Dividends & Income Digest: The Year In Review

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Includes: AAPL, ABBV, AZSEY, BA, BLK, BMWYY, BPR, CBL, CNK, CSCO, CVX, DDAIF, DIS, DLR, GILD, GWW, HD, HON, IBM, KHC, KR, LAZ, MAC, MAS, MCD, MO, NCMI, RCL, RDS.B, SBUX, SO, SPG, STOR, T, TCO, UNIT, WHR
by: Rebecca Corvino

Summary

Every issue, SA explores a dividend and income investing theme, as well as highlighting recent insightful pieces of opinion and analysis.

This week, contributors review the past year and look forward to the next one.

Is there a topic you'd like to see covered in a future D&I Digest? Let us know by commenting below.

For our previous Dividends & Income Digest, I asked several authors about the year ahead and their 2018 watch lists. This time around, I'd like to take a step back and look at the year we're leaving behind, with a 2017 annual review.

Here's what several of our authors had to say about the past year.

Adam Aloisi

My beginning-of-the-year expectations were far muted compared to what we've seen for the S&P 500 and Nasdaq. Fortunately, I was pretty fully invested, so, like others, I have benefited from the general groundswell. I'm mostly holding (but not adding to) many of my strategic sweet-spot (lower yield, higher growth) YTD outperformers: Boeing (BA), Apple (AAPL), Honeywell (HON), Home Depot (HD), BlackRock (BLK), Masco (MAS), and Royal Caribbean (RCL) being a cross-section. All wasn't rosy, however. Generally high REIT, and, to a much lesser extent, high-yield exposure hurt, although I had wins with Digital Realty's (DLR) acquisition of DuPont Fabros and Buffett's investment in STORE Capital (STOR). Elsewhere, Disney (DIS), Kroger (KR), Whirlpool (WHR), as well as Altria (MO) have been somewhat disappointing laggards. Biggest hits were an investment in Uniti (UNIT) early in the year and, despite a fairly negative muted investment thesis, holding on to GE because of capital gains. My personal lesson there was simply to get out when an upside thesis evaporates. Better to pay tax on the gain than to watch the gain flame out! Of course, hindsight is always 20/20 there.

Much hasn't changed personally on an allocative level, although I've moved a bit more to some alternative hard assets and done a bit of bottom fishing recently. Heading into 2018, I'd continue to advise new money caution. Although I'd see it as a mistake to do a wholesale timing bail, some profit-taking or targeted rotation may be advised. We're not at the Y2K valuation bubble, but we're headed vaguely in that direction. On a non-equity level, pay close attention to a flattening yield curve, which will put stress on financiers, heavily levered CEFs, BDCs, and other income producers that may be highly tied to it. Despite five 25bps central bank moves over the past two years and three this year alone, longer term bond traders are clearly not buying what the Fed is selling on the short end.

The Dividend Guy

How have you fared in 2017, and are you making any adjustments going forward?

Since I started investing my first dollar back in 2003, I keep a 100% equity portfolio. I can say it served me well in 2017. Each year, I review each of my holdings to make sure my investment thesis is still valid. If the reasons why I purchased the stocks in the first place are still good, I see no reason to make adjustments. So far this year, all my holdings meet my seven dividend investing growth principles.

What big positive/negative development (or surprise) defined the year for you?

To be honest, I was bullish for 2017, but I didn't expect the market to surge like this. After two years where earnings weren't really meeting expectations, we saw a big jump in earnings beat this year. What defines this year is that I feel 2017 is a marking point where investors start to completely ignore risk and greatly reward mediocre successes. We have seen many companies jumping by 10%-plus on their Q3 releases (IBM (IBM), Wal-Mart (WMT), W.W. Grainger (GWW) to name a few). I don't think such a jump is justified.

What was your highlight/lowlight of the year?

