Combined Portfolio Review And Additions

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Includes: AAPL, BRK.B, CVX, DUK, GIS, HRL, IBM, INTC, JNJ, KIM, KMB, KO, MCD, MMM, O, PG, PSA, QCOM, SO, SPG, T, TGT, VTR, WFC, WMT, WSM, XOM
by: Kent Candee
Summary

Combined portfolio has 27 current holdings.

Current dividend yield is only 2.75%.

A 56% market value gain since 2011 initial investment.

Additions of Kimberly Clark and 3M.

Watch list resources for 2019 possible additions.

I have created two portfolios, which I refer to as my combined portfolio. My goal is to create a dividend portfolio capable of delivering an annual dividend yield in the range of 3-6% of the current market value. However, the dividend percentage is rather irrelevant at the point of retirement and my desire to supplement my anticipated social security. The importance is the actual dollar value being generated by the dividend payments. My goal is to leave some of the dividend income for reinvestment and continued portfolio growth during our retired years. Our retirement income will only consist of social security and what we have saved over the years and invested in dividend growth stocks. We have no pensions or annuities unless we decide to create annuities later in life by converting some of our invested dollars.

The real question I should be asking and answering, "What constitutes success along the way"? So, here are my benchmarks: current dividend yield at least 3%, annual dividend growth rate above 7%, and an internal rate of return in the range of 6%. Diversification that limits market value loss in bear market times. Still working on what this would look like regarding percent of holdings within the different sectors.

There are 27 holdings in the combined portfolio. The portfolio consists of a rollover 401k and a Roth IRA. The rollover 401k was initially invested back in 2011, while the Roth IRA was started in 2016 for my spouse.

The rollover 401k does not receive any additional funds, although I am considering rolling over an additional 401k into the account. I have been contemplating this for over a year but have not acted on it. Main reason is due to my somewhat portfolio neglect during 2018. Any stock purchases in this account come from either sales of existing stocks or the dividends received.

The Roth IRA is funded with at least $6,000 each year, usually from taxable account savings.

There were some surprises as I looked at this review, like the current dividend yield of only 2.75% and how 39% of the portfolio is comprised of 3 holdings that only contribute 0.52% to the current yield. The cumulative portfolio gain of only 56% since 2011 was also a little shocking on first glance. On the positive side, the portfolio initial yield on cost by weight is 7.48%.

Dividend Performance

The current dividend yield on the combined portfolio is a measly 2.75%, short of the 3% minimum I have set. However, when I consider the yield on cost for the portfolio, it is 7.48%. My combined cumulative dividend growth has been 18.6% or an approximate growth rate of 2.2% per year. The rollover 401k has had 33.9% cumulative dividend growth or an average of 3.8% per year, while the Roth IRA has had 7.8% cumulative or an average of 2.5% growth. My desire would be to generate a yearly average of 7% dividend growth, which would allow the dividend to double every 10 years or so. The current dividend growth is far short of the 7% per year goal.

Table 1 shows the combined portfolio holdings as of midday on 1/3/2019. The column headers are as follows:

SYM = Symbol

CD = Current Dividend from E*TRADE Financial Corporation

CDY = Current Dividend Yield

WGT = Weight of holding

PY = Portfolio Yield by Weight

DP = Dividend at Purchase

IYC = Initial Yield on Cost

CYC = Current Yield on Cost

PYCW = Portfolio Yield on Cost Weight

Table 1. Combined Portfolio

Rollover401k

Company

SYM

CD

CDY

WGT

PY

DP

IYC

CYC

PYCW

Apple

(AAPL)

0.73

2.04%

9.33%

0.19%

0.3787

4.23%

8.16%

0.90%

Berkshire Hathaway

(BRK.B)

0

0.00%

17.40%

0.00%

0

0.00%

0.00%

0.00%

Chevron

(CVX)

1.12

4.13%

3.43%

0.14%

1.07

4.76%

4.98%

0.20%

General Mills

(GIS)

0.49

5.01%

1.76%

0.09%

0.49

3.79%

3.79%

0.08%

Hormel

(HRL)

0.21

2.01%

1.70%

0.03%

0.17

2.19%

2.71%

0.05%

Intel

(INTC)

0.3

2.67%

4.24%

0.11%

0.225

4.21%

5.62%

0.28%

Johnson & Johnson

(JNJ)

0.9

2.86%

6.03%

0.17%

0.57

3.63%

5.74%

0.41%

Coca-Cola Co

(KO)

0.39

3.34%

4.46%

0.15%

0.255

2.73%

4.17%

0.22%

McDonald's

(MCD)

1.16

2.65%

12.62%

0.33%

0.61

3.06%

5.82%

0.87%

Procter & Gamble

(PG)

0.7172

3.16%

4.36%

0.14%

0.525

3.45%

4.71%

0.24%

Qualcomm

(QCOM)

0.62

4.43%

2.57%

0.11%

0.25

1.59%

3.94%

0.12%

AT&T

(T)

0.51

6.87%

2.95%

0.20%

0.43

5.83%

6.92%

0.24%

Target

(TGT)

0.64

3.87%

2.97%

0.12%

0.6

4.51%

4.81%

0.17%

Ventas

(VTR)

0.7925

5.45%

2.47%

0.13%

0.73

4.59%

4.98%

0.14%

Wells Fargo Co.

