My Dividend Growth Portfolio - Q1 2018 Summary

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 a volatile quarter. This quarter came after a wonderful year. The first month was a direct continuation of the Q4 2017, while the other two months were very volatile. In the past quarter, my portfolio's total return was -5.67% after fees and taxes. This was a tough quarter, and my total return was lower than the S&P 500's. I don't measure my portfolio's performance by its total return, yet it is still a good benchmark.

My main goal is to achieve a growing stream of dividends, which will give me some more financial freedom. My dividend income over in Q1 2018 was 26% higher than the dividend income in Q1 2017. This is in line with my goals to achieve a 20% dividend income growth in 2018. Over the past quarter, I kept adding fresh funds, and the dividend growth so far is positively impacted by the tax cuts. In Q2, big banks will release the stress test results, which will give us a clue about the upcoming dividend payments.

The short-term forecasts I made last quarter were mostly correct and supported my investment thesis. The interest rate was raised once again according to the Fed's plan. There is a coalition in Germany led by Merkel, and the tensions in Korea have faded. However, the big surprise was the trade war between the United States and China. The tariffs, if imposed, may hurt many American companies over the short term. I still hope that the two super powers will be able to solve these trade issues using negotiations instead of tariffs, which are economic weapons of mass destruction.

While this is the major concern in the coming quarter, we are also getting closer to the midterm elections. 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 change in the tax code is ahead, and we all know that the market hates uncertainty.

When I look forward into the short-term future, I am monitoring closely the trade war and the polls regarding the November election. If 2017 had more geopolitical events that were concerning Europe, 2018 will be more focused on the U.S and China relationship. A positive aftermath may include an improvement in the situation in the Korean peninsula and the end of the trade war. The negative aftermath may include a world with much less free trade, and high tensions in Korea. Each scenario will impact the stock market.

My plan for 2018 is to keep executing my investment thesis. I will keep allocating funds to my portfolio monthly. 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. So far, I see the volatility as an opportunity which allows you to buy future income for cheaper prices. I don’t believe that the tariffs will have an impact in the long and medium term. I wish you all a great quarter.

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 to hedge myself against possible failures in my strategy. Being overconfident in the financial world can lead to devastating results. Therefore, I am making some effort to allocate my funds and make sure that my assets stay diversified.

Right now, my dividend growth portfolio accounts for 76% 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. In Q1, I increased the amount of funds I am allocating towards the medium-term managed account. 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 diversify my investments wisely.

My Goals

At the end of 2017, I have set my goals for 2018. So far, I am on track towards achieving my financial and personal goals. While my net worth hasn't increased over the past quarter, I did invest more, and hopefully this investment will bring positive returns in the future. The dividend income grew by 26% YoY, and I am sure that by continuing to executing my strategy, my goals will be met.

I also started to achieve goals regarding to my education, both formally and informally. I got started the MBA program at Tel Aviv University, which I am enjoying very much. Moreover, I have already read several books in 2018. Becoming a better investor requires experience and knowledge. I keep working on both aspects, and I must quantify them to see my progress. By becoming more educated and experienced, I will be able to be a better investor.

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 overallocated to. I don't want to totally ignore my optimal allocation. Over the past quarter, I tried to buy some consumer staples, energy and REIT stocks. I found attractive candidate in each sector, and I purchased some of them over the past three months.

Over this quarter, I haven't changed my optimal allocation at all. It seems to work for me 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. 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 several articles regarding companies that I find attractive. I bought shares in some of them, while others are still on my radar. In Q2, I will try to add some more consumer staples, and information technology companies. I hope that the volatility in the Nasdaq index continues so I may have an opportunity to buy some tech companies for better prices.

Sector	Current Allocation	Optimal Allocation
Consumer Staples	18.9%	20.0%
Health Care	12.6%	12.5%
Industrials	12.1%	12.5%
Financials	14.2%	12.5%
Consumer Discretionary	9.6%	10.0%
Energy and Materials	10.3%	10.0%
Information Technology	7.4%	8.0%
REITs	7.9%	7.5%
Telecommunications	3.8%	4.0%
Utilities	3.2%	3.0%

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My Portfolio

The following table shows the 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 and Facebook have already started a buyback programs. I hope that both will offer dividends in the years to come. You can read my articles about investment in Google or Facebook for the future dividends here and here.