My highlight is definitely the fact that I quit my job to work full time on my online investment services. This also enabled me to manage my previous job pension fund. In September 2017, I have received $108K CAD as a commuted value for my pension plan that I invested in the stock market (65% in US and 35% in CDN). I can then enjoy the current bull market where I made over $10,000 in my first two months of investing. Believe it or not, there are still good buying occasions on the stock market. Companies like Disney, Starbucks (SBUX), and Lazard (LAZ) are still undervalued, in my opinion.

What have you learned this past year? How have your goals/strategy changed?

It's not really what I have learned rather than my past learning has been confirmed. No matter what people say, stick to your investment plan. Before the year started, many investors claimed it would be the year of the crash (as they said in 2016 and in 2015). Unfortunately for them, it was completely the opposite. 2017 shows me that investing in strong dividend growers will not only pay while I ride the bull market but I will also receive juicy payouts during economic downturns. I have not changed anything to my plan in 2017, and I do not intend to change anything to my strategy going forward. I think this is a key point when you invest. You are better off taking more time to select a strategy that meets your investing needs and stick to it afterwards.

What are your next steps as we head into 2018?

I haven't completely finished investing the money I received from my pension plan. I still have enough money to enter into two more positions. My focus will be put toward investing this money according to my dividend growth strategy. I will also read as much as possible about the tax bill. However, I will wait until everything is said and done. There is no point in reading about hearsay. I'd rather get my information once the bill is passed and the impacts will be official.

As a final note, I would suggest investors look at their biggest winners and losers in their cash accounts. They could be able to do year-end tax optimization with a few trades. Obviously, it is always best to get a tax expert's advice before making any transactions.

Julian Lin

This year has been one filled with many great events. The big one for me was becoming a Seeking Alpha contributor in late 2017. I asked myself, what did I want to invest in? What did I want to write on? I focused on arguably the most attractive contrarian sector: mall REITs.

My first big analytical project was CBL Properties (CBL), a high-dividend stock that many authors had been recommending. After studying their financial statements for myself, I realized that their dividend was not as safe as it appeared, and advised readers to keep their position sizes small. I was absolutely ridiculed in the comment stream as readers pointed out the abundant "FFO coverage." Needless to say, they cut their dividend in only the next two weeks. While it was an accurate call, my regret is that I wish I had avoided shares altogether. Every dollar counts!

There were two things I learned from CBL. First, do your own analysis, and trust it, as this is most important, even more than commentary from management. Second, and more importantly, allow a stock's risk profile to determine position size. If a stock is a SWAN (sleep well at night), then it might be permissible to allocate large position sizes (5%), but anything short of a SWAN must be kept in a small position (1%). It doesn't matter how "cheap" it seems, it would be a mistake to allocate a large position to a risky stock just because it seems super cheap.

My favorite part of writing is diving deep into the business model and seeking to understand it well enough that I could explain it very clearly to my readers. Past dividend growth, earnings growth, stock performance are all nice metrics, but they are not forward-looking. In my opinion, only a strong business model is forward-looking, and strong portfolio returns can only be predicted if you understand all of your core positions deep down to the bone.

Going into 2018, I'm very bullish on high-quality mall REITs in Simon Property Group (SPG), Macerich (MAC), GGP Inc. (GGP), and Taubman (TCO). I believe that they are well positioned to benefit from rent increases (which they have been doing forever) as well as near-term catalysts in the form of M&A and activist investors. I'm also bullish on a speculative position in National CineMedia (NCMI). This is a stock that I believe Wall Street has forgotten about - MoviePass is making great waves and may very well go bankrupt, but the fact that it has driven theater traffic up so dramatically while at the same time causing Cinemark (CNK) to release their own subscription service has made me believe that theater traffic may begin to increase in the future. This would add tailwinds to an already cheap valuation at a 12.5% dividend yield.

All in all, I look forward to 2018 and all the new investing ideas I come across.

Stefan Redlich

How have you fared in 2017, and are you making any adjustments going forward?

