Buying Stocks For A Dividend Growth Portfolio: Postscript A

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Includes: ABBV, BA, BCE, BHF, CLX, COL, CVX, EMR, ENB, F, GE, GG, GIS, HON, INTC, JNJ, KMB, KMI, LMT, MCD, MET, MMM, MSFT, NEM, NNN, NVS, PAAS, PEP, PG, PPG, QCOM, S, TD, TRP, UL, UPS, UTX, VZ, WELL, WTR, XOM
by: The Hedged Economist

Summary

Don't lose the forest for the trees.

It does matter how the trees grow.

BHF,KMI,GG,PAAS,ENV,UTX,UPS,LMT,QCOM,CLX,WTR,KMB,EMR,MET,BCE,NVS,GIS,ABBV,TRP,BBL,NNN,CVX,GE,PPG,HON,VZ,F,INTC,PG,TD,PEP,MSFT.

XON,JNJ,UL,HCN,MCD,MMM,BA.

Introduction

This posting is truly a postscript. With the completion of "Buying Stocks For A Dividend Growth Portfolio: Part 3 The Portfolio," Sep. 6, 2017 on SeekingAlpha, I didn't think there would be anything more to say. The logic of the portfolio had been explained in Part 1. Part 2 had discussed buying opportunities for each stock, and Part 3 presented the entire portfolio.

However, in response to one of the postings, there was a request to identify those stocks that currently look cheap and those that looked overpriced. That is a different approach from the portfolio focus of the postings. As described in the previous posting in this series (part 1a- here - and especially part 1b here), positions are initiated with a very long holding period in mind, and, consequently, they are often initiated by making a small purchase with the intent to add to the position at better prices over time.

The focus is on accumulating a stock over a period of time rather than in one purchase. Thus, almost every stock in the portfolio can be viewed as being one where accumulating more shares makes sense. The exception would be if the position has grown to the point where it makes portfolio sense to look elsewhere in order to avoid too much concentration in one stock. For years, that accumulation was done primarily through dividend reinvestment. In general, it would make no sense to hold a stock in a portfolio if one wasn't willing to accumulate more of the stock. At the same time, many of the stocks in the portfolio are currently overpriced. Thus, a major purchase would be inappropriate if the objective is immediate capital gain.

While this posting will identify specific stocks, I wrote this series because there's more to be gained from understanding my experience than from specific recommendations. That's true whether it's my recommendation or someone else's. For example, Johnson & Johnson (JNJ) and Boeing (BA) have been in this portfolio for a long time. During that period certain trading patterns have been noted and were discussed in connection with the stocks. However, noting a trading pattern doesn't determine whether a stock is an appropriate purchase. Whether stocks should be purchased at a given price depends on one's intended holding period, portfolio objectives, and what one already owns.

In both cases (JNJ and BA), there has only been one conviction buy. What is most important is that the circumstances that led to those conviction buys represent situations that occasionally surface in connection with other stocks. It's far less important whether those two stocks are currently overpriced (my opinion), than that similar circumstances can be identified in other stocks. Lockheed Martin (LMT) was in the situation very similar to the situation with Boeing (described in "Buying Stocks For A Dividend Growth Portfolio: Part 2a Core Examples," SeekingAlpha, Aug. 27, 2017, Buying Stocks For A Dividend Growth Portfolio: Part 2a Core Examples). Lockheed Martin is still ramping up on the benefits. General Electric (GE) and other companies discussed below may be at different stages in a situation similar to Johnson & Johnson when the conviction buy was made (also discussed in Part a).

However, with the entire portfolio as background, this posting discusses which stocks are currently on my watch list. Nothing that follows should be taken as a recommendation to buy. Rather, what follows explains what looks sufficiently interesting to look into it further. The result is a watch list not a buy list. I would caution that I am not an expert at analyzing individual stocks. Over my investment career I've focused instead on analyzing businesses and industries, and on portfolio composition. Consequently, what follows will not be a detailed justification for individual adjustments in my portfolio. Rather, it should be looked at as a real-time update of the portfolio. The only hypothetical I will introduce is that I will treat each holding as if it were round lots.

