My Dividend Growth Portfolio - Q4 2017 Summary

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Includes: AAPL, ABT, AFL, AMP, AMZN, BAC, BDX, BP, C, CAH, CAT, CCL, CSCO, CVS, CVX, D, DIS, DLR, DUK, EMR, ETN, FB, GD, GE, GIS, GOOG, GOOGL, IBM, JNJ, JPM, K, KHC, KMB, KMI, KO, LMT, LVS, MCD, MDT, MMM, MMP, MO, MSFT, NEE, NFLX, NKE, NSC, O, OHI, PEP, PFE, PG, PK, PM, QCOM, RCL, RDS.B, SCG, SO, T, TGT, TROW, TXN, UNP, UTX, V, VFC, VLO, VTR, VZ, WEC, WFC, WMT, WPC, XOM
by: Khen Elazar
Summary

In 2015 I started publishing quarterly updates regarding my dividend growth portfolio.

I believe that someone who writes about financial assets should share his main holdings with his readers.

In this article, I will share my portfolio, changes in the past 3 months and stocks that are currently on my wish list.

Introduction

It's time to summarize not only the past quarter, but also this wonderful year. Q4 was another strong quarter for investors. In the past quarter my portfolio's total return was 7.27%. The total return of my portfolio in 2017 was 20.01% after fees and taxes. This is an amazing figure. It is similar to the S&P total return. However, my portfolio has a beta of 0.78. It means that I managed to beat the S&P 500 while owning a less volatile portfolio. 2017 joins 2016 as another great year for my portfolio. My total return in 2016 was 17.23%.

While total return is an important metric to measure a stock portfolio, it is for sure not my main metric. My main goal is to achieve a growing stream of dividends, which will give me some more financial freedom. In 2017, my dividend income rose by 32%. The future income for 2018 is forecasted to be at least 13% higher than the income received in 2017. I hope to eventually achieve a 20% dividend income growth in 2018. In order to achieve it, I will need to add more funds to the portfolio, and 6%-7% overall dividend growth.

The short term forecasts I made last quarter were correct, and supported my investment thesis. The interest rate was raised in December by the Federal Reserve. The tensions in Korea didn't affect the general public, and it appears Merkel will be able to form a coalition in Germany. It really seems like most major regimes in the world are trying to be rational. The global economy for sure appreciates this state of mind, and the global growth is forecast to stay strong at over 3% in 2018.

When we look at 2018, I admit that I do have some concerns. While the tax cuts made by the Republican Party in the United States will push the stock market forward, it is hard to weigh on the risks. In 2017, we had several risks to take into account, mainly geopolitical, and every time the different parties were ready to deal with them. The only major political event to expect in 2018 is the midterm elections in November. These elections will allow us to understand the public's position regarding Trump's agenda. A major shift in the balance of power in Congress may imply that another tax plan is ahead, and we all know that the market hates uncertainty.

My plan for 2018 is to keep executing my investment thesis. I will keep allocating funds to my portfolio on a monthly basis. I will invest in stocks I believe are cheap or fairly valued. I will try to achieve higher dividend income, and high total return. I see no reason to amend my investment thesis at the moment, as it has worked for me over the past several years. I wish you all a great 2018.

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Investment Allocation

In Q4 2016, I liquidated my Lending Club position as well as a short-term deposit I had. Since then, I put my emphasis on my three accounts: the brokerage account, the pension fund and my medium-term account. While I manage my own portfolio in the brokerage account, I use the services of two investment firms to manage my other two accounts.

My dividend growth portfolio was more than 83% of my assets two years ago. In order to try to balance it, I allocated more funds to my other accounts. I want to balance it in order to hedge myself against possible failures in my strategy. Being overconfident in the financial world can lead to devastating results.

Right now my dividend growth portfolio accounts for 78% of my investments, and I am willing to lower this figure to 75% to begin with. Hopefully, I will be able to achieve it in 2018 as I allocate more funds towards these two accounts. However, I don't see it as a crucial goal because my dividend growth portfolio is very well diversified and contains a collection of blue chip companies. While I am proud of my achievements as a young investor, I must stay humble and allocate my investments wisely.

My Goals

2017 was a really good year for me. I managed to achieve most of my goals. All my financial goals were reached, and some other personal goals were achieved as well. I have already set my goals for 2018. On the financial side I hope to achieve significant growth in my net worth, and my dividend income. I believe that as long as I keep executing my strategy, I will be able to achieve these goals.