(WFC)

0.43

3.66%

0.93%

0.03%

0.375

2.94%

3.37%

0.04%

Walmart

(WMT)

0.52

2.23%

1.68%

0.04%

0.48

2.56%

2.77%

0.06%

Exxon Mobil

(XOM)

0.82

4.77%

3.23%

0.15%

0.57

2.58%

3.72%

0.14%

2.15%

4.16%

SpouseRothIRA

Duke Energy

(DUK)

0.9275

4.38%

0.99%

0.04%

0.8254

4.19%

4.71%

0.27%

International Business Machines

(IBM)

1.57

5.53%

1.02%

0.06%

1.3

3.82%

4.61%

0.28%

Kimco Realty Corporation

(KIM)

0.28

7.63%

0.91%

0.07%

0.27

5.72%

5.94%

0.32%

Kimberly Clark Corp

(KMB)

1

3.59%

1.00%

0.04%

1

3.65%

3.65%

0.22%

3M Company

(MMM)

1.36

2.95%

1.66%

0.05%

1.36

2.56%

2.56%

0.25%

Realty Income Corp

(O)

0.663

4.24%

0.96%

0.04%

0.63

4.27%

4.49%

0.25%

Public Storage

(PSA)

2

4.02%

1.08%

0.04%

2

3.82%

3.82%

0.24%

Southern Company

(SO)

0.6

5.41%

1.12%

0.06%

0.5425

4.60%

5.09%

0.33%

Simon Property Group

(SPG)

2

4.82%

1.35%

0.06%

1.75

4.47%

5.11%

0.40%

AT&T

(T)

0.51

6.87%

1.01%

0.07%

0.48

5.69%

6.04%

0.36%

Wells Fargo Co

(WFC)

0.43

3.66%

0.89%

0.03%

0.38

3.15%

3.57%

0.19%

Williams Sonoma Inc

(WSM)

0.43

3.42%

0.95%

0.03%

0.38

3.22%

3.64%

0.20%

0.60%

3.12%

2.75%

7.48%

Source: Author

Reviewing the dividend performance and the measly 2.75%, it is evident that there are three holdings that contribute to this situation, AAPL, BRK.B, and MCD as these three stocks represent over 39% of the portfolio weight with only 0.52% combined portfolio yield. Looking at their contribution by portfolio yield on cost weight, they contribute 1.77% of the 7.48% total. On first pass, I am not real thrilled with the dividend yield. However, when BRK.B consumes 17% of the portfolio and does not pay a dividend, I am willing to accept the current yield and the yield on initial cost. I subtracted out BRK.B from the portfolio and the dividend yield increased to 3.33%. I will reflect on these three stocks a little more after reviewing the portfolio performance.

Portfolio Performance

The overall performance of the portfolio has been a 56% market value increase over initial investments for an approximate 6% internal rate of return. The rate of return is biased to the low side because the two portfolios were started in different years. However, it does meet my goal of 6% per year of growth. In a bull market, like we have had since the initial investments, I would suggest this to be inadequate, even though it meets my goal. Naturally, I have no one to blame but myself because of my passive approach.

Table 2 lists the sectors, date bought, credit rating, percent gain or loss, and 5-year dividend growth rate. The column headers are as follows:

STR = Sector

DB = Date holding was purchased

CR = S&P credit rating from Standard & Poor's (bold means a change in rating)

%GL = Market value percent gain or loss (loss shown in brackets)

5YDG% = 5-year dividend growth rate from the CCC listing at The Drip Investing Resource Center.