Although each individual stock in the portfolio will be discussed, the posting is really about the portfolio not the individual stocks. How one would adjust this portfolio is totally different from how one would start from scratch if one did not own any stocks. Having over 5% of your portfolio in a stock and deciding not to add to the position is quite different from not including the stock in an initial purchase. It also should be apparent from the organization of the posting that each company is viewed as a part of an industry, rather than viewing it as an individual stock.

Also, the portfolio objectives and criteria should be kept in mind. The portfolio criteria are:

1-Generates a reliable dividend stream that will grow over time

2-Displays less volatility than the market in general

3-Provides returns that do not lag the overall market over a full market cycle

4-Contains core stock holdings in a diversified portfolio of assets

5-Requires very few changes over a long period of time

That fifth objective means that some of the trades that look appealing will be passed up. Which trades have occurred or will definitely occur will be clearly identified and differentiated from those that are only being considered. After all, that's what a watch list implies; something looks interesting but has yet to be thoroughly evaluated.

Below is a list of the portfolio holdings. It is the same table that was presented in Part 3 of this series with the order of presentation reversed to run from smallest holding the largest. Two columns have been added. The first is a brief summary of what will be discussed in this posting. The final column is the yield. The list was not updated to reflect any changes that occurred in the price or yield of the stocks since the list was initially published. While the stocks are listed from smallest portfolio component to largest in the table below, the discussion will be around industry groups.

% of the

% of the

Thoughts,

STOCK

Portfolio's

Dividend

questions,

Stock's

TICKER

Value

Flow

or ideas

Yield

BHF

0.12%

0.00%

out

KMI

0.08%

0.07%

out

2.62%

GG

0.65%

0.13%

Hold to sell

0.61%

PAAS

0.71%

0.14%

Hold to sell

0.60%

ENB

0.34%

0.53%

from KMI or ??

4.59%

UTX

0.97%

0.80%

watch, merger

2.43%

UPS

0.88%

0.88%

seasonal?

2.93%

LMT

1.20%

0.98%

watch

2.40%

QCOM

0.66%

0.98%

watch

4.40%

CLX

1.28%

1.06%

from BHF or MET?

2.45%

WTR

1.37%

1.12%

2.41%

KMB

1.13%

1.24%

from BHF or MET?

3.21%

EMR

1.16%

1.30%

3.31%

MET

1.16%

1.33%

Watch or sell

3.36%

BCE

0.94%

1.52%

4.77%

NVS

1.42%

1.59%

reinvesting dividends

3.30%

GIS

1.42%

1.70%

from BHF or MET?

3.52%

ABBV

1.43%

1.73%

3.55%

TRP

1.53%

1.91%

from BHF or MET?

3.67%

BBL

1.47%

2.37%

4.73%

NNN

1.81%

2.84%

Watch, another buy?

4.62%

CVX

2.14%

2.92%

4.02%

GE

2.24%

2.97%

watch

3.90%

PPG

5.23%

3.20%

trade+?

1.80%

HON

5.41%

3.40%

low yield, sell call?

1.85%

VZ

2.14%

3.49%

watch+

4.80%

F

1.69%

3.56%

6.20%

INTC

3.53%

3.72%

watch

3.10%

PG

3.71%

3.77%

watch

2.99%

TD

3.08%

3.88%

3.70%

PEP

4.58%

4.21%

2.70%

MSFT

5.76%

4.21%

2.15%

XOM

3.15%

4.29%

interesting at 4%

4.00%

JNJ

5.21%

4.43%

2.50%

UL

4.59%

4.48%

2.87%

HCN

2.88%

4.76%

yield when needed

4.87%

MCD

6.28%

5.12%

sell call?

2.40%

MMM

7.33%

5.73%

Let it run or sell call?

2.30%

BA

9.33%

7.61%

Let it run or sell call?

