March to Freedom Fund rose almost 5% in January.
Our first purchase of the month was Ventas, which I found to be the most undervalued stock that I follow.
We then added to our Dominion Energy position at the end of January.
Dividend income was up more than 35% year over year.
The month of January closed out much the same as 2017 did, with markets reaching new highs. The S&P 500 rose 5.62% during January while the Dow Jones Industrial Average climbed 5.80%. The technology heavy NASDAQ gained 7.41%. In comparison, the portfolio that will be used to cover my wife and I’s expenses in retirement, which I call The March to Freedom Fund, gained 4.81% in the first month of the year. This figure includes just dividends received and not new money added to the account.
January ended with the bulk of earnings season still to go, but investors seemed to feel that 2018 would pick up right where 2017 left off. And to a certain extent it did as you can see by the gains for the major indexes. However, the 10-year treasury yield climbed from 2.46% to 2.72% at the end of January. This was a move of more than 10% within a single month. With a higher treasury yield, stocks, particularly the higher yielding ones, might have competition for investing dollars for the first time in quite some time (rates climbed higher still into the start of February which caused declines across all of the major averages, but that is a topic for next month). So where does all this talk of rates leave The March to Freedom Fund? In the same exact place as before, searching for undervalued stocks that offering safe and compelling dividend yields and growth rates. Before we get to what we bought this month, let’s take a look at some of our stocks performed to start the year.
It might be a new year, but Boeing (BA) is still atop our leader board. After climbing almost 90% in 2017, Boeing’s stock has added another 20% in gains to start 2018. Gilead (GILD), which was one of our worst performers in 2016 and finished about even in 2017, has railed almost 17% to start the year. We added shares of Gilead at the end of September of last year. AbbVie, on the strength of some very impressive earnings and guidance for 2018, has seen its share price rise 16% in 2018. This comes on the heels of a 54% gain last year. Target (TGT), which was our worst performer last year, has gained 15.28% to start 2018. MasterCard (MA), our third best performing stock last year, climbed 11.65% year to date. I am not surprised to see Boeing, AbbVie and MasterCard among our leaders for the year, but Gilead and Target have been a nice surprise. Both of these stocks have been underperformers for us over the last couple of years. Can their momentum continue? We shall see.
Ventas (VTR) saw its share price drop 6.73% in January, making it our biggest laggard. We purchased shares of Ventas during the month, which we will discuss a bit later. Realty Income (O) declined 6.72%. I like both of these higher yielding names and hope to purchase more of Realty Income in 2018. Rounding out our bottom 5 performers, we see that Southern Company (SO) dropped 6.20%, Procter & Gamble (PG) lost 5.99% and AT&T (T) fell 3.68%. Notice a theme here? Higher yielding stocks have underperformed to start the year, which has coincided with the rise in the 10-year treasury yield we discussed before. We added to AT&T at the beginning of December and buy a small amount of Procter & Gamble through EQ, formerly known as Shareowner Services. This is not a recommendation to use this service, just stated in the interest of full disclosure. Southern is one of the smallest positions in our portfolio and I hope to add to the name this year. Shares currently yield more than 5%.
Our first purchase of 2018 was Ventas on 1/17/2018 at $54.88. Value Line gives VTR a 3 for financial safety and a B+ for financial strength. At the time of purchase, F.A.S.T. Graphs said the stock sported a 14.7 price to AFFO ratio. This was a 12.24% discount to the 5-year average AFFO of 16.5. CFRA has a one-year price target of $66, offering us more than 20% of upside from our purchase price. CFRA’s fair value was $58.66, a nearly 7% discount to their fair value. Morningstar says fair value is $65, which is an 18.44% discount to purchase price. Value Engine’s one-year price target is $59.88 and their fair value is $64.71, giving us as much as 9.11% and 17.91%, respectfully, of upside potential. Average these numbers out and I found VTR to be almost 17% undervalued at the time we added to our position. Based on how I find fair value, Ventas is the most undervalued stock that I follow. And at a 5.76%, I’m happy to add more shares. Yes, the stock is the worst performer in our portfolio to date, but I’m buying stock for the long term. At some point, higher yielding stocks will likely be back in favor. I consider Ventas to be a full position for our portfolio.
