My Dividend Growth Portfolio - Q3 2018 Summary

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Includes: AAPL, ABBV, ABT, ADM, AFL, AMP, BA, 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, MSFT, NEE, NKE, NSC, O, OHI, PEP, PFE, PG, PK, PM, QCOM, RCL, RDS.B, SBUX, 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 another quarter. This quarter was another mediocre quarter for me. I have been lagging the S&P 500 this entire year, and this quarter was no different. The total return in Q3 was 1.2% lower than the S&P 500. 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 Q3 2018 was 29% higher than the dividend income in Q3 2018 and 9.5% higher than Q2 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 the new approved dividends will start flowing to my account. At the same time I enjoyed some impressive dividend hikes like the one offered by McDonald's (NYSE:MCD).

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, the European Union and China. It may have an impact on the results in the medium term. The new trade agreement between Canada, Mexico and the United States will help calming the markets on the other hand.

Midterm elections are coming in the current quarter. 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. Right now, the polls suggest that the Republicans will lose their control of the house but will maintain the Senate.

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. A divided congress will probably mean that there will be no regulatory impact on corporations until 2020.

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 that 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 80% of my investments, and I am willing to lower this figure to 75% by the end of 2018. I will not be able to do it because I had to transfer more money to the brokerage account due to tax reasons. Nevertheless, my goals have not changed.

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 am continuing to educate myself, and I enjoy 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 have had an amazing 5 weeks road trip in the United States, and hopefully will have another short trip in the winter. 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 tried to buy some consumer staples stocks.

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 am looking now at T. Rowe. 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 Q4, 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. However, I have been hoping for it for a very long time, and so far without success.

Optimal Allocation

Current Allocation

Sector

20.0%

18.04%

Consumer Staples

12.5%

13.10%

Health Care

12.5%

12.24%

Industrials

12.5%

13.15%

Financials

10.0%

10.67%

Consumer Discretionary

10.0%

10.18%

Energy and Materials

8.0%

7.65%

Information Technology

7.5%

8.01%

REITs

4.0%

4.10%

Telecommunications

3.0%

2.86%

Utilities

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 and Facebook 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 (NASDAQ:GOOG) or Facebook (NASDAQ:FB) for the future dividends here and here.

Sector Company Ticker % of portfolio % of income
Information Technology Apple Inc. AAPL 2.13% 0.85%
Health Care AbbVie Inc. ABBV 1.18% 1.49%
Health Care Abbott Laboratories ABT 2.31% 1.09%
Financials Aflac Incorporated AFL 2.35% 1.62%
Financials Ameriprise Financial AMP 0.74% 0.56%
Financials Bank of America Corporation BAC 2.22% 1.40%
Health Care Becton, Dickinson and Company BDX 0.99% 0.35%
Energy BP plc BP 1.46% 2.39%
Financials Citigroup C 1.12% 0.87%
Health Care Cardinal Health Inc CAH 1.35% 1.48%
Industrials Caterpillar CAT 2.56% 1.80%
Consumer Discretionary Carnival Corporation CCL 0.40% 0.39%
Information Technology Cisco Systems, Inc CSCO 0.76% 0.64%
Health Care CVS Health Corp CVS 0.50% 0.39%
Energy Chevron Corporation CVX 1.94% 2.17%
Utilities Dominion Energy, Inc. D 0.31% 0.45%
Consumer Discretionary The Walt Disney Company DIS 2.90% 1.30%
REIT Digital Realty Trust, Inc DLR 1.83% 2.04%
Utilities Duke Energy Corporation DUK 0.50% 0.72%
Industrials Emerson Electric Co. EMR 2.28% 1.77%
Industrials Eaton Corp PLC ETN 0.71% 0.67%
Information Technology Facebook, Inc FB 1.22% 0.00%
Industrials General Dynamics Corporation GD 0.26% 0.14%
Consumer Staples General Mills, Inc. GIS 1.06% 1.52%
Information Technology Alphabet Inc. GOOG 1.49% 0.00%
Information Technology International Business Machines Corporation IBM 1.15% 1.46%
Health Care Johnson & Johnson JNJ 4.36% 3.50%
Financials JPMorgan Chase JPM 1.77% 1.55%
Consumer Staples Kellogg Company K 0.52% 0.52%
Consumer Staples The Kraft Heinz Company KHC 0.52% 0.73%
Consumer Staples Kimberly-Clark Corporation KMB 2.13% 2.33%
Energy Kinder Morgan, Inc. KMI 1.13% 1.55%
Consumer Staples The Coca-Cola Company KO 2.02% 2.12%
Industrials Lockheed Martin Corporation LMT 0.43% 0.34%
Consumer Discretionary Las Vegas Sands Corp. LVS 0.37% 0.58%
Consumer Discretionary McDonald's Corporation MCD 3.12% 2.70%
Health Care Medtronic plc MDT 1.86% 1.17%
Industrials 3M Company MMM 0.79% 0.63%
Energy Magellan Midstream Partners MMP 1.37% 2.38%
Consumer Staples Altria Group Inc MO 2.26% 3.73%
Utilities NextEra Energy, Inc. NEE 0.42% 0.34%
Consumer Discretionary Nike NKE 1.05% 0.31%
Industrials Norfolk Southern Corporation NSC 2.19% 1.18%
REIT Realty Income Corp O 1.76% 2.57%
REIT Omega Healthcare Investors Inc OHI 2.42% 6.15%
Consumer Staples PepsiCo, Inc PEP 2.42% 2.52%
Health Care Pfizer Inc. PFE 0.55% 0.53%
Consumer Staples The Procter & Gamble Company PG 1.57% 1.67%
REIT Park Hotels & Resorts Inc. PK 0.41% 0.67%
Consumer Staples Philip Morris International Inc PM 3.06% 5.31%
Information Technology Qualcomm Incorporated QCOM 0.91% 0.96%
Consumer Discretionary Royal Caribbean Cruises Ltd RCL 0.57% 0.38%
Energy Royal Dutch Shell plc RDS.B 0.89% 1.46%
Consumer Discretionary Starbucks Corporation SBUX 0.69% 0.56%
Utilities The Southern Company SO 0.81% 1.40%
Telecom AT&T Inc T 2.09% 3.88%
Consumer Staples Target Corporation TGT 1.54% 1.39%
Financials T. Rowe Price Group TROW 0.69% 0.54%
Industrials Union Pacific Corporation UNP 1.43% 0.87%
Industrials United Technologies Corporation UTX 1.58% 0.98%
Financials Visa Inc V 1.88% 0.33%
Consumer Discretionary V.F. Corporation VFC 1.57% 0.96%
Energy Valero Energy Corporation VLO 0.71% 0.62%
REIT Ventas, Inc. VTR 0.67% 1.23%
Telecom Verizon Communications Inc VZ 2.01% 2.81%
Utilities Wisconsin Energy Corp WEC 0.83% 0.86%
Financials Wells Fargo & Co WFC 2.38% 2.44%
Consumer Staples Wal-Mart Stores, Inc WMT 0.94% 0.65%
REIT W. P. Carey Inc. WPC 0.91% 1.83%
Energy Exxon Mobil Corporation XOM 2.68% 3.18%