2.40%

Stock by stock discussion of portfolio holdings

Financials

Brighthouse Financial (BHF) is very small holding and will be exited. The company is MetLife's (MET) business of selling life insurance and annuities to individuals. The company also inherits the previous life insurance policies and annuities sold by MetLife. Many of those legacy policies, especially the annuities, guarantee returns based upon an assessment of the environment at the time they were sold. In the current low interest-rate environment, meeting those obligations will be a stretch.

That's true of all life insurance and annuity products. However, it is particularly troubling in connection with Brighthouse Financial. The company salesforce-based distribution channel could be constrained by the Fiduciary Rule being considered by the Department of Labor. The Fiduciary Rule could force anyone selling such products as a part of a retirement plan (think IRA) to act as a fiduciary. Further, most deferred annuities are sold as retirement programs. Thus, efforts to create a healthier total book of business by selling new policies may be constrained.

Their business model is being challenged on multiple fronts. The obligations they incurred have more interest-rate risk than was anticipated when they were sold. In order to compensate, they are taking on assets that embody more risk. Finally, their fundamental salesforce-based distribution model may not be sustainable. Consequently, the amount of effort that would be required to monitor the holding isn't justified by any potential upside. Further, the stock does not offer the level of reliable, consistent performance that would make it appropriate for this portfolio. It should be noted that the reasons for selling are unrelated to what dividend policy Brighthouse Financial adopts.

MetLife (MET) presents many of the same problems as Brighthouse Financial. However, in the case of MetLife, asset quality is more of a concern than distribution channels and legacy products. MetLife does not avoid those problems, but they seem more manageable for MetLife than for Brighthouse Financial.

Insurance companies are required to list their assets with various regulatory agencies. Consequently, it is possible to construct a profile of the asset side of the industry's balance sheet. Recently, just such an analysis was discussed in: "BlackRock Finds Insurance Industry Riskier Than in 2008" (Bloomberg Video•August 29, 2017).

While the focus of the discussion was how the insurance industry would fare in a financial crisis, the more important facts are that in order to compensate for the low interest-rate environment insurance companies have entered into more risky, less liquid assets. Further, the large life insurance companies like MetLife tend to dominate the data. In fact, MetLife is mentioned by name in the video. Consequently, MetLife (MET) is another position that will be exited.

Exiting these firms in the financial sector presents an interesting opportunity. Over the short-run, there may be a market rotation into the financial sector. If that occurs, which is highly probable, positions in the sector can be exited by selling covered calls with the intent of having the position called. For reasons related to regulatory risk, the intent is not to reinvest the proceeds in the financial service sector. However, from a portfolio perspective it would be nice to have more representation in the financial service sector.

TD Bank (TD) is a relatively safe banking investment, especially when compared to US banks. At any given point in time, there are risks associated with banking in the US and in Canada, but for the long-term investor a Canadian bank is a more stable holding. This is discussed in previous postings, and, if one is inclined, there is an excellent book called FRAGILE BY DESIGN by Calomiris Haber that provides an excellent comparison of banking in different countries.

Given the exit from MetLife and Brighthouse, TD would be a logical stock to examine as an alternative. However, it's not being considered in this portfolio because it appears to be overpriced and has recovered from the price depressing impact associated with concern about the housing bubble in Canada. That concern was overblown, and consequently, TD had already been purchased to the level that seemed to be the appropriate weighting for the financial sector in this portfolio.

REITs

REITs only recently became a separate sector. They used to be a part of the financial service sector. There is logic to looking at REITs either way. Historically, much of the commercial real estate held by REITs was held by life insurance companies and, to a lesser extent, other financial service firms. However, for a variety of reasons, many related to changes in accounting practices, as well as tax laws, REITs have become a distinct asset class. As a consequence, investors are now offered the opportunity to invest directly in the assets rather than indirectly through a financial service firm that also is involved in other business activities.