I also set some goals that are meant to increase my knowledge both formally and informally. I got admitted to the MBA program at Tel Aviv University, which is the most lucrative program in the country. Moreover, I want to read at least six books in 2018. Becoming a better investor requires experience and knowledge. I keep working on both of these aspects, and I must quantify them in order to see my progress.

On an even more personal note, I have some other goals that have nothing to do with the financial world. I hope to find the time and money to travel to a new destination during this year. By setting goals you can organize your time better. I highly recommend it to everyone. It allows you to see your progress during the year.

Sector Allocation

As my brokerage account is my largest asset, I keep allocating money there according to my optimal sector allocation. As I am still accumulating, I don't mind buying stocks from sectors I am over-allocated to. I don't want to totally ignore my optimal allocation. Over the past quarter I have put an emphasis on various sectors, as I had to deal with the sale of General Electric (GE), my lack of exposure to the IT sector, and the surge in the financial sector.

Over this quarter, I haven't changed my optimal allocation at all. It seems to work for me pretty well. The financial sector has been an overachiever over the past several quarters, so I probably won't add to this sector unless a great opportunity arises. In the first quarter of 2018, I will try to add some REITs and utilities. The rate hike in December didn't help these two sectors, and I already saw some candidates that my fit my strategy.

I still lack some companies in the IT sector. I am looking at Microsoft (MSFT) and several other companies like Texas Instruments (TXN). In the past month, I wrote three article regarding companies in the IT sector. They discussed Texas Instruments, Cisco (CSCO) and IBM (IBM). All three companies seem pretty interesting to me.

Optimal Allocation

Current Allocation

Sector

20.0%

18.8%

Consumer Staples

12.5%

12.6%

Health Care

12.5%

13.0%

Industrials

12.5%

14.6%

Financials

10.0%

9.7%

Consumer Discretionary

10.0%

10.1%

Energy and Materials

8.0%

7.7%

Information Technology

7.5%

6.9%

REITs

4.0%

3.9%

Telecommunications

3.0%

2.6%

Utilities

My Portfolio

The following table shows my current holdings in my brokerage account. All the companies below are part of my dividend growth portfolio. Alphabet (GOOG) (GOOGL) and Facebook (FB) don't pay dividends. However, they both enjoy steady growth in their free cash flow. This metric is the base of any dividend payment. As a long-term investor, I don't mind waiting until they are ready to share some of this wealth with their investors. Alphabet has already started a buyback program in 2015. I hope that both will offer dividends in the years to come. You can read my article about investment in Google or Facebook for the future dividends here.

% of income

% of portfolio

Ticker

Company

Sector

0.88%

1.81%

(AAPL)

Apple Inc.

Information Technology

1.30%

2.01%

(ABT)

Abbott Laboratories

Health Care

1.67%

2.32%

(AFL)

Aflac Incorporated

Financials

0.62%

0.99%

(AMP)

Ameriprise Financial

Financials

1.34%

2.55%

(BAC)

Bank of America Corporation

Financials

0.42%

0.93%

(BDX)

Becton, Dickinson and Company

Health Care

2.79%

1.50%

(BP)

BP plc

Energy

0.74%

1.31%

(C)

Citigroup

Financials

1.72%

1.95%

(CAH)

Cardinal Health Inc

Health Care

1.96%

3.13%

(CAT)

Caterpillar

Industrials

0.42%

0.48%

(CCL)

Carnival Corporation

Consumer Discretionary

0.67%

0.70%

(CSCO)

Cisco Systems, Inc

Information Technology

0.46%

0.54%

(CVS)

CVS Health Corp

Health Care

2.51%

2.28%

(CVX)

Chevron Corporation

Energy

0.54%

0.36%

(D)

Dominion Energy, Inc.

Utilities

1.17%

2.30%

(DIS)

The Walt Disney Company

Consumer Discretionary

2.25%

1.87%

(DLR)

Digital Realty Trust, Inc

REIT

0.50%

0.32%

(DUK)

Duke Energy Corporation

Utilities

2.12%

2.37%

(EMR)

Emerson Electric Co.

Industrials

0.73%

0.75%

(ETN)

Eaton Corp PLC

Industrials

0.00%

1.47%

(FB)

Facebook, Inc

Information Technology

0.16%

0.29%

(GD)

General Dynamics Corporation

Industrials

1.14%

0.99%

(GIS)

General Mills, Inc.