I currently own 70 companies in my portfolio. I didn't start any new positions in the past quarter. I only added to existing positions. The current valuation of several sectors seems way too high in my opinion. 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 market is closed for a decade.

Acquisitions Made in Q3 2018

I bought shares in two sectors over the course of this quarter. This is the fourth quarter in a row in which I bought shares of companies in the consumer staples sector. In this quarter, I added to my positions in Kraft Heinz, Kellogg's and General Mills. The declining share price and the high dividend yield 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 have full confidence that these companies will be able to deal with the headwinds. It really reminds me of the McDonalds situation when everyone was pessimistic. These companies have strong brands, and efficient logistics. They need to refresh their line of products, but I wouldn't underestimate them.

In the telecommunications sector, I added to my positions in AT&T. The latest share price decline pushed the dividend to 6%. It is the second quarter in a row I buy shares of AT&T, because of the combination of good valuation and strong and safe dividend. I am happy to take this 6% with 2% annual growth, as the company is deleveraging after the Time Warner acquisition.

Sales Made in Q3 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 Q3 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. I am looking forward for its next quarterly report and hope to see another improvement like the one seen last quarter.

What Am I Looking For?

When I look at my portfolio, I see a great collection of companies. Every year I feel more confident about some companies, and less confident about others. 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. We even got a small dividend increase that signals that the age of frozen dividends is over. Hopefully Royal Dutch Shell will follow BP and offer a dividend increase soon. 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 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. So far, the talented management team managed to lead the company well, and the latest quarterly report included several positive signs. I am looking forward to see how this situation will develop.

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.

In the past quarter I bought companies that are Type 1 like AT&T, and some may define the consumer staples stocks as type 1 as well due to their lack of growth. I wouldn't characterize them like that because they are dealing with short and medium term challenges.

https://static.seekingalpha.com/uploads/2018/7/19/20475971-15319880233290424.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 consumer staples sector, I am looking at Kellogg, Kraft Heinz and General Mills. These are all blue chips that trade for an attractive price compared to their average. I will keep looking for opportunities in the sector. I am willing to start a position in Archer Daniels Midland (ADM). I will gladly initiate a position if the share price reaches $45.

In the IT sector, I am still looking for an opportunity to buy Microsoft (MSFT) or Texas Instruments (TXN). I have been waiting for these two for over a year, but I still didn't have the opportunity to buy them. I am patient, and in the meantime, I will buy other stocks in attractively valued companies. The same patience rewarded me when I bought shares of Starbucks, Disney and Nike for attractive valuation.

Another sector which I find fairly valued is the real estate sector. Investors are afraid of the raising interest rates, and some of the leading names in the sector are attractive right now and offer good entry points. I am looking at companies like Realty Income and W. P. Carey as examples of strong companies that offer good value at the moment.

Conclusion

Q3 2018 was a very stable quarter. The indices and my portfolio achieved positive gains, but I still lagged the S&P 500. 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 are having limited effect on the market. The level of uncertainty in the geopolitical arena is not as high anymore, and besides the trade tensions the atmosphere seems positive. Investors should hope for low volatility, but make sure their portfolio is ready to deal with a trade war that may happen with China. I will try to take advantage of any volatility and try to purchase some stocks that are expensive at the moment like Boeing (BA) 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 COMPANIES 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.