In terms of portfolio management, it means that it may be necessary to hold two different positions in order to accomplish the same exposure that it was previously possible to get through one firm. The flipside is that investors now have far more ability to control the extent to which they are exposed to various risks and returns. There are currently two REITs in this portfolio. They're both at the level that eliminates any need for further portfolio adjustment. Nevertheless, both should be on the watch list of any investor who is not fully invested in the two names discussed below.

National Retail Properties (NNN) should definitely be on a watch list. The price is depressed partially out of concern that the retail sector will be decimated by Amazon. The hype is overblown. Amazon is an amazing company, but there are multiple potential uses for the type of retail space that is of importance to National Retail Properties. NNN is not having problems leasing its properties, and it has ample experience handling properties where the tenants are in financial difficulties. I recently added to my position in NNN. In other words, in and around these prices, NNN is definitely an opportunity to buy a quality REIT at a reasonable price.

Welltower (HCN) is a healthcare REIT that specializes in healthcare facilities related to old age. The sector in which they operate has been affected by two trends. First, there has been a building boom which creates a slight oversupply which has depressed the price of the stocks of REITs like Welltower. Second, there has been considerable regulatory uncertainty associated with health insurance. That too has depressed the price of Welltower despite the fact that it has only limited exposure to the areas that could be most severely hurt by major regulatory changes. However, the stock has recovered significantly since the fall of last year when those factors seem to have had their most severe negative impact. So, it should be watched for any pullback that creates an advantageous entry point.

Welltower has an additional advantage from the portfolio perspective. It provides indirect exposure to the healthcare industry through a mechanism other than pharmaceuticals, health insurance, and hospital firms.

There are a number of industries that characteristically have a higher dividend than others. REITs do so in order to maintain their tax status. Consequently, from a portfolio management perspective, they become of particular interest as a method to get the average portfolio yield up to the target, which is 3% in my case. Given the current weights of these two REITs in the portfolio, if an additional high dividend REITs were needed from a portfolio management perspective, there are other REITs that hold similar properties that would be of interest. The cyclical behavior of REITs also appears to be less correlated with the rest of the market than many other sectors. They add a certain amount of diversification.

Pipelines

Kinder Morgan, Inc. (KMI) this is another small position that will be exited. Kinder Morgan has not been a company where one could make an investment and just hold it without concern. Pipelines are not overrepresented in the portfolio. Thus, the response will be to move the funds to a different pipeline. There are three reasons for the move. One is just to eliminate a position and thereby simplify the portfolio. The second is to eliminate a position that has to be monitored because of the tendency of the company to get over leveraged and overly ambitious. The third is the minor increase in the yield that can be accomplished by the transition.

Enbridge (ENB), as primarily a natural gas pipeline, looks particularly appealing since they have reconfigured their network to reflect changes in the natural gas market. It also has an appealing dividend which should help with the objective of getting the total portfolio yield to about 3%. Their dividend is over 4.5%.

TransCanada Pipeline (TRP) has a lower yield than Enbridge, and the stock looks a little less appealing on a price basis. However, their exposure to crude production in Canada pretty much insures that the dividend is safe. Further, the acquisition of Columbia Pipeline Group makes sense.

Enbridge (ENB) and TransCanada Pipeline (TRP) are both positions that can be expanded. Both Enbridge and TransCanada have pipelines that are being developed currently. That creates a certain amount of price volatility. Consequently, someone who specializes in monitoring the regulatory process and its impact on the development of infrastructure such as pipelines might be able to trade into the stock at a more advantageous price or by selling a cash covered put. I will just expand my position in both pipelines.

Energy

Chevron (CVX) is an excellent hold. It appears overpriced based upon current energy market prices, but, of course, that could change if energy prices changed dramatically.

Exxon Mobil (XOM) is an excellent hold, and at a close to 4% dividend, it is worth watching. Any positive change in the energy market would be a catalyst to buy. Accumulating it at these prices is a reasonable strategy. However, I don't believe that any will be added to this portfolio. Because of the high yields of the energy companies and pipelines, they currently contribute as large a portion of the total dividend flow as seems advisable for this portfolio.

