My Dividend Growth Portfolio - Q4 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, EPD, 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, and another year. The last quarter was extremely volatile in the stock market. It started with new highs, continued with sharp declines and ended a little higher than the lows. I don't believe that this was such an extreme scenario. I believe that we as investors got used to the low volatility and forgot how it feels when the stock market is being volatile. Up until the last quarter I was lagging the S&P 500 when it comes to my portfolio's return. Due to the conservative portfolio that I have, I managed to get through Q4 with less losses. My return in 2018 was -6.8% compared to the S&P 500 return of -6.24%. 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. In 2018, my dividend income rose by 27%. The future income for 2019 is forecasted to be at least 11% higher than the income received in 2018. I hope to eventually achieve a 25% dividend income growth in 2018. In order to achieve it, I will need to add more funds to the portfolio, and 6%-7% overall dividend growth. This is a more ambitious goal than I had last year. Since I crushed my goal last year, I decided to be more aggressive.

There are many reasons to believe that 2019 will be volatile as well. We have a dividend congress that may cause additional government shutdowns. We also have a trade war between the United States and China, and tensions between the United States and some of its European allies. On the other hand, corporate profits are still forecasted to grow, the central bank lowered the number of forecasted rate hikes, and it seems like the tensions between the United States and Mexico and Canada are lower.

I believe that eventually it will be decided by the health of the economy; if the real economy doesn't slow and corporate profits continue to grow, investors can expect another year of impressive dividend growth. The short term will probably be volatile as the markets will react to any news about the macro events.

When we look forward into the short-term future, we should ignore the noise. Nobody knows what the markets will do in the coming month or year, but it will probably be much higher in a decade. While I monitor the markets, and follow the short-term events like the elections, rate hikes and trade tensions, I see it as a long journey.

My plan for 2019 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.

Image result for growth photo coins (Source: Freepik)

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 79% of my investments, and I wanted to lower this figure to 75% by the end of 2018. I didn't do it because I had to transfer money to the brokerage account due to tax issues. Nevertheless, my goals have not changed, and while I try to get it to 75%, I will have no problem with any figure between 75%-80%. As my dividend growth portfolio grows and becomes more diversified, I will feel more comfortable with it accounting for even more than 80%.

My dividend growth portfolio is very well-diversified and contains a collection of 73 blue chip companies. While I am proud of my achievements as a young investor, I must stay humble and diversify my investments wisely.

(Source: graph made by author)

My Goals

At the end of 2017, I have set my goals for 2018. 2018 was very good to me. I managed to achieve my financial goals, and most of my personal goals. My net worth has increased over the past year, and I invested more, and hopefully, this investment will bring even more positive returns in the future. The dividend income grew by 27% YoY, and I am sure that by continuing to execute my strategy, my goals will be met. I have already set my goals for 2019. On the financial side, I hope to achieve significant growth in my net worth, and my dividend income. I believe that as long as I keep executing my strategy, I will be able to achieve these goals.

I also achieved some of my personal goals. I am studying in a great MBA program, and I got to travel. I hope that in 2019 I will get to travel again, continue to do well at school, and I hope that I can read more books to gain some more knowledge. This way I will become an even better investor.

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. Just set some goals that are challenging but achievable, and make sure they are quantifiable.

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 and energy stocks.

Over this quarter, I haven't changed my optimal allocation at all. It seems to work for me well. The real estate sector has performed well, so I probably won't add to this sector unless a great opportunity arises. I am looking now at Microsoft (MSFT), and hope to be able to acquire it for a fair price. In the coming quarter, I will probably invest more in consumer staples, industrials and information technology.

I usually write articles regarding companies that I find attractive. I bought shares in some of them, while others are still on my radar. In Q1, I will try to add some more dividend growth 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%

18.7%

Consumer Staples

12.5%

13.2%

Health Care

12.5%

10.9%

Industrials

12.5%

12.5%

Financials

10.0%

11%

Consumer Discretionary

10.0%

9.9%

Energy and Materials

8.0%

7.1%

Information Technology

7.5%

9.3%

REITs

4.0%

4.2%

Telecommunications

3.0%

3.3%

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 or Facebook for the future dividends here and here.

