My Dividend Growth Portfolio - Q2 2018 Summary

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Includes: AAPL, ABBV, ABT, AFL, AMP, BAC, BDX, BP, C, CAH, CAT, CCL, CSCO, CVS, CVX, D, DIS, DLR, DUK, EMR, ETN, FB, GD, GIS, GOOG, IBM, JNJ, JPM, K, KHC, KMB, KMI, KO, LMT, LVS, MCD, MDT, MMM, MMP, MO, NEE, NKE, NSC, O, OHI, PEP, PFE, PG, PK, PM, QCOM, RCL, RDS.B, SBUX, SO, T, TGT, TROW, 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 another quarter. This quarter came after a mediocre quarter for me. The first month was a direct continuation of the first quarter. My portfolio suffered from negative returns while the other two months made up for it. The total return in Q2 was 2.2%, which is lower than the S&P 500 which I use as my benchmark. While it's not my ultimate benchmark, I still compare my performance to the S&P 500 as it shows an alternative way of investing.

My main goal is to achieve a growing stream of dividends, which will give me some more financial freedom. My dividend income in Q2 2018 was 29% higher than the dividend income in Q2 2018 and 3.8% higher than Q1 2018. 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. The big banks have passed the stress tests and will increase their dividend payments substantially in this quarter. It will have a positive impact on my portfolio.

We have several topics that can make the markets volatile even though the corporations are showing strong reports. The first one is the trade war between the United States and the European Union and China. It may have an impact on the results in the medium term. Moreover, the summit between President Trump and President Putin also created some unrest among politicians from both parties. Some of them called for hearings regarding the Trump Putin relations.

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. Moreover, the current Russia-US relations will be in the center of the coming elections.

When I look forward into the short-term future, I am monitoring closely the trade war and the polls regarding the November election. 2018 has the potential to be very volatile, but I only find the trade war dangerous for the corporations' performance. The other issues may cause short-term volatility but shouldn't have any long-term impact.

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 any sign for volatility as an opportunity which allows me to buy future income for cheaper prices. While tariffs can impact medium-term results, I don’t believe they will have an impact in the long 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% by the end of 2018. In Q1, I increased the amount of funds I am allocating towards the medium-term managed account. There may be a change in this plan as may have to transfer some funds from the managed accounts to my portfolio due to tax reasons.

Luckily, my dividend growth portfolio is very well-diversified and contains a collection of 70 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. My net worth has increased over the past quarter, and I invested more, and hopefully, this investment will bring even more positive returns in the future. The dividend income grew by 29% YoY, and I am sure that by continuing to execute my strategy, my goals will be met.

I also started to achieve goals regarding to my education, both formally and informally. I have completed the first semester of the MBA program at Tel Aviv University. Moreover, I keep reading books about investing, and it always gives me new ideas. 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 hope to achieve higher returns.

On an even more personal note, I have some other goals that have nothing to do with the financial world. I am travelling next month, and this will be another goal that I achieved 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 healthcare 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. In the coming quarter, I will probably invest more in consumer staples.

You can follow me to read articles regarding companies that I find attractive. I bought shares in some of them, while others are still on my radar. In Q3, I will try to add some more consumer staples, and information technology companies. I hope that the volatility in the Nasdaq index will increase so I may have an opportunity to buy some tech companies for better prices.