Table 2. Portfolio Performance

Rollover401k

Company

SYM

WGT

STR

DB

CR

%GL

5YDG%

Apple

AAPL

9.32%

Technology

8/9/12

AA+

297%

26.60

Berkshire Hathaway

BRK.B

17.34%

Consumer, Non-cyclical

6/22/11

AA

151%

NA

Chevron

CVX

3.44%

Energy

7/27/15

AA-

20%

4.20

General Mills

GIS

1.77%

Consumer, Non-cyclical

9/20/17

BBB

-25%

8.80

Hormel

HRL

1.70%

Consumer, Non-cyclical

10/19/17

A

34%

17.80

Intel

INTC

4.21%

Technology

3/18/13

A+

106%

NA

Johnson & Johnson

JNJ

6.04%

Healthcare

8/10/11

AAA

100%

6.70

Coca-Cola Co

KO

4.46%

Consumer, Non-cyclical

6/7/12

BBB

25%

7.40

McDonald's

MCD

12.65%

Services

3/22/11

BBB+

119%

5.90

Procter & Gamble

PG

4.36%

Consumer, Non-cyclical

8/10/11

AA-

48%

4.40

Qualcomm

QCOM

2.57%

Technology

4/25/13

A-

-12%

18.30

AT&T

T

2.96%

Services

8/10/11

BBB

0%

2.20

Target

TGT

2.96%

Services

3/28/17

A

23%

13.10

Ventas

VTR

2.46%

Real Estate

9/9/16

BBB+

-9%

7.60

Wells Fargo Co.

WFC

0.93%

Financial

1/7/16

A-

-9%

11.80

Walmart

WMT

1.68%

Services

6/17/14

AA

23%

5.40

Exxon Mobil

XOM

3.23%

Energy

12/20/12

AA+

-22%

7.00

SpouseRothIRA

Duke Energy

DUK

1.00%

Utilities

5/6/16

A-

7%

2.9

International Business Machines

IBM

1.02%

Technology

1/4/16

A

-17%

12.3

Kimco Realty Corporation

KIM

0.91%

Real Estate

5/16/17

BBB+

-23%

7.3

Kimberly Clark Corp.

KMB

1.00%

Staples

4/5/18

A

1%

6.5

3M Company

MMM

1.66%

Industrials

4/6/18

AA-

-14%

14.8

Realty Income Corp.

O

0.96%

Real Estate

9/19/17

A-

6%

7.4

Public Storage

PSA

1.08%

Real Estate

5/16/17

A

-5%

NA

Southern Company

SO

1.12%

Utilities

1/7/16

A-

-6%

3.4

Simon Property Group

SPG

1.34%

Real Estate

5/16/17

A

5%

13.2

AT&T

T

1.02%

Services

1/7/16

BBB

-12%

2.2

Wells Fargo Co.

WFC

0.88%

Financial

3/10/16

A-

-3%

11.8

Williams-Sonoma Inc.

WSM

0.95%

Services

9/20/17

NA

5%

11.8

Source: Author

Of the 9 holdings, 12 have negative market value increases ranging from -3% for WFC in the Roth IRA to -25% for GIS in the rollover401k. The 17 gainers ranged from 1% KMB to AAPL's 297%. Not shown in the tables is the current cash level, which stands at 4.9%.

Earlier, I attributed the dividend poor performance to AAPL, BRK.B, and MCD due to their portfolio 39% weight and indicated I was alright with this. My reasoning for being alright is all three stocks have contributed nicely to the portfolio's overall performance at 297%, 151%, and 119%, respectively.

When I look at the 5-year dividend growth rate for AAPL, I am very pleased with the 26.9%, but less excited with MCD's 5.9%. Excluding AAPL, there were 8 other holdings (HRL, QCOM, TGT, WFC, IBM, MMM, SPG, WSM) that generated double-digit 5-year dividend growth rates. Using my criteria of at least a 7% dividend growth rate, there are 6 other holdings (GIS, KO, VTR, XOM, KIM, O) that met this criteria.

With regards to diversification, the portfolio has at least one holding in 10 sectors. The sector distribution is Technology (4), Consumer, Non-cyclical (5), Energy (2), Healthcare (1), Services (5), Real Estate (5), Financial (1), Utilities (2), Staples (1), and Industrials (1). Diversification could be improved by increasing the number of holdings in the real estate, financial, utilities, healthcare, and staples sectors. This would also make the portfolio more defensive and less on the growth potential. Back in January 2017, I wrote an article that reviewed the portfolio's diversification in greater detail and talked about adding an industrial or materials sector stock after selling Caterpillar (CAT). I did not add either sector until I added MMM to the Roth IRA in April 2018.

The credit rating for the overall portfolio is around an A-, and this needs to be looked at closer when making additional stock purchases. The only AAA holding is JNJ with seven holdings rated AA- or better and six holdings at BBB or BBB+. The remaining holdings are A-, A, or A+. Of interest is the downgrading of GIS, KO, QCOM, T, WFC, and IBM that occurred in 2018 by Standard & Poor's. I have not gone and researched the rationale for Standard & Poor's actions, but it does put me on alert for their future performance, particularly GIS, KO, and T rated BBB. On a