Consumer Staples

0.00%

1.53%

(GOOG)

Alphabet Inc.

Information Technology

1.67%

1.33%

(IBM)

International Business Machines Corporation

Information Technology

3.91%

4.97%

(JNJ)

Johnson & Johnson

Health Care

1.30%

1.92%

(JPM)

JPMorgan Chase

Financials

0.60%

0.53%

(K)

Kellogg Company

Consumer Staples

0.29%

0.26%

(KHC)

The Kraft Heinz Company

Consumer Staples

1.35%

1.16%

(KMB)

Kimberly-Clark Corporation

Consumer Staples

0.58%

0.67%

(KMI)

Kinder Morgan, Inc.

Energy

2.41%

2.20%

(KO)

The Coca-Cola Company

Consumer Staples

0.37%

0.46%

(LMT)

Lockheed Martin Corporation

Industrials

0.68%

0.48%

(LVS)

Las Vegas Sands Corp.

Consumer Discretionary

2.82%

3.55%

(MCD)

McDonald's Corporation

Consumer Discretionary

1.28%

1.75%

(MDT)

Medtronic plc

Health Care

0.66%

1.00%

(MMM)

3M Company

Industrials

2.69%

1.63%

(MMP)

Magellan Midstream Partners

Energy

3.68%

2.85%

(MO)

Altria Group Inc

Consumer Staples

0.37%

0.41%

(NEE)

NextEra Energy, Inc.

Utilities

0.37%

0.88%

(NKE)

Nike

Consumer Discretionary

1.08%

2.00%

(NSC)

Norfolk Southern Corporation

Industrials

2.37%

1.44%

(O)

Realty Income Corp

REIT

7.25%

2.14%

(OHI)

Omega Healthcare Investors Inc

REIT

2.62%

2.80%

(PEP)

PepsiCo, Inc

Consumer Staples

0.63%

0.50%

(PFE)

Pfizer Inc.

Health Care

1.28%

1.22%

(PG)

The Procter & Gamble Company

Consumer Staples

1.02%

0.39%

(PK)

Park Hotels & Resorts Inc.

REIT

5.97%

4.27%

(PM)

Philip Morris International Inc

Consumer Staples

1.06%

0.89%

(QCOM)

Qualcomm Incorporated

Information Technology

0.39%

0.61%

(RCL)

Royal Caribbean Cruises Ltd

Consumer Discretionary

1.75%

0.99%

(RDS.B)

Royal Dutch Shell plc

Energy

1.08%

0.61%

(SO)

The Southern Company

Utilities

3.25%

1.76%

(T)

AT&T Inc

Telecom

1.61%

1.47%

(TGT)

Target Corporation

Consumer Staples

0.53%

0.79%

(TROW)

T. Rowe Price Group

Financials

0.87%

1.35%

(UNP)

Union Pacific Corporation

Industrials

1.17%

1.68%

(UTX)

United Technologies Corporation

Industrials

0.36%

1.64%

(V)

Visa Inc

Financials

1.15%

1.43%

(VFC)

V.F. Corporation

Consumer Discretionary

0.65%

0.66%

(VLO)

Valero Energy Corporation

Energy

3.29%

2.12%

(VZ)

Verizon Communications Inc

Telecom

1.03%

0.87%

(WEC)

Wisconsin Energy Corp

Utilities

2.65%

3.11%

(WFC)

Wells Fargo & Co

Financials

0.76%

1.10%

(WMT)

Wal-Mart Stores, Inc

Consumer Staples

2.16%

1.02%

(WPC)

W. P. Carey Inc.

REIT

2.86%

2.39%

(XOM)

Exxon Mobil Corporation

Energy

I currently own 67 companies in my portfolio. I added six new positions in the past quarter, and sold one. The new positions were Facebook, Kellogg, Kraft Heinz, General Dynamic and Park Hotels & Resorts. I found them attractive during the quarter, and they all fit my long term goals. I am not worried at all about the amount of positions I hold. These blue chip companies don't need me to follow them on a daily basis. In fact, I wouldn't mind holding them even if the stock exchange will be closed for a decade.