2017 has been a great year with double-digit returns even if accounting for a significant appreciation in the EUR/USD currency pair. My portfolio has expanded significantly in size and depth, and while the absolute number of 86 individual positions is certainly not small, the majority of these are still very small investments below $500 each, while my core holdings of Apple, AT&T (T), Altria, Gilead (GILD), Royal Dutch Shell (RDS.B), AbbVie (ABBV), BMW (OTCPK:BMWYY), Allianz (OTCPK:AZSEY), McDonald's (MCD), Southern (SO), and Cisco (CSCO) continued to grow. Going forward with the broad market trading at 26 times earnings and thus significantly above its average of roughly 16 times earnings, the challenge for 2018 will be to focus on sectors and stocks that have not been part of the broad rally, most notably food stocks, MLPs, REITs and some individual stocks with poor performance and undervalued status such as the German car makers BMW and Daimler (OTCPK:DDAIF) and also Gilead. The rally will probably continue throughout 2018, and I have no intention to sell anything. But with every percentage point gained, the potential cliff for stocks to fall off gets higher and higher.

What big positive/negative development (or surprise) defined the year for you?

The most spectacular and also worrying thing to happen in 2017 was the parabolic rise of cryptocurrencies. With a combined market cap of over $600BN, this is no small market anymore, although still small enough in order not to unleash any havoc on the real financial markets. However, with the interest in these cryptos exponentially increasing and exchanges offering first futures, more and more institutional investors will get lured in and with that also financial institutions offering loans. Also, if the private sector starts reducing its consumption and instead invests its savings into the deflationary crypto market with the expectation that every drop will get bought and that this market can only keep on rising, the impact on the economy could materialize sooner than everyone expects. When everybody thinks cryptos will go to another galaxy and you simply cannot lose, then this will be the time when trend will reverse fast and furious. I personally treat these cryptos as highly speculative assets of which I hold a tiny position, but more for gambling and purely speculative diversification instead of as a solid investment.

My highlight of the year was the 20% collapse of Altria once the FDA announced its plans to curb down on tobacco usage. As a relatively new investor, seeing a mighty stock such as Altria plummet like that based on a single piece of news that is as vague as it gets was really astounding, and I am very happy to have blended out all that noise and paranoia and added to my position.

What have you learned this past year? How have your goals/strategy changed?

Basically, I am thinking very hard about investing more into ETFs as beating the market is as hard as it gets. I am very happy with my portfolio performance so far, especially given the strong euro as a German investor, but 30%-plus returns for the main indexes is just a remarkable development, which is very tough to beat. Following the credo "if you can't beat them, join them" I am rethinking part of my investments for 2018. I will certainly continue stock-picking as it forces me to do my own due diligence about individual stocks and also be able to step in when attractive buying opportunities, such as Altria's nosedive or AT&T's recent downward trend, appear. And even though these two events worked out perfectly for me, I am not expecting these rapid turnarounds for every opportunity. For instance, with Gilead, more patience is required, but I am very confident that it will pay off in the long run. This double-sided strategy (buying ETFs to replicate the performance of the broad market as well as individual stocks) will be at the center of my preparations as we head into 2018. Furthermore, I will continue the work on my portfolio performance tool, which should allow me to compare performance vs. benchmark across any time period both in USD and in EUR and also separate the gains/losses from existing and new investments.

PendragonY

2017 was a pretty good year for my portfolio. Although my main goals center around increasing income, my broker reports that on average the shares in my portfolio are worth 14% more than I paid for them. In prior years, my goal for income growth was 11%, but I have consistently done better than that, so this year, I raised it to 12%. Complicating the income growth picture was $26,000 I added to the portfolio from an old 401(k) this May. I added $875 to the income goal to account for the additional resources. As of Friday, December 15th, I need to collect about $200 more to reach my year-end goal. However, I expect to collect around $1,000 more before the end of the year, so I should exceed my goal.

One of the things I like about dividend growth investing is that you don't get a lot of surprises. 2017 didn't really give me any big surprises. I think my biggest surprise was at the end of November. I got a lot more dividends than I expected based on last year. Year over year, this November saw my dividend payment go up 60%.