Miners

Pan American Silver (PAAS) and Gold Corp (GG) are both stocks that are held to sell. Both are precious metal miners that suffer from all the deficiencies of that industry. If I felt the need to add to my position in precious metals, it might not be in these companies. I have held Newmont Mining (NEM) in the past, and I believe it is well-run company that has demonstrated a commitment to their shareholders.

BHP Billiton (BBL or BHP) is a cyclical play based upon the price of the underlying commodities they produce, most notably iron ore. It's a hold at current prices. If one felt the need to add more exposure to the mining industry in this portfolio, the logical approach would be to try to diversify the metals covered.

Industrials

United Technologies (UTX) definitely belongs on the watch list. The uncertainty surrounding their intention to merge with Rockwell Collins (COL) has caused the stock to pull back from its recent highs to a level that looks like a decent price at which to expand one's position or initiate a position. United Technologies looks to benefit regardless of whether the merger occurs or not. But, the market has penalized the company ever since its announcement of the intended merger. It's a stock worth watching.

General Electric (GE) presents an interesting dilemma. The question is whether the previous management has done irreparable damage or whether, with new management, the company can turn around. The new management has postponed unveiling any major new plans until November.

GE has been dead money for over a decade. However, with the new manager and a strong balance sheet it's a potential turnaround. Unfortunately, unlike Johnson & Johnson, GE has not retained AAA rating. Further, previous management has made major mistakes in terms of the services offered by GE. That's different from the situation at Johnson & Johnson, which pretty much retained its product profile.

GE's management needs to focus on operating its existing businesses and stop thinking that the environment explains why certain businesses are not prospering. It is highly unlikely that other companies can operate in the same general business areas and make money, but, somehow, the environment selectively penalizes GE. If in November there are indications that the Board and management recognize that the problems are within GE, not in the environment, it will be a strong positive indicator. Further, how they handle the dividend will reveal how stockholder-friendly the company is going to be.

Consequently, GE should be on the watch list. I recently added a little to my position in the belief that November will mark the low point for GE. Many investors might prefer to wait as the stock could come down more in price between now and November. In terms of watching GE, one should also compare the opportunity and risks associated with GE to those offered by UTX (discussed above) and HON (discussed below).

Honeywell (HON) is in many respects in the opposite situation from General Electric. General Electric has been a disaster for the last decade while Honeywell has performed exceptionally well. GE has just experienced a turnover of senior personnel from the chief executive who overpromised and underperformed. Honeywell, by contrast, just experienced a turnover of senior staff from a chief executive who is been widely recognized as an excellent chief executive. Consequently, GE stock is extremely depressed while Honeywell stock has done quite well and is overpriced.

Honeywell has one of the lowest yields of any of the stocks where there is a significant position. So, its contribution to the dividend stream is not excessively large, but the size of the holding itself is more than 5% of the portfolio. It would seem that it would be safe to sell a covered call and risk losing part of the position in order to enhance the yield with the proceeds from selling the call.

Emerson Electric (EMR) is a hold at its current price. In other words, it's a bit overpriced and lacks a catalyst that would justify purchasing at its current price.

PPG Industries, Inc. (PPG) is in a very interesting situation that justifies putting it on a watch list. Their recent effort to take over Akzo Nobel ended with PPG withdrawing their offer. Their decision to withdraw the offer rather than continue to pursue the takeover demonstrates the discipline in capital allocation that has been characteristic of PPG.

Akzo Nobel is in a very difficult, and perhaps untenable, position if it intends to retain its independence. On the Friday before a general meeting held to confirm the appointment of new Chief Executive Thierry Vanlancker, Akzo Nobel issued a profit warning. It also announced that its finance chief was taking a leave of absence for health reasons, and it unveiled a new management structure. Former Chief Executive stood down for health reasons less than two months ago.