Acquisitions Made in Q4 2017

I bought shares in many sectors over the course of this quarter. I had extra funds due to the sale of General Electric. I bought shares in six out of ten sectors. In the healthcare sectors I added to my positions in Cardinal Health and Medtronic. Both of them traded at attractive valuations, and I took advantage of it. I also love the current price of CVS.

In the energy sector I added to my positions in Royal Dutch Shell and Exxon Mobil. Both companies were still lagging their peers, and I found them to be attractively valued. Since I purchased the shares both of them made a nice run, and I will look at their valuation again before I add more.

I also invested in the real estate sector. I added to my position in Realty Income, and initiated a position in Park Hotels & Resorts following some very interesting coverage by Brad Thomas. After analyzing the company myself, I decided to start a small position in this promising REIT.

As I stated above, I also purchased some Facebook stocks. Facebook doesn't pay a dividend, but it manages to show consistent growth in its earnings and EPS. Unlike its FANG counterparts, Amazon (AMZN) and Netflix (NFLX), Facebook actually shows significant income and free cash flow, and not just revenue growth like Amazon, or subscriber growth like Netflix.

Due to the failure of General Electric, I had to allocate some funds towards the industrial sector. I added to my position in United Technologies, as I truly believe in the future growth of this conglomerate. Moreover, I initiated two positions in Eaton and in General Dynamics. Both of them offer growth prospects for the future. General Dynamics is fairly valued under $200.

After years without buying any consumer staples company, I initiated two small positions. I bought some shares of Kellogg and Kraft Heinz. Both of them are not cheap, but these small positions will help me track these two. I will add more if the price drops more.

Sales Made in Q4 2017

The only stock I sold this quarter, and actually this year, was General Electric. The company failed its investors when it was unable to fund its growth projects, and pay dividends. As the dividend was halved, I decided to leave. This is the second dividend cut in the past decade. This inconsistency is exactly what I don't want to see from a management team.

In addition, I sold put options for KMI with a strike of $17.5. The options will expire next week, and they probably won't be exercised. At least I enjoyed the premium.

What Am I Looking For?

When I look at my portfolio, I see a great collection of companies. Last year the only company that concerned me was BP. I was worried that they won't be able to sustain their dividend. Obviously I was wrong, and the cash flow has grown significantly. General Electric was a bad surprise, but I coped with it.

In 2018 I will follow Omega Healthcare Investors closely. The whole industry of SNF seems a little bit shaky, and some analysts and SA contributors believe that the dividend is at risk. While the dividend seems adequately covered at the moment, it should be monitored closely.

You probably recognize the chart below, as it is part of my stock analysis. Using this chart contributes to my analysis thesis. I keep looking for Type 2 stocks mostly, as they offer the best combination of growth and income. However, as I lack exposure to REITs and utilities, I will look at Type 1 stocks as well.

https://static.seekingalpha.com/uploads/2016/10/24/20475971-14773060406439445_origin.png

Stocks to Consider

These stocks have all passed my initial screening, and should be thoroughly analyzed before I decide to add more or initiate a new position. In the REITs sector, I like the current valuation of Ventas (VTR). As the P/AFFO reaches 13, I find it to be an attractively valued healthcare REIT with 5.8% dividend yield.

In the utilities sector, I like both Dominion and Duke. I am not a big fan of the current valuation, but both of them are on my watch list. I actually think that the acquisition of SCANA (SCG) is a positive move. The price was fair, and the acquisition will be accretive to the 2018 EPS.

Other stocks that I am considering are Cisco, Disney, Royal Caribbean, Archer Daniels Midland and Southern Company. They all pass my basic screening in terms of dividend growth and valuation. I believe that in my next quarterly update, some of these names will be part of my portfolio.

Conclusion

2017 was a great year, and I am looking forward to making the best out of 2018 as well. I will keep executing my investment thesis, as I invest in companies on a monthly basis. Hopefully, I will be able to achieve my goals, and get closer to my long term objectives.

Last year I believed that 2017 will be volatile, and I was wrong. This time I believe that 2018 will contain fewer events that may increase stock market volatility. If I am wrong, I will try to take advantage of the volatility, and purchase some stocks that are very expensive at the moment. Good luck to everyone.

If you would like to follow my portfolio, and my analysis of the stocks I consider, please follow me by clicking the "Follow" button at the top of this page next to my name.

Disclosure: I am/we are long ALL STOCKS IN MY PORTFOLIO. 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.