This year, I went all in on using the Discounted Dividend Model for stock valuation. I had used it before to help make decisions, but in 2017, I made it the primary tool in deciding what to pay for shares I wanted. I had several large transactions this year, where I closed my positions in Chevron (CVX) and Kraft-Heinz (KHC) and where I got $26,000 from an old 401(k). I wrote about how I used DDM to deploy the cash from each of those actions. So far, I like how DDM has worked for me this year.

Next year, I plan to do pretty much what I have been doing. So, I will continue to accumulate dividend payments until I have $1,500. With the $3.95 commission my broker charges, that keeps the friction to a minimum. That also allows me to make a purchase a little faster than once a month, which lessens the impact of potentially missing an ex-dividend date. Based on my projection of dividends received this year, my goal for dividend payments next year is $27,000. I will adjust that once I have collected all the dividend payments for December.

Achilles Research

The most interesting/surprising thing that happened in the stock market in 2017 was that stock prices kept going up. Investors haven't seen a major correction in the stock market since the first quarter of 2016 when concerns over spiraling energy prices weighed on valuations. The sell-off was a huge opportunity for income investors to gobble up income-producing stocks at widely discounted prices - I just wished I bought more while stocks were in the bargain bin. I still think that dividend stocks, for the most part, are overvalued as we are heading into 2018. High-yield stocks in the business development company and REIT sectors are particularly expensive, and the yield sector remains at risk of a major correction.

I have scaled back my exposure to the high-yield sector in 2017, selling numerous high-yield BDCs and mortgage REITs into the strength. Heading into 2018, the question is how long can high-yield income vehicles sustain their price gains, and when will a correction shake things up?

Speculating about the timing of a market correction makes little sense, of course. The only thing I can say is that I am going to gradually build up my cash position in order to be able to double down on quality dividend stocks when the opportunity arises. Investors in a bull market often make the mistake to think that stock prices can only climb higher - just like they did in the past. This unjustified optimism is often a recipe for disaster. Given today's strong economic fundamentals (above 3% GDP growth, accelerating interest rate growth, unemployment on track to crack 4 percent), a recession is becoming more and more likely within the next one or two years, in my opinion. Paying cyclically inflated prices for high-yield income vehicles that are set to correct sooner rather than later is a big strategic mistake that I think will hurt investors long term.

I consider high-yield income vehicles to be at least 10 percent overvalued today. As the market correction in Q1-2016 has shown, stock prices can slump quickly when investor sentiment takes a turn for the worse. In 2018, income investors will have to be prepared for a stock market drop, which would be a good thing: A correction will wash up many more, much more lucrative investment opportunities. It is up to investors to prepare for such an opportunity and accumulate cash in order to be able to take advantage of a pullback. Most investors are fully invested by now, and I think this is a good moment to turn more cautious. The time to be fearful is always when others are greedy. I expect cash to be king in 2018, and I am prepared to buy a whole lot more stocks during a 10-15% market drop than I did in all of 2017.

Now, it's your turn to weigh in, in the comments below. How did 2017 treat you, and what are you looking forward to in 2018?

If you enjoy the D&I Digest and would like to be alerted to future editions, don't forget to "follow" me! And please let me know if there's a topic you'd like to see covered in a future D&I Digest, either by commenting below or sending me a private message. I'd love to hear from you.

Finally, here's some recent Dividends & Income content you might want to check out (if you haven't already):

Dividend Growth 50: It's A Happy 3rd Anniversary, Even As Mr. Market Gets Some 'Revenge' by Mike Nadel

This Epic Dividend Growth Stock Is Firing On All Cylinders by Dividend Sensei

6 Questions For REITs In 2018 by Hoya Capital Real Estate

Retirement Security: Confessions Of A Serial Stock Predator by George Schneider

10 REITs That Should Benefit Under The Tax Plan by Brad Thomas

Zuckerberg Should Consider A Dividend by Nicholas Ward

Retirement Strategy: Yes, You Can Retire With Less Than You Think by Regarded Solutions

Chris DeMuth Jr. Positions For 2018: Opportunities Ahead by SA Editors

The Yield Curve And Your Investments by Ploutos

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.