double dipping” in that I’ll be collecting a dividend from Home Depot (HD) in September, but I purchased HD using the money from my sale of COH and I also collected that dividend in Q3, which can only happen once since I won’t get a dividend from COH in October. Omega Healthcare Investors Inc. (OHI) announced an increase from $0.63 to $0.64 for the quarter, so that helps. Also the banks as previously reported raised their dividends for Q3 and SCCO took theirs from $0.12 to $0.14 for this quarter. Very happy about the increased cash flow and looking forward to future dividend hikes.

Sector Diversification

Let’s see where my sector weightings are as of July 31. Not much has changed, I still am looking for suitable investments in Energy, Industrials, and Technology. And soon I might be looking for a replacement for SCCO in the Materials sector. More on that later.

Consumer Discretionary

10.5%

Consumer Staples

6.0%

Energy

0.0%

Financials

30.7%

Health

15.2%

Industrials

0.0%

Materials

13.7%

REIT

13.2%

Technology

0.0%

Telecom

7.6%

Utilities

4.5%

Short Options

-1.6%

Cash

0.2%

100.0%

Asset Allocation for the Portfolio

If you saw my previous article, you will know that I just rolled over a large sum of money from an old 401(k) plan. After running through a number of on-line questionnaires I had told you that I settled on the following model, the “Large Cap Equities” portion of the portfolio (target of 40%) being made up of an S&P 500 Index fund and the existing positions that you can all see above.

After reviewing the choices available to me with index funds and ETFs I settled on a slightly more complicated model. In addition to evenly splitting my “Small/Mid Cap” money in half, I also decided I would break the fixed income portion of the portfolio into domestic and international fixed income. Here is what I will be tracking to starting now and each month going forward. I will adjust the portfolio to try to maintain this asset allocation for the foreseeable future:

Large Cap Equities

40%

Small Cap Equities

5%

Mid Cap Equities

5%

International Equities

10%

Domestic Fixed Income

30%

International Fixed Income

10%

As of July 31, this is what my asset allocation looks like:
Pretty much right on target, which is not at all surprising since this new and improved portfolio is about a week old. Over time the intention is to draw down the $70k in the S&P 500 Index fund and invest the proceeds in either a new or existing position, so the "Individual Stocks" percentage should grow slowly over time while the "S&P 500 Index" percentage shrinks, but I will strive to maintain a total of 40% for the Large Cap positions.

New Position or Add to Existing?

As I mentioned I believe that very soon, barring a catastrophic collapse in the share price of SCCO to the tune of 11% in the next couple of weeks, I will have $3,500 of cash lying around that I will need to do something with. Since there are no known catalysts (SCCO reported earnings last week) it is a near certainty that this will be the case. I would be left with positions in 7 of the 11 sectors and the obvious solution to me is to try to plug one or more holes with that $3,500. The sectors I would need to fill being Energy, Industrials, Materials, and Technology.

Need to “Gas Up” the Dividends

The most obvious of the sectors to fill to me seems to be Energy, at least based on how beaten up the sector has been lately.

Source: Bloomberg

And the most obvious Energy stock, the one that is screaming at me to be purchased here, is Exxon Mobil (XOM). This stock has a 3.8% yield and is a dividend champion, having raised their dividend 35 straight years with the most recent raise just occurring in May. Switching out a 1% yield for a 3.8% yield would definitely "gas up" the future income, in fact it would add about $20 per quarter just from this one switch.

There is a reason the stock is hovering just above a 52 week low, however, so I will need to do a little more homework before I pull the trigger. I will share with you my reasons for buying XOM if that is in fact what I end up doing.

Other Sectors I’m Missing

Of course I could also jump right back into the Materials sector with that money. There are some wonderful names there such as Bemis Company (BMS) or Nucor (NUE) that are both dividend champions. One of the companies I’m following, WestRock Company (WRK), is a “challenger” but they have been raising their dividend at a spectacular rate. Maybe it’s time to dig a little deeper into their business model.

Chart
WRK Dividend data by YCharts

In the Industrials sector, I have long been a fan of 3M Company (MMM), and this is one of those stocks that never seems to reach a good “entry point”. They have raised their dividend for 59 straight years. Maybe I should just go ahead and jump on this dividend train and ride it into retirement.

Chart
MMM data by YCharts

After closing my position in International Business Machines (IBM), I have a gaping hole in the tech stocks. I have been keeping my eye on Cisco Systems (CSCO) and Qualcomm (QCOM), both of which I think would make a fine addition to my portfolio, either now or in future months.

Beefing up an Existing Position

Of course not all of my sectors have what I would call “full positions” just yet. Utilities is only 4.5% of my portfolio, so perhaps adding a bit to my Southern Company (SO) would be a good call. My Hormel Foods (HRL) position is only 6% of my portfolio, and while it is up a little bit from where I initiated the position, it is still attractive to me at these levels. Or since there are other Consumer Staples stocks that I like, maybe it is time to add a PepsiCo (PEP) or Coca-Cola (KO) here. There are so many options and things to consider. I probably wouldn't mind owning a piece of all of the stocks I mentioned at some point, the question is which one should I purchase first (and soon)?

Conclusion

I am pleased with the progress of the portfolio. As the months go on, there will be plenty of exciting decisions I will have to make if I am to reach my dividend income goals, and there will be some rather boring portfolio re-balancing that I will need to do if I am to maintain my asset allocation goals.

The third quarter may be the first quarter where I will hit $250 in dividends collected. My 10 year goal is now $10,000 per year in dividends collected (let’s say $2,500 per quarter), so I will need the portfolio to generate ten times what it is generating today in dividends. That is a tall task, even considering the capital I’ll be adding to dividend growth stocks, and one that I am anxious to keep track of. I am looking forward to seeing how quickly I break through the various milestones of round numbers. How long before I have my first $300 quarter or $500 quarter, or even more exciting my first $1,000 quarter?

Finally, I am constantly amazed at the quality advice I have received from the Seeking Alpha community, so I have to ask for some again. I am frankly a little torn as to what I should do next. Pre-homework, I am very much leaning towards filling the empty slot in the Energy sector, but I’m not completely set on doing so. If you have any advice to help me construct my portfolio I am very interested to hear it. Thank you in advance, and thank you for reading!

Disclosure: I am/we are long AIG, AMGN, BAC, BLK, C, HD, HRL, OHI, SCCO, SO, T. 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.