Sector Company Ticker % of portfolio %of income
Information Technology Apple Inc. (AAPL) 1.62% 0.83%
Health Care AbbVie Inc. (ABBV) 1.25% 1.61%
Health Care Abbott Laboratories (ABT) 2.45% 1.21%
Consumer Staples Archer Daniels Midland (ADM) 0.06% 0.05%
Financials Aflac Incorporated (AFL) 2.50% 1.57%
Financials Ameriprise Financial (AMP) 0.58% 0.54%
Industrials The Boeing Company (BA) 1.32% 0.93%
Financials Bank of America Corporation (BAC) 2.03% 1.36%
Health Care Becton, Dickinson and Company (BDX) 0.92% 0.35%
Energy BP plc (BP) 1.31% 2.32%
Financials Citigroup (C) 0.90% 0.85%
Health Care Cardinal Health Inc. (CAH) 1.24% 1.44%
Industrials Caterpillar (CAT) 2.37% 1.75%
Consumer Discretionary Carnival Corporation (CCL) 0.33% 0.38%
Information Technology Cisco Systems, Inc (CSCO) 0.74% 0.62%
Health Care CVS Health Corp. (CVS) 0.45% 0.38%
Energy Chevron Corporation (CVX) 1.90% 2.11%
Utilities Dominion Energy, Inc. (D) 0.36% 0.48%
Consumer Discretionary The Walt Disney Company (DIS) 2.96% 1.33%
REIT Digital Realty Trust, Inc. (DLR) 1.89% 1.98%
Utilities Duke Energy Corporation (DUK) 0.60% 0.70%
Industrials Emerson Electric Co. (EMR) 1.93% 1.74%
Energy Enterprise Products Partners (EPD) 0.34% 0.65%
Industrials Eaton Corp PLC (ETN) 0.62% 0.65%
Information Technology Facebook, Inc. (FB) 1.12% 0.00%
Industrials General Dynamics Corporation (GD) 0.22% 0.14%
Consumer Staples General Mills, Inc. (GIS) 1.08% 1.48%
Information Technology Alphabet Inc. (GOOG) 1.45% 0.00%
Information Technology International Business Machines Corporation (IBM) 0.95% 1.42%
Health Care Johnson & Johnson (JNJ) 4.42% 3.39%
Financials JPMorgan Chase (JPM) 1.68% 1.51%
Consumer Staples Kellogg Company (K) 0.48% 0.51%
Consumer Staples The Kraft Heinz Company (KHC) 0.76% 1.18%
Consumer Staples Kimberly-Clark Corporation (KMB) 2.35% 2.26%
Energy Kinder Morgan, Inc. (KMI) 1.08% 1.51%
Consumer Staples The Coca-Cola Company (KO) 2.31% 2.06%
Industrials Lockheed Martin Corporation (LMT) 0.36% 0.33%
Consumer Discretionary Las Vegas Sands Corp. (LVS) 0.35% 0.57%
Consumer Discretionary McDonald's Corporation (MCD) 3.66% 2.62%
Health Care Medtronic plc (MDT) 1.87% 1.13%
Industrials 3M Company (MMM) 0.79% 0.62%
Energy Magellan Midstream Partners (MMP) 1.56% 2.95%
Consumer Staples Altria Group Inc. (MO) 2.03% 3.62%
Utilities NextEra Energy, Inc. (NEE) 0.48% 0.33%
Consumer Discretionary Nike (NKE) 1.02% 0.33%
Industrials Norfolk Southern Corporation (NSC) 1.96% 1.15%
REIT Realty Income Corp. (O) 2.20% 2.50%
REIT Omega Healthcare Investors Inc. (OHI) 2.93% 5.97%
Consumer Staples PepsiCo, Inc. (PEP) 2.66% 2.45%
Health Care Pfizer Inc. (PFE) 0.59% 0.54%
Consumer Staples The Procter & Gamble Company (PG) 1.91% 1.62%
REIT Park Hotels & Resorts Inc. (PK) 0.37% 0.65%
Consumer Staples Philip Morris International Inc. (PM) 2.77% 5.16%
Information Technology Qualcomm Incorporated (QCOM) 0.78% 0.93%
Consumer Discretionary Royal Caribbean Cruises Ltd. (RCL) 0.46% 0.37%
Energy Royal Dutch Shell plc (RDS.B) 0.82% 1.42%
Consumer Discretionary Starbucks Corporation (SBUX) 0.88% 0.54%
Utilities The Southern Company (SO) 0.91% 1.36%
Telecom AT&T Inc. (T) 1.95% 3.84%
Consumer Staples Target Corporation (TGT) 1.26% 1.35%
Financials T. Rowe Price Group (TROW) 0.63% 0.53%
Information Technology Texas Instruments Incorporated (TXN) 0.39% 0.35%
Industrials Union Pacific Corporation (UNP) 1.33% 0.84%
Financials Visa Inc. (V) 1.83% 0.38%
Consumer Discretionary V.F. Corporation (VFC) 1.32% 1.04%
Energy Valero Energy Corporation (VLO) 0.52% 0.60%
REIT Ventas, Inc. (VTR) 0.82% 1.19%
Telecom Verizon Communications Inc. (VZ) 2.30% 2.72%
Utilities Wisconsin Energy Corp. (WEC) 0.96% 0.89%
Financials Wells Fargo & Co. (WFC) 2.31% 2.37%
Consumer Staples Wal-Mart Stores, Inc. (WMT) 1.02% 0.63%
REIT W. P. Carey Inc. (WPC) 1.06% 1.79%
Energy Exxon Mobil Corporation (XOM) 2.39% 3.09%

