The stock markets continued their strong momentum from August in September setting new records despite increasing concerns on a full-scale trade war, an appreciating U.S. dollar, rising commodity cost and interest rates rising further.
While the broad market indices set new records select technology stocks and virtually every Chinese stock got hammered. Chinese Amazon clone Alibaba (BABA) is now down more than 25% from its 52-week high and JD.com (JD) has collapsed a whopping 53% as rape allegations against its CEO have massively punished the stock.
With events unfolding so quickly and markets potentially overshooting in both directions (depending on the sector and the respective securities) I played it a bit calmer in September and reduced net investments to $2,136 of which almost 50% was attributed towards one stock I firmly believe in. I did a bit of divestments and a bit of profit taking to support that big purchase.
The markets are looking increasingly shaky with different asset classes making some quick moves up or down. Now that the 10-year Treasuries are trading comfortably above 3% (around 3.2% right now) also U.S. technology stocks have come under pressure. Solid dividend stocks have performed much better in October which could be interpreted as a flight to safety despite Treasury yields closing in on what companies like Procter & Gamble (PG) or Coca Cola (KO) are currently yielding.
Portfolio Changes | 1 new stock, 1 sale and 12 repurchases
I deployed $2,136 in fresh capital in September marking the lowest monthly contribution since October last year. However, even that reduced investment activity is comfortably above my minimum target of $1,500. I may further reduce investment activity as I am expecting market conditions to deteriorate requiring to preserving and raising capital in order to catch some real bargains. At the same time though, as I could be wrong as well, I won't stop investing but instead carefully search for these attractive long-term entry points.
The biggest purchase
One of these beaten down stocks is Micron (MU), a stock where opinions differ wildly whether it remains or does not remain a cyclical investment. The stock has experienced sharp declines of more than 30% in recent months as analysts turned increasingly cautious predicting the end of another cycle. As such, they argue, it has little meaning that Micron is only trading at around 4 times earnings.
With Micron it all boils down to the fundamental question whether it will be different this time with Micron or whether we will see again prices below $20 before the next cycle starts. I am very confident that this time secular growth trends paired with record buyback, low levels of debt and an overall very positive industry outlook will compensate for expected price declines in DRAM and NAND. It is very likely that Micron will not be able to match its record almost $12 EPS from FY2018 in FY2019 but event if it only manages to reach half of that this would translate into a valuation of only 7.5 times forward earnings.
The big elephant of course in the room is a potential further deterioration in the U.S. - China trade war but if that happens all bets are off the table. Based on the information about Micron's business and industry dynamics and trends the stock is an absolute steal at these levels.
Savvy investors use the series of analyst downgrades before analysts figure out that Micron's trough earnings will be substantially higher than what they have been in the past. You can be optimistic or pessimistic in the short term, but in the long run, short-term pricing issues and analyst estimates mean absolutely nothing.
I am optimistic and thus added multiple times in September to Micron totaling 23 shares at $1,025 for an aggregate purchase price of $44.56.
I opened a new position in Consolidated Edison (ED) complementing existing stock positions in U.S. utilities. It is a company with almost two centuries of history distributing electricity and gas. It is a very consistent dividend payer and has grown its dividend slowly but steadily over decades resulting in a dividend streak of 44 years of uninterrupted yearly dividend increases. This is exactly the type of stock you want to own when markets get frothy as you can count on their consistency and reliability no matter what markets do.
I added to my position in Blackstone (NYSE:BX) and plan to build this into one of my core portfolio holdings. The company recently described its long-term growth plan demonstrating the tremendous amount of earnings and cash flow growth the firm has still in its pockets. Blackstone's dividend yield of 6.2% is certainly misleading as it is actually a distribution and thus subject to quarterly returns. However, Blackstone's CFO Michael Chae said that "the potential for outsized shareholder returns is significant". I am totally with him here as its impeccable fundraising pipeline and soaring assets under management are second to none.
My repurchases break down as follows:
1) Continue ongoing monthly stock savings plans: These are routine investments between $50 and $115 each into Wells Fargo (NYSE:WFC), Visa, McDonald's (NYSE:MCD), Johnson & Johnson (NYSE:JNJ), Apple and the lesser-known Commonwealth Bank of Australia (OTCPK:CBAUF).
2) Invest in dividend and growth stocks:
- I continued adding shares of JD to my portfolio as the tsunami of bad news surrounding the stock (rape allegations, trade wars) has pushed the stock to multi-year lows. I remain very confident in the long-term prospects of the company and consider today's firesale prices a unique opportunity. If I am wrong I will lose 100% in the absolute worst case but if I am right gains of multi-bagger potential are in store.