Sector

Current Allocation

Optimal Allocation

Consumer Staples

18.65%

20%

Health Care

12.01%

12.5%

Industrials

11.66%

12.5%

Financials

13.41%

12.5%

Consumer Discretionary

10.62%

10%

Energy and Materials

10.59%

10%

Information Technology

7.72%

8%

REITs

8.12%

7.5%

Telecommunications

4.12%

4%

Utilities

3.11%

3%

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 (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ: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 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) 1.89% 0.87%
Health Care AbbVie Inc. (ABBV) 0.76% 0.92%
Health Care Abbott Laboratories (ABT) 2.08% 1.11%
Financials Aflac Incorporated (AFL) 2.25% 1.66%
Financials Ameriprise Financial (AMP) 0.75% 0.57%
Financials Bank of America Corporation (BAC) 2.26% 1.43%
Health Care Becton, Dickinson and Company (BDX) 0.98% 0.36%
Energy BP plc (BP) 1.50% 2.39%
Financials Citigroup (C) 1.10% 0.90%
Health Care Cardinal Health Inc. (CAH) 1.34% 1.52%
Industrials Caterpillar (CAT) 2.51% 1.85%
Consumer Discretionary Carnival Corporation (CCL) 0.38% 0.40%
Information Technology Cisco Systems, Inc. (CSCO) 0.69% 0.66%
Health Care CVS Health Corp. (CVS) 0.45% 0.40%
Energy Chevron Corporation (CVX) 2.05% 2.23%
Utilities Dominion Energy, Inc. (D) 0.32% 0.47%
Consumer Discretionary The Walt Disney Company (DIS) 2.90% 1.34%
REIT Digital Realty Trust, Inc. (DLR) 1.99% 2.09%
Utilities Duke Energy Corporation (DUK) 0.53% 0.74%
Industrials Emerson Electric Co. (EMR) 2.19% 1.81%
Industrials Eaton Corp PLC (ETN) 0.67% 0.68%
Information Technology Facebook, Inc. (FB) 1.64% 0.00%
Industrials General Dynamics Corporation (GD) 0.25% 0.15%
Consumer Staples General Mills, Inc. (GIS) 1.18% 1.56%
Information Technology Alphabet Inc. (GOOG) 1.57% 0.00%
Information Technology International Business Machines Corporation (IBM) 1.15% 1.50%
Health Care Johnson & Johnson (JNJ) 4.15% 3.58%
Financials JPMorgan Chase (JPM) 1.75% 1.59%
Consumer Staples Kellogg Company (K) 0.56% 0.52%
Consumer Staples The Kraft Heinz Company (KHC) 0.63% 0.75%
Consumer Staples Kimberly-Clark Corporation (KMB) 2.09% 2.39%
Energy Kinder Morgan, Inc. (KMI) 1.18% 1.59%
Consumer Staples The Coca-Cola Company (KO) 2.07% 2.17%
Industrials Lockheed Martin Corporation (LMT) 0.42% 0.32%
Consumer Discretionary Las Vegas Sands Corp. (LVS) 0.49% 0.60%
Consumer Discretionary McDonald's Corporation (MCD) 3.14% 2.41%
Health Care Medtronic plc (MDT) 1.75% 1.19%
Industrials 3M Company (MMM) 0.80% 0.65%
Energy Magellan Midstream Partners (MMP) 1.44% 2.39%
Consumer Staples Altria Group Inc. (MO) 2.31% 3.34%
Utilities NextEra Energy, Inc. (NEE) 0.45% 0.35%
Consumer Discretionary Nike (NKE) 1.02% 0.32%
Industrials Norfolk Southern Corporation (NSC) 2.00% 1.09%
REIT Realty Income Corp. (O) 1.45% 2.10%
REIT Omega Healthcare Investors Inc. (OHI) 2.48% 6.30%
Consumer Staples PepsiCo, Inc. (PEP) 2.60% 2.58%
Health Care Pfizer Inc. (PFE) 0.50% 0.54%
Consumer Staples The Procter & Gamble Company (PG) 1.57% 1.71%
REIT Park Hotels & Resorts Inc. (PK) 0.41% 0.68%
Consumer Staples Philip Morris International Inc. (PM) 3.27% 5.44%
Information Technology Qualcomm Incorporated (QCOM) 0.77% 0.99%
Consumer Discretionary Royal Caribbean Cruises Ltd. (RCL) 0.50% 0.33%
Energy Royal Dutch Shell plc (RDS.B) 0.97% 1.50%
Consumer Discretionary Starbucks Corporation (SBUX) 0.68% 0.57%
Utilities The Southern Company (SO) 0.95% 1.43%
Telecom AT&T Inc. (T) 2.09% 3.98%
Consumer Staples Target Corporation (TGT) 1.44% 1.43%
Financials T. Rowe Price Group (TROW) 0.79% 0.56%
Industrials Union Pacific Corporation (UNP) 1.29% 0.81%
Industrials United Technologies Corporation (UTX) 1.54% 1.00%
Financials Visa Inc. (V) 1.84% 0.33%
Consumer Discretionary V.F. Corporation (VFC) 1.51% 0.99%
Energy Valero Energy Corporation (VLO) 0.71% 0.64%
REIT Ventas, Inc. (VTR) 0.77% 1.26%
Telecom Verizon Communications Inc. (VZ) 2.03% 2.82%
Utilities Wisconsin Energy Corp. (WEC) 0.86% 0.88%
Financials Wells Fargo & Co. (WFC) 2.67% 2.50%
Consumer Staples Walmart Stores, Inc. (WMT) 0.93% 0.66%
REIT W. P. Carey Inc. (WPC) 1.01% 1.87%
Energy Exxon Mobil Corporation (XOM) 2.75% 3.26%