The profit warning and new structure have a common root: overly ambitious objectives put forward to fend off PPG's buyout offer. Vanlancker admitted the company wouldn't increase operating profits as much as previously expected. As the company thrashes around trying to meet unrealistic performance goals laid out in order to fend off the PPG offer, the management team will lose credibility. It could end up being forced to accept a new takeover approach.

PPG is in the rather advantageous position of being able to wait and perhaps pick up all or part of Akzo Nobel at a better price or look elsewhere for alternative opportunities. It is likely that the price of PPG's stock will increase now that the uncertainty associated with their efforts to acquire Akzo Nobel and have been removed. The uncertainty about whether PPG would pay an outrageous price rather than walk away from the deal probably depressed PPG's stock price. Because of the potential for rapid movement as the uncertainty dissipates, selling a covered call would seem to be very risky unless one wants to intentionally reduce the position.

However, because of that upward potential, it would seem advisable to continue to hold the existing position with PPG even though, like Honeywell, it's one of the lower yielding stocks in the portfolio and represents over 5% of the portfolio's holdings. PPG should be watched for any pullback toward $100, but it shouldn't be surprising if the price runs up instead. However, selling cash covered put(S) at or close to $100 would not be a bad way to initiate one's position.

3M (MMM) is a difficult company to trade. It's usually well-run and priced accordingly. Thus, it would be perfectly legitimate to classify it as overpriced currently. However, if it continues to perform, it could become even more expensive in terms of price. Also, the company could experience a two-for-one split of its stock if management believes it is the appropriate response to its current price.

While the portfolio weight of 3M might justifies selling a covered call, the difficulty of getting back into the stock is the reason that it has been allowed to become as large portion of the portfolio yield. The decision has been, and continues to be, to let this winner run.

Transportation

Transportation is sometimes lumped in with industrials and sometimes treated as a separate industry. It's clearly a service industry, and it is best viewed as such. The performance of the sector can be quite different from the industrials.

United Parcel (UPS) doesn't currently seem to be particularly appealing, although it is a safe dividend. The stock has displayed a seasonal pattern the last couple years, and it is worth watching in order to see whether that seasonal pattern surfaces again. If it does, it may be a trading opportunity. However, like most of the market, UPS is currently overpriced.

Aerospace

Aerospace is clearly just an industry, and it is really a part of the industrial sector. However, it is worth considering it separately since the drivers in the industry are markedly different from those for most other industrial firms. That in-and-of-itself is a good reason to retain exposure to the industry through the cycle. The cycle of the aerospace industry will be very different from that of many other firms. The difference in the development cycles and end markets characteristic of aerospace versus many other industries results in aerospace exposure being very appealing as one of the areas of activity of many conglomerates.

For example, in this portfolio Honeywell, United Technologies, and GE are all recognized as major producers of aerospace-related products. Consequently, that total exposure needs to be monitored especially as those conglomerates shift their emphasis between the different industries they serve. Nevertheless, the benefit of pure aerospace exposure justifies holding positions that provide direct exposure.

Lockheed Martin (LMT) although currently expensive, the company is in a strong position. It might be worth buying on dips. In this portfolio, the portfolio weight will be allowed to increase over time. While Boeing provides additional exposure to the industry, the conglomerates mentioned earlier (UTX, HON, GE) tend to be increasing their focus on commercial aviation rather than government/defense aviation. Lockheed Martin can help to offset that concentration, but it is not an urgent need because of the large position Boeing holds in the portfolio.

Boeing has become the largest position in the portfolio, and the intent is to let it run. It is currently overpriced, but like 3M, Boeing's management may choose to do a stock split which would probably provide a temporary boost to the stock's price. Also, the company is in an extremely strong position both in commercial aviation and defense contracting. It would be nice to be able to sell a covered call and use proceeds to enhance the position of Lockheed Martin, but the risk of undermining the intent to let the stock run is too great.

Transportation equipment, non-aircraft

Other than some of the conglomerates that have some exposure to transportation equipment, the portfolio has only minor exposure to this sector.