Our second purchase of the month occurred on 1/30/2018 when we added to our Dominion Energy (D) position. We paid $75.51 for shares at a yield of 4.42%. Value Lines gives Dominion a 2 for financial safety and a B++ for financial strength. At the time of purchase, F.A.S.T. Graphs said the current PE ratio was 20.7, about 1% above the stock’s 5-year average PE of 20.5. CFRA has a one-year price target of $80, offering us about 6% of upside potential based off of our purchase price. CFRA’s fair value was $74.56, meaning shares were about 1.3% overvalued at the time of purchase. Morningstar sees fair value as being $87 a share, a 15.22% discount to purchase price. Value Engine has a one-year price target of $77.83, offering about 3% upside potential. Value Engine’s fair value is $73.71, showing shares to be about 2.4% overvalued at time of purchase. Average these numbers out and I found that Dominion Energy was 3.27% undervalued when we bought our batch of shares. We’ve bought Dominion twice in 2017, first at $77.77 on 4/10/2017 and then again at $77.73 on 8/14/2017. I now consider Dominion to be a full position, but if shares were to pull back on from here I wouldn’t mind buying more of the utility company. One of the goals I set for our portfolio was to increase the income we receive from utility companies. A year ago, we didn’t own a single share of a utility company. Now, I project that almost 5% of 2018’s dividend income will come from this sector.
After this month’s activity, our portfolio now consists of the following 39 companies:
3M (MMM), Abbott Laboratories (ABT), AbbVie, Aflac (AFL), Altria (MO), Apple (AAPL), AT&T, Boeing, Chevron (CVX), Cisco (CSCO), Coca-Cola (KO), Costco (COST), Cummins (CMI), CVS Health (CVS), Disney (DIS), Dominion Energy, Exxon Mobil (XOM), General Mills (GIS), Gilead Sciences, Honeywell International (HON), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Lockheed Martin (LMT), MasterCard, McCormick & Company (MKC), Microsoft (MSFT), Nike (NKE), PepsiCo (PEP), Philip Morris (PM), Procter & Gamble, Qualcomm (QCOM), Realty Income, Southern Company, Starbucks (SBUX), Target, Ventas, Verizon (VZ), V. F. Corp (VFC) and Visa.
Another month in the books, another month of strong dividend growth. Outside of the March, June, September and December months, this January was the best month we’ve ever had for dividend income. Even if you take out the dividend payment that Ventas moved from December to this month, January was still a record month for us. Dividend income climbed 35.18% from Jan 2017, was higher by 71.34% from Jan 2016, rose 112.50% from Jan 2015 and was up 144.29% from Jan 2014. I am amazed at the figures every month that I update this section of our portfolio. Our dividend income started from humble beginnings and through new purchases, dividend growth and reinvestment of dividends, our income stream keeps on soaring. I like seeing our portfolio climb higher, but I love seeing our dividend income reach new heights every month. Doesn’t matter if our portfolio is up or down, our dividend income keeps on trucking.
10 companies paid us dividends this month: Nike, Pepsi, Philip Morris, Altria, Disney, Ventas, Realty Income, McCormick & Co., Cisco and JPMorgan.
January gave our portfolio an almost 5% gain to start the year. We added to our Ventas and Dominion Energy positions during the month and saw a record for dividend income. I continue to be amazed at the increases in dividend income over previous years. Simply by buying shares of what I consider to be undervalued stocks at reasonable valuations and reinvesting all dividends, our income stream is growing by leaps and bounds. How did January treat you? What do you think of our purchases this month? Does the rise in interest rates impact your investment thesis? Feel free to leave a comment below.
Disclosure: I am/we are long ABBV, AFL, CMI, CVX, GILD, GIS, HON, JPM, KO, XOM, MA, MMM, MO, MSFT, PG, PM, QCOM, T, TGT, V, VFC, VTR, AAPL, BA, CSCO, CVS, DIS, JNJ, O, PEP, SBUX, VZ, NKE, LMT, D, COST, ABT, MKC, SO. 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.