I currently own 73 companies in my portfolio. I started four new positions in this quarter and made one sell. I started new positions with EPD, BA, ADM, and TXN. I sold my position in United Technologies (UTX). I also added to existing positions. 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 Q4 2018

I bought shares in four sectors over the course of this quarter. This is the fifth quarter in a row in which I bought shares of companies in the consumer staples sector. In this quarter, I added to my position in Kraft Heinz, and started a new position with Archer Daniels Midland. The declining share price and the high dividend yield made it attractive to me.

In information technology, I bought shares in Texas Instruments. The volatility in Nasdaq allowed me to buy some shares for what I believe is an attractive valuation. I am looking forward to adding more to this position, and maybe start a position in other companies in the sector.

In the energy sector, I focused on MLPs. I added to my existing position in Magellan Midstream Partners and initiated a position in Enterprise Products Partners. Both are very stable MLPs with long streaks of dividend growth. I believe that the current dividend yield makes them both attractive.

In the industrial sector, I purchased shares in Boeing. I took advantage of the share price decline to buy several shares, and I would love to add more when the price is around $300. Boeing enjoyed improved fundamentals in 2018, but its share price stayed roughly the same. Therefore, it became attractive.

Sales Made in Q3 2018

Over the past quarter, I have sold one stock. I sell when a company cuts its dividend, and that didn't happen in Q4 2018. However, I did sell my position in United Technologies because I was disappointed by them. The talks about breakup together with the uncertainty regarding the latest acquisition, and no clear statement regarding the dividend policy made me uncomfortable and disappointed. Therefore, I decided to sell the stock. If the situation becomes clearer, I will consider it again.

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. Two years ago, I was concerned with BP, and last year I became more concerned with OHI and UTX. That's why diversification is a key. 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 2019, I will keep following Omega Healthcare Investors closely. 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 last quarterly reports included several positive signs. I am looking forward to seeing how this situation will develop. Some investors my suggest that AT&T is unsafe, but I strongly disagree.

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, industrials and information technology sectors.

In the past quarter, I bought companies that are Type 1 like Enterprise Products Partners, and others that were Type 2 like Boeing, Archer Daniels Midland and Texas Instruments. Magellan Midstream is unique as it shows high yield and relatively high dividend growth.

(Source: graph created by author)

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 Archer Daniels Midland. I will gladly add to my position if the share price remains around $40, and hopefully goes lower. This was one of my targets last quarter.

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

I will also be happy to add to companies in the Industrial sector. I am looking forward to adding to Boeing and to Eaton. Both offer fair valuation in my opinion and will offer an attractive yield and dividend growth. Lockheed Martin and General Dynamics are also attractive options right now.

Conclusion

Q4 2018 was a very volatile quarter. The indices and my portfolio achieved negative gains, but I managed to achieve returns similar to the S&P 500, while increasing my dividend income. 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 will be having limited effects on the market in the long term. The atmosphere has changed significantly in the past quarter. If we thought that the geopolitical arena is getting calmer, we were probably wrong. Investors should hope for low volatility, but make sure their portfolio is ready to deal with a trade war and weakening economic data. I will try to take advantage of any short-term volatility and try to purchase some stocks that are expensive at the moment.

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.