Ford Motor Company (F) is the only direct exposure to non-aircraft transportation equipment. Because of the high yield, the company can make an adequate contribution to the dividend flow while representing a very small portion of the total holdings of the portfolio. Unlike many of the other stocks in the portfolio, Ford Motor may not be a permanent holding. However, the reasoning behind that comment would indicate that Ford Motor Company is worth watching closely right now, and it might be a very good buy.

Whether Ford Motor stays in the portfolio or not depends upon how well they maintain their dividend through the current cycle. Uncertainty about the issue has depressed the stock, but the stock has also been depressed by the failure of management to clearly articulate how they are responding to changes that are taking place in the transportation equipment industry. The shorthand way to describe their problem is that they have not said what they will do about Uber, Tesla and self-driving cars. The realistic way to view the situation is that they will respond to the competition. Once that response becomes apparent, the stock should appreciate, and the basic problem of how well they can maintain their dividend through the cycle will be the driving influence on whether the company is a desirable holding.

Technology

While often treated as a separate industry, technology is actually a very diverse set of industries that range from capital-intensive cyclical industries to those that provide software services. It is quite possible to set up positions within this industry with markedly different cyclical behavior.

Qualcomm (QCOM) stock is currently depressed because of the uncertainty associated with their dispute with Apple. If one wants a position in the stock, now would be the time to buy. Their dispute with Apple is undoubtedly going to cost Qualcomm. That cost is probably reflected in the price, and the price is probably further depressed by the uncertainty associated with how much that cost will be.

Microsoft (MSFT) is a bit overpriced. It is still one of very few companies with the AAA rating, and, as such, it should be targeted for purchases anytime it is being written off as old tech.

Intel (INTC) should be watched closely for any pullbacks. For dividend growth investors, it is one of the more appealing opportunities in the sector. It has a reasonable yield of about 3%, a price/earnings ratio below the market average, and a beta that is only slightly above one. The price is depressed simply because the market does not seem to appreciate or tolerate the fact that it is a capital goods producer with a long cycle. Intel's weight in the portfolio was recently increased slightly.

Utilities

Aqua America (WTR) seems to be a perpetual hold. It is rare for the price of the stock to fall enough to justify a purchase. The only reason to hold it is to gain utility exposure outside of the energy field.

Telecommunications

Bell Canada (BCE) is currently less appealing than the major US telecom companies.

Verizon (VZ) should definitely be on a watch list. I recently purchased more in order to adjust its weight in the dividend flow. It would be a mistake to write off VZ. The communications industry goes through periods of intense competition, and right now it's in one. They don't last forever. The fact that Verizon's stock is being depressed because they compete is ample reason to consider it a very interesting purchase possibility.

As a bond proxy, Verizon's stock could suffer as interest rates rise. But, interest rates will not go up forever. If you want to forecast interest-rate cycle, go right ahead. It's a legitimate way to try to trade VZ. One caution, I spent my entire career working with some of the best economist in the business, and all state right up front that forecasting interest-rate cycles is prone to error.

Consumer Staples

Clorox (CLX) is currently overpriced, but it should be put on a watch list. If the price pulls back (e.g., on a Wall Street downgrade), it is a very appropriate holding for a dividend growth portfolio.

Kimberly-Clark (KMB) is in a situation very similar to Clorox. It's currently overpriced, but should be on a watch list since it seems to be approaching a price at which a purchase would make sense.

Procter & Gamble (PG) is in the midst of the proxy fight with an activist investor. Yet, the stock has performed well despite the controversy. However, it is cheap relative to peers. The stock could be hurt if the activist investor loses the proxy fight and decides to liquidate its position in Procter & Gamble.

Looking through the temporary effect of the controversy on the stock price, it appears that management has recognized the shortcomings of their recent performance. They identified the corrective actions they intend to take or are in the process of taking. However, their response seems to be as much about defending their control of the company as improving its performance. Many of the steps they're taking are those that were recommended by the activist investor.