- I also added to one of my favorite dividend growth stocks: Texas Instruments (TXN). The company has recently hiked its dividend an impressive 24% and boosted its repurchase program by $12B. I got excited about that and added on the next day only to see this investment lose more than 5% the next days as U.S. technology stocks started to experience wild sell-offs amid rising interest rates. Although the timing of this investment was bad, the stock itself is great and one of my favorite SA authors, Dividend Sensei, has just published a great piece laying out the 5 best reasons to invest.
All net purchases and sales in September can be seen below:
Dividend Income: What happened on the dividend side?
My income from 29 corporations amounted to $349 in dividends, up 67% Y/Y and 15% higher sequentially.
The top five companies led by Royal Dutch Shell (RDS.B) and Commonwealth Bank of Australia (OTCPK:CBAUF) accounted for 53% of monthly dividend income. Interestingly, despite the top two holdings contributing more than 1/3 of total showing that a fat bottom of the dividend pyramid is just as important as the tip.
In case of the Commonwealth Bank the dividend is supreme but is only paid semi-annually and while the stock itself is basically underwater the regular monthly investments over the last two years have helped lower my cost basis. In total, factoring in dividends, the overall position is 11% in the red despite unrealized stock depreciation losses of 17.5%.
All dividends break down as follows:
The dashboard above shows how the monthly dividend income breaks down into individual stocks. It also shows the change in income versus the previous quarter and year.
I also created a new dashboard which shows all-time dividends by stocks clustered in a tree map which best shows the relative importance of each holding. Unsurprisingly, following the big September distribution Royal Dutch Shell remains number one and will continue to do so for the foreseeable future.
Let me know in the comments section if you think this is a useful visualization.
Here is a look at my favorite chart: the net dividend income development by month over time between 2015 and 2018, where you can easily see the development of my dividend income as well as the average annual dividend in a given year:
The yearly average in net dividend income dropped $9 compared to the previous update but still remains on track to hit $3,000 in annual dividend income. Accounting for the fact that this is my weakest month, I still expect to reach that point already in November.
Next, I have scattered all the individual dividend payments I have ever received and colored them by year, rearranging the years side by side rather than horizontally as in previous updates:
The readability of the numbers is rather poor, as there is so much data, but the bigger picture becomes apparent regardless of these numbers. I am just looking at the size and quantity of the bubbles as they keep on climbing higher and expanding in size.
It remains fascinating to watch how all these metrics develop over time. Right now, as I am still in the early stages, these metrics are not that impressive but the growth is truly striking, and all these instruments help me measure it and provide meaning to it.
Speaking in terms of meaning, another way to express the monthly dividend income is in terms of Gifted Working Time (GWT). I am assuming an average hourly rate of $25 here. My annual target is to replace 120 hours of active work with passive dividend income. This translates to $3,000 in annual net dividends, or around $250 per month.
What this shows is as follows:
- All time (blue area) - Around 203 hours, or 25.4 days, of active work have been replaced with passive income since the start of my dividend journey. Assuming a 5-day work week, that equals 5 full weeks, or more than an entire month, of vacation funded via dividends.
- YTD (green bars) - Around 92 hours, or 11.5 days, of active work have been replaced with passive income in 2018 already. If the target of 120 hours is achieved by year end, this represents a total of 15 days, or three full weeks, of active work to have been replaced by passive income.
October Dividend Preview
The snapshot below is taken from my newly released Dividend Calendar & Dashboard Tool (make sure to follow instructions) and shows expected gross dividend payments for October 2018.
I use that tool basically every day, and I would be happy if you give it a try as well, for free of course. I am also very interested in your ongoing feedback regarding this, as it continues to be popular across the community. In case of any problems, I am more than happy to assist you in setting up everything. I am also working on simplifying and automating it further, as well as adding new features. This, however, takes a lot of time actually, so please be patient.