Sector	Company	Ticker	% of portfolio	% of income
Information Technology	Apple Inc.	(AAPL)	1.8%	0.8%
Health Care	AbbVie Inc.	(ABBV)	0.6%	0.8%
Health Care	Abbott Laboratories	(ABT)	2.1%	1.2%
Financials	Aflac Incorporated	(AFL)	2.5%	1.8%
Financials	Ameriprise Financial	(AMP)	0.8%	0.6%
Financials	Bank of America Corporation	(BAC)	2.5%	1.2%
Health Care	Becton, Dickinson and Company	(BDX)	0.9%	0.4%
Energy	BP plc	(BP)	1.5%	2.6%
Financials	Citigroup	(C)	1.2%	0.7%
Health Care	Cardinal Health Inc.	(CAH)	1.8%	1.6%
Industrials	Caterpillar	(CAT)	2.8%	1.8%
Consumer Discretionary	Carnival Corporation	(CCL)	0.5%	0.4%
Information Technology	Cisco Systems, Inc.	(CSCO)	0.7%	0.7%
Health Care	CVS Health Corp.	(CVS)	0.5%	0.4%
Energy	Chevron Corporation	(CVX)	2.1%	2.4%
Utilities	Dominion Energy, Inc.	(D)	0.3%	0.5%
Consumer Discretionary	The Walt Disney Company	(DIS)	2.2%	1.1%
REIT	Digital Realty Trust, Inc.	(DLR)	1.9%	2.3%
Utilities	Duke Energy Corporation	(DUK)	0.6%	0.8%
Industrials	Emerson Electric Co.	(EMR)	2.2%	2.0%
Industrials	Eaton Corp. PLC	(ETN)	0.7%	0.7%
Information Technology	Facebook, Inc.	(FB)	1.4%	0.0%
Industrials	General Dynamics Corporation	(GD)	0.3%	0.2%
Consumer Staples	General Mills, Inc.	(GIS)	0.8%	1.1%
Information Technology	Alphabet Inc.	(GOOG)	1.4%	0.0%
Information Technology	International Business Machines Corp.	(IBM)	1.3%	1.5%
Health Care	Johnson & Johnson	(JNJ)	4.6%	3.6%
Financials	JPMorgan Chase	(JPM)	2.0%	1.2%
Consumer Staples	Kellogg Company	(K)	0.6%	0.6%
Consumer Staples	The Kraft Heinz Company	(KHC)	0.2%	0.3%
Consumer Staples	Kimberly-Clark Corporation	(KMB)	1.2%	1.3%
Energy	Kinder Morgan, Inc.	(KMI)	1.1%	1.7%
Consumer Staples	The Coca-Cola Company	(KO)	2.2%	2.3%
Industrials	Lockheed Martin Corporation	(LMT)	0.5%	0.3%
Consumer Discretionary	Las Vegas Sands Corp.	(LVS)	0.5%	0.6%
Consumer Discretionary	McDonald's Corporation	(MCD)	3.5%	2.6%
Health Care	Medtronic plc	(MDT)	1.7%	1.2%
Industrials	3M Company	(MMM)	0.9%	0.7%
Energy	Magellan Midstream Partners	(MMP)	1.4%	2.5%
Consumer Staples	Altria Group Inc.	(MO)	2.7%	3.6%
Utilities	NextEra Energy, Inc.	(NEE)	0.5%	0.4%
Consumer Discretionary	Nike	(NKE)	1.0%	0.3%
Industrials	Norfolk Southern Corporation	(NSC)	1.8%	1.2%
REIT	Realty Income Corp.	(O)	1.5%	2.3%
REIT	Omega Healthcare Investors Inc.	(OHI)	2.3%	6.8%
Consumer Staples	PepsiCo, Inc.	(PEP)	2.7%	2.8%
Health Care	Pfizer Inc.	(PFE)	0.5%	0.6%
Consumer Staples	Procter & Gamble Company	(PG)	1.7%	1.8%
REIT	Park Hotels & Resorts Inc.	(PK)	0.4%	0.7%
Consumer Staples	Philip Morris International Inc.	(PM)	4.3%	5.5%
Information Technology	Qualcomm Incorporated	(QCOM)	0.8%	1.1%
Consumer Discretionary	Royal Caribbean Cruises Ltd.	(RCL)	0.6%	0.4%
Energy	Royal Dutch Shell plc	(RDS.B)	1.0%	1.6%
Utilities	Southern Company	(SO)	1.0%	1.5%
Telecom	AT&T Inc.	(T)	1.8%	3.0%
Consumer Staples	Target Corporation	(TGT)	1.4%	1.5%
Financials	T. Rowe Price Group	(TROW)	0.7%	0.6%
Industrials	Union Pacific Corporation	(UNP)	1.3%	0.9%
Industrials	United Technologies Corporation	(UTX)	1.6%	1.1%
Financials	Visa Inc.	(V)	1.7%	0.4%
Consumer Discretionary	V.F. Corporation	(VFC)	1.5%	1.1%
Energy	Valero Energy Corporation	(VLO)	0.7%	0.7%
REIT	Ventas, Inc.	(VTR)	0.7%	1.4%
Telecom	Verizon Communications Inc.	(VZ)	2.0%	3.0%
Utilities	Wisconsin Energy Corp.	(WEC)	0.9%	0.9%
Financials	Wells Fargo & Co.	(WFC)	2.7%	2.4%
Consumer Staples	Walmart Stores, Inc.	(WMT)	1.0%	0.7%
REIT	W.P. Carey Inc.	(WPC)	1.0%	2.0%
Energy	Exxon Mobil Corporation	(XOM)	2.7%	3.3%

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I currently own 69 companies in my portfolio. I added two new positions in the past quarter: VTR and ABBV. I found them attractive during the quarter, and they fit all my long-term goals. I am not worried at all about the number of positions I hold. These blue-chip companies don't need me to follow them daily. In fact, I wouldn't mind holding them even if the stock exchange is closed for a decade.

