Model Dividend Growth Portfolio: August Update

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Includes: BK, IFF, LVS, MMM, MS, SCHD
by: Brad Kenagy

Summary

This is my overview and update for my model dividend growth portfolio for August.

It has been 3 months since I started the model portfolio and has swung back and forth between outperforming and underperforming.

5 new positions were added to the model portfolio during August.

This is my August update for my model dividend growth portfolio that I started at the end of May. If this is your first time viewing my model portfolio, you can find my portfolio selection process here. The month of August was a great month for the overall market and my model portfolio. The following chart shows the performance of my model portfolio compared to my benchmark: The Schwab U.S. Dividend Equity ETF (SCHD). At first glance, you will notice that it appears my model portfolio is underperforming by a wide margin, however, the model portfolio is only 50.69% invested. The best way I have found to judge the performance is to look at a comparison to the percentage of returns for the index my model portfolio is achieving with the amount it has invested. As you can see, if the “% of DG portfolio invested” is above the ratio of the DG portfolio return/SCHD return, that shows my model dividend growth portfolio is underperforming the benchmark on an allocation adjusted basis. At the end of July my portfolio was outperforming and the cause of the underperformance of the portfolio by the end of August was due to the strong market gains and the fact that I added a number of new positions which have not yet had enough time to impact the results.

Data from Sharewise

Previous positions added to

During the month of August, additional shares of Packaging Corporate (PKG) were added to the model portfolio after they continued selling off after the initial addition to the model portfolio at the end of June.

New Portfolio Selections

Bank of New York Mellon

Bank of New York Mellon (BK) was added to the model portfolio because the company has a strong business model with a large percentage of its revenues coming from recurring fee-based services. The following chart shows that BK is highly focused on investment services, which include clearing, securities lending, collateral management, etc. Since their business in focused on investment services, that in turn leads to a large percentage of revenues based on fees and from recurring sources, which is shown in the second chart below. In addition, they have a strong capital return policy that consists of a dividend that was recently increased nearly 17%. Also, after the CCAR results they authorized a $2.4 billion share repurchase program, which at current prices represents about 4.6% of shares outstanding. Finally, another vote of confidence comes from the fact that Berkshire Hathaway (NYSE:BRK.A) (BRK.B) holds a stake of over 6% that was just added to during the second quarter and is now their 10th largest holding.

Bank of New York Mellon investor day presentation

Bank of New York Mellon investor day presentation

**After shares were added to the model portfolio the fell over 5% in the following couple of days, so more shares were added to the model portfolio after the initial purchase.

Morgan Stanley

Morgan Stanley (MS) was added to the model portfolio because they are one of the leading investment banks on Wall Street and they posted strong revenue growth y/y. As is shown below, all three of the business segments of the company grew y/y and the largest segment (Institutional Securities) posted the strongest growth +20% y/y. With most companies, it is a very positive factor when your largest business segment is grows 20% y/y. In addition to a quality underlying business, Morgan Stanley also increased their dividend 20% and authorized $4.7 billion for share repurchases which at current prices represents 5.50% of shares outstanding.

Morgan Stanley Q2 Earnings report

3M

3M (MMM) was added to the model portfolio because they have an extremely diversified business that was caught up in all the trade talk where many industrials where unjustly sold off. The table below shows the diversification that 3M has because they have their hands in everything from industrial products, health care, energy and pretty much everything in between.

Just like Morgan Stanley, all the business segments for 3M posted y/y sales growth, which is a good sign for the overall economy because 3M has their hands in so many segments of the market.

3M Q2 earnings presentation

Another reason why I added shares of 3M to the model portfolio was a technical pattern (head & shoulders) that ran its course and provided a solid opportunity to add shares to the model portfolio once the stock RSI fell below 50 during the middle of August.


ThinkorSwim

Las Vegas Sands

Las Vegas Sands (LVS) was added to the model portfolio because the stock has been going straight down since the middle of June and is now at levels not seen since November of 2017. Las Vegas Sands has a large presence in China and thus anything China related has seen a decline in share price. What makes Las Vegas Sands attractive is the exposure to China and has the potential for future growth in Japan. When looking at casinos, one thing to watch for is debt and an example of why this is important can be seen if you look at a ten-year chart of Caesars (CZR). Out of the three largest casino stocks by market cap, Las Vegas Sands has the lowest net debt to market cap and the best asset coverage. With the potential for growth, best in-group debt coverage and a dividend that is currently yielding over 4.5%, Las Vegas Sands is an attractive stock worth considering.

Net Debt/ Mkt Cap

Total Assets Ex:Intangibles / Total Liabilities

LVS

Las Vegas Sands

13.72%

1.45

(WYNN)

Wynn Resorts

43.77%

1.16

(MGM)

MGM Resorts

84.97%

1.29

Table data from Gurufocus

International Flavors & Fragrances

International Flavors & Fragrances (IFF) was added to the model portfolio because the stock has been falling ever since the company announced a deal to merge with Frutarom (OTCPK:FRUTF) in May. This is a big deal for IFF because the deal price is $7.1 billion and the current market cap stands at just over $10 billion and the deal is expected to close in Q4. The following chart shows that IFF is acquiring a company that is growing revenues at a strong pace and in my opinion, which warrants the price that IFF is paying to acquire Frutarom.

IFF transaction and Q1 earnings call

It is likely that the share price of IFF may be range bound until the deal closes and synergies are finally realized. However, for a long-term dividend growth option, IFF is a solid choice because of the increased scale they will have once the deal closes.

Current Portfolio Holdings

The table below shows all the current model portfolio holdings along with the performance of each. Even though the portfolio is slightly underperforming its benchmark, this is to be expected given the strong run up in the market that has occurred over the last month and the fact that the model portfolio is not fully invested as I am methodically building the portfolio and now have just over 50% invested. In addition, I am pleased I only have a couple companies that have small losses.

Sharewise

Portfolio Breakdown

The following table shows the breakdown so far of the allocation by sector the model portfolio currently has. Financials, Industrials and REITs are the top three sectors. Over the past few months, these sectors have provided the best opportunity to add stocks to the model portfolio because of interest rate fears, tariff talk, etc. As always, there will be sector rotation or things that popup (like Senate hearings) that will for example push the technology sector down and create opportunities to add quality companies to the model portfolio.

Table data from Sharewise

Closing Thoughts

In closing, so far the performance of my model dividend growth portfolio been well and I expect that the performance of my model portfolio will close the gap with its benchmark as time goes on. It will take some time for that to occur, since I am methodically building the portfolio.

Disclaimer

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LVS over the next 72 hours.

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.