My portfolio composition
As of end of September, based on cost basis and previously mentioned clustering, my portfolio is composed as follows:
- Value - 54% (unchanged)
- Growth - 40% (unchanged)
- Speculative - 6% (unchanged)
By holding, it looks like this:
|Royal Dutch Shell Plc Class B||(RDS.B)||4.24%|
|Altria Group Inc||(MO)||3.56%|
|Cisco Systems, Inc.||(CSCO)||3.20%|
|Gilead Sciences, Inc.||(GILD)||3.10%|
|Micron Technology, Inc.||(MU)||3.00%|
|Commonwealth Bank of Australia||(ASX: CBA)||2.50%|
|Main Street Capital Corporation||(MAIN)||2.04%|
|Wells Fargo & Co||(WFC)||2.02%|
|Johnson & Johnson||(JNJ)||2.00%|
|B&G Foods, Inc.||(BGS)||1.75%|
|Philip Morris International Inc.||(PM)||1.65%|
|Bank of Nova Scotia||(BNS)||1.37%|
|Bayerische Motoren Werke AG Preference Shares||(OTCPK:OTCPK:BMWYY)||1.24%|
|Dominion Energy Inc||(D)||1.21%|
|Bank of America Corp||(BAC)||1.18%|
|Honeywell International Inc.||(HON)||1.16%|
|Verizon Communications Inc.||(VZ)||1.13%|
|Texas Instruments Incorporated||(TXN)||1.11%|
|Procter & Gamble Co||(PG)||0.98%|
|The Coca-Cola Co||(KO)||0.95%|
|Omega Healthcare Investors Inc||(OHI)||0.92%|
|Senior Housing Properties Trust||(SNH)||0.89%|
|Spectra Energy Partners, LP||(SEP)||0.78%|
|General Motors Company||(GM)||0.75%|
|Alibaba Group Holding Ltd||(BABA)||0.74%|
|Royal Bank of Canada||(RY)||0.72%|
|Advanced Micro Devices, Inc.||(AMD)||0.68%|
|Tableau Software Inc Class A||(DATA)||0.67%|
|Ares Capital Corporation||(ARCC)||0.64%|
|JPMorgan Chase & Co.||(JPM)||0.64%|
|General Mills, Inc.||(GIS)||0.63%|
|Facebook, Inc. Common Stock||(FB)||0.58%|
|HUYA Inc - ADR||(HUYA)||0.55%|
|Walt Disney Co||(DIS)||0.49%|
|Exxon Mobil Corporation||(XOM)||0.48%|
|Stag Industrial Inc||(STAG)||0.47%|
|Realty Income Corp||(O)||0.47%|
|Pebblebrook Hotel Trust||(PEB)||0.44%|
|CoreSite Realty Corp||(COR)||0.43%|
|Blackstone Group LP||(BX)||0.37%|
|Starwood Property Trust, Inc.||(STWD)||0.36%|
|QTS Realty Trust Inc Class A||(QTS)||0.35%|
|Teekay Tankers Ltd.||(TNK)||0.34%|
|Walgreens Boots Alliance Inc||(WBA)||0.31%|
|Uniti Group Inc||(UNIT)||0.31%|
|Kinder Morgan Inc||(KMI)||0.28%|
|Enterprise Products Partners L.P.||(EPD)||0.28%|
|Consolidated Edison, Inc.||(ED)||0.28%|
|Macquarie Infrastructure Corp||(MIC)||0.25%|
|Nextera Energy Partners LP||(NEP)||0.24%|
|Activision Blizzard, Inc.||(ATVI)||0.21%|
|Dominion Energy Midstream Partners LP||(DM)||0.18%|
|Fresenius Medial Care||(FMS)||0.18%|
|Apollo Commercial Real Est. Finance Inc||(ARI)||0.13%|
|Energy Transfer Equity LP Unit||(ETE)||0.13%|
|Apollo Investment Corp.||(AINV)||0.13%|
|Hi-Crush Partners LP||(HCLP)||0.12%|
|DHT Holdings Inc||(DHT)||0.12%|
|Shell Midstream Partners LP||(SHLX)||0.12%|
|Brookfield Infrastructure Partners L.P.||(BIP)||0.12%|
|General Electric Company||(GE)||0.11%|
|Meet Group Inc||(MEET)||0.11%|
|Atlassian Corporation PLC||(TEAM)||0.11%|
As always, I hope that you find this update interesting and relevant. The biggest inspiration for me is reading these updates from other authors and following their progress over the years. Compared to them, I am still really at the beginning of my journey, and I would appreciate if you want to follow/continue to follow my journey as well. I hope to inspire many more readers to also start and share their journey.
Author's note: If you enjoyed this article, the only favor I ask for is to click the "Follow" button next my name at the top of this article. This allows me to develop my readership so I can offer my opinion and experiences to interested readers who may not have received them otherwise. Happy investing :)
Disclosure: I am/we are long ALL STOCKS MENTIONED.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.