On balance, the stock should be watched, and it would look appealing on any dip in the stock price. There could be some very nice opportunities if the activist investor decides to sell off its position. Given its portfolio weight and the portion of the dividend yield that it contributes, there will probably be no changes related Procter & Gamble in this portfolio.

Unilever (UL) is an excellent hold, but it's probably overpriced in terms of adding to the position. Having gone through a hostile merger effort, the company will probably perform in a very shareholder-friendly manner over the near-term.

Consumer staple food products

General Mills (GIS) should definitely be on the watch list. I recently acquired some more General Mills, but it is possible that the stock will be available at an even lower price in the near future. In which case, I may acquire some more.

Pepsi (PEP) is an excellent holding, but is probably a bit overpriced.

Retail

McDonald's (MCD) until Sept. 11, I would've said McDonald's was clearly overpriced and in a ripe position for a covered call with little risk. Then some brilliant analyst realized McDonald's had restaurants in Florida and Houston. The stock price retreated from a high as a result of that exposure. In this portfolio, it was still a candidate for a covered call because it was over weighted. However, because of the price drop, there was more risk associated with that strategy. The risk was that the hurricanes' impact on earnings was overestimated and the stock would snap back resulting in the call being exercised. That seems to be exactly what happened and now the stock looks like a more appropriate covered call on part of the position.

Pharmaceuticals

Novartis (NVS) is not overpriced, and the price at least justifies reinvesting dividends. The yield is reasonable and the P/E isn't too high.

AbbVie (ABBV) appears to be too expensive at current prices. The price/earnings ratio is not excessively high, but the dividend yield is a bit low.

Johnson & Johnson is a bit overpriced. The P/E is a little high, and the dividend yield is a little low. Johnson & Johnson usually commands a premium, but even by its own standards the dividend is a little low. There've been other instances where Johnson & Johnson's stock has been in this position. Then subsequently, the company experienced a growth spurt in both earnings and dividends. Different analysts will argue whether they do or do not see a catalyst for such a growth spurt. I have not identified one. It would require a detailed analysis and valuation of the market potential of their drug development pipeline. I have not done a detailed analysis simply because my current position makes it unnecessary.

Summary

Previous postings addressed the portfolio. This one looked at the portfolio stock by stock. However, it's impossible to address the appropriateness of a stock without making some sort of assumptions about the portfolio and the investor's personal finances.

An alternative approach to looking at this portfolio is to assume no portfolio. Under that assumption the relative attractiveness of stocks would be totally determined by the objectives of the portfolio being constructed. The logical fallback under the no portfolio assumption would be the original Widows' and Orphans' Portfolio first discussed in a posting on the Hedgedeconomist.com (JANUARY 9, 2011, "Investing PART 9: One version of the "Unfinished symphony") with minor modifications. Many of those modifications are in the most recently updated in Part 2a of this series on Buying Stocks for Dividend Growth Portfolio (Buying Stocks For A Dividend Growth Portfolio: Part 2a Core Examples).

Similarly, managing the portfolio would be handled differently if the individual were in a drawdown state where the portfolio was being used as a source of income. The logical endgame of building portfolio is to eventually use it as a source of income either ongoing or in retirement.

Those two topics, investing under and no portfolio assumption and managing a portfolio in retirement will be the subject of the next postscript.

The dividend growth portfolio described in this posting constitutes the core and the bulk of what I consider to be a reasonable portfolio. Whether that constitutes a reasonable approach for any other individual depends upon their risk tolerance and time horizon.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I own all of the stocks mentioned in this posting, and I am a consumer of some of the products produced by the companies. However, I have no other business relationship with any company mentioned in this article. As described in the posting, I intend to buy and sell some of the stocks mentioned. That is not intended as an endorsement of the purchase or sale of any of the stocks mentioned. Rather, the intent of this posting is to identify what looks interesting and worth further analysis.

Disclosure: I am/we are long ALL STOCKS MENTIONED.

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.