I currently own 70 companies in my portfolio. I added one new position in the past quarter: Starbucks. I found it attractive during the quarter, and it fits my long-term goals. You can read about my strategy regarding Starbucks here. 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 Q2 2018

I bought shares in several sectors over the course of this quarter. In the healthcare sector. In the healthcare sector, I added to my position a position in AbbVie. The share price continued to suffer from weakness, and I took advantage of it to add some more shares. Strong fundamentals, attractive valuation and promising pipeline make it attractive in the low 90s.

In the energy sector, I added to my positions in Exxon Mobil. Exxon still lags its peers, and I found it to be attractively valued. Investors are worried to the massive investments the company is willing to make. As a long-term investor, I am elated by it. These investments will help the company to achieve better results in the years to come. Now, I find Magellan Midstream Partners to be very attractive in the energy sector.

In the consumer discretionary sector, I added to my position in Disney and initiated a position in Starbucks. You can read all about my Starbucks strategy in my previous article. Regarding Disney, the company trades for forward P/E of 15, and it is the leading media company in the world. In a world where content is the king Disney is the king of kings. I will gladly add more if the stock price comes closer to $100 again.

This is the third quarter in a row in which I bought shares of companies in the consumer staples sector. In this quarter, I added to my positions Kimberly-Clark, Kraft Heinz, and General Mills. The declining share price and the high dividend yield which 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. I am confident that these companies will be able to deal with the changing business environment. They have done it for decades, and there is no reason why they would stop now.

In the telecommunications sector, I added to my positions in AT&T. The latest share price decline pushed the dividend to 6%. The uncertainty regarding the Time Warner deal is much lower, and the dividend is well covered. The company will be able to offer a more diversified array of services to its clients, and it will leverage its Tim Warner acquisition to achieve competitive advantages in the sector.

Sales Made in Q2 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 Q2 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. Luckily, the latest quarterly reports showed an improvement in the situation of the company. I did sell Starbucks put options.

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. The bright side is the improvement since Q1. The Orianna situation is getting closer to be resolved, and the companies have relatively high level of liquidity.

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 Kellogg (NYSE:K). It suffers from very low EPS growth that had investors worried. I believe it's only a short-term weakness. Kellogg is developing new products, and I covered it in my articles over the past quarter. I will keep looking for opportunities in the sector. Maybe I will get the chance to start a position in Archer Daniels Midland (NYSE:ADM) which is slightly expensive right now.

In the IT sector, I am still looking for an opportunity to buy Microsoft (NASDAQ:MSFT) or Texas Instruments (NYSE:TXN). However, now I believe that the most attractive company in the sector is Alphabet. It doesn't pay dividends, but the growing free cash flow will eventually support a dividend in the future. The same happened with Cisco, Apple, and other IT peers.

I am willing to buy some shares in the industrials and healthcare sector as well. Hopefully, I will buy some more AbbVie and Pfizer in the healthcare sector as the valuation seems attractive. In the industrials sector, I am always looking for good opportunities to add to United Technologies and initiate a new position in Boeing. Due to the American pressure on the EU to increase defense spending, it will be wise to follow this subsector. Make sure Lockheed Martin, General Dynamics, and Raytheon are in your watchlist.

Conclusion

Q2 2018 was a very stable quarter. The indices and my portfolio achieved positive gains every month. It is possible that the volatility is behind us, but I don't think this is the case. 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 monthly. Hopefully, I will be able to achieve my goals and get closer to my long-term objectives.

The macro events have surprised me and many around the world. The level of uncertainty in the geopolitical arena is high. Investors should hope for low volatility, but make sure their portfolio is ready to deal with a trade war that may happen. If the rest of 2018 will be as volatile as its first quarter, I will try to take advantage of the volatility and purchase some stocks that are expensive at the moment like Boeing and Microsoft. 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.