Acquisitions Made in Q1 2018

I bought shares in many sectors over the course of this quarter, i.e., in five out of ten sectors. In the healthcare sector, I initiated a position in AbbVie. The current sell-off gives investor an attractive valuation, and I took advantage of it. I advised investors to be more cautious with AbbVie not very long ago, but the improvement in the fundamentals, together with current valuation, made the risk-reward ratio more compelling. I also love the current price of CVS Health Corp.

In the energy sector, I added to my positions in Kinder Morgan and Exxon Mobil. Both companies are still lagging their peers, and I found them to be attractively valued. Exxon Mobil suffers from a short-term negative sentiment due to its intention to invest more funds in capex. As a long-term investor, I believe this is a good sign, and I took advantage of the opportunity to buy some more shares. At the moment, I find Magellan Midstream Partners more attractive than Kinder Morgan due to the higher dividend and better track record.

I also invested in the real estate sector. I initiated a new position in Ventas. I read some very interesting coverage by Brad Thomas, and as the dividend yield has hovered around 6%, I found it too hard to resist. After analyzing the company, I decided to start a small position in this well-known REIT. I am willing to add more to this position if the price keeps declining.

This is the second quarter in a row in which I bought a consumer staples company. In this quarter, I added to my position in Procter & Gamble. The declining share price and the yield which was higher than 3.5% made it attractive to me. Sure, I don't expect any major dividend growth in the short term, but adding to this position at an attractive yield was very compelling. I will add more if the price keeps declining.

In the utilities sector, I added to my positions in Duke Energy and Southern Company. Both companies' share price declined over the past several months. I don't think their fundamentals have deteriorated, so in my opinion, it wasn't justified. Therefore, I added to these two positions, and I will consider adding more if the valuation stays attractive. If the next interest rate hike starts a sell-off in the utilities sector, I will scan it again for more candidates.

Sales Made in Q1 2018

Over the past quarter, I have not sold any stock. I sell when a company cuts its dividend, and that didn't happen in Q1 2018. When I look at the near future, the only dividend in danger is the one offered by Omega Healthcare. If the company cannot maintain the payout, I will sell my position. Moreover, I haven't sold any put options due to the high volatility. It's hard to find options with decent premium and an adequate margin of safety.

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 the company will not be able to sustain its dividend. Obviously, I was wrong, and the cash flow has grown significantly. I am always looking for the weaker links in my portfolio, and I try to measure the effect of a possible dividend cut on my dividend income.

In 2018, I will follow Omega Healthcare Investors closely. The whole SNF industry seems a little bit shaky, and some analysts and SA contributors believe that the dividend is at risk. While the dividend seems adequately covered now, it should be monitored closely. The company will pay roughly 100% of its FAD, so there is practically no margin of safety for the management.

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. I will look for these Type 2 stocks in the consumer staples and information technology sectors.

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 consumer staples sector, I am looking at Kraft Heinz and Procter & Gamble. Both companies suffer from very low EPS growth that had investors worried. I am trying to understand whether it's only a short-term weakness or a long-term trend. PG has been going through a restructuring process over the past years. I added some this quarter, and I may add more when I see the annual dividend increase. It will give me information about what management believes will happen to the EPS in the coming years.

In the IT sector, I am still looking for an opportunity to buy Microsoft or Texas Instruments. However, at the moment I believe that the most attractive company in the sector is Facebook. The data breach issue is severe, but I don't believe it will have a long-term impact on the business. Facebook has a very wide moat, and that will help the company to confront this issue. The current P/E ratio is attractive, in my opinion, and FCF is forecasted to keep growing.

In the consumer discretionary sector, I consider buying more shares of Disney and Royal Caribbean Cruises. If the volatility continues, I hope I am able to acquire some shares of Starbucks (SBUX). The shares are still overvalued, in my opinion, and as growth slows down, I expect it to trade at a more compelling valuation.

Conclusion

Q1 2018 was a very volatile quarter. It is possible that the whole year will be just a volatile. I am looking forward to making the best out of the coming quarter 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 would be volatile, and I was wrong. 2018 seems to be much more volatile. The events have surprised me, as I thought the trade war wasn't going to happen. If 2018 stays as volatile as its first quarter, I will try to take advantage of the volatility and purchase some stocks that are very expensive at the moment. Good luck to everyone.

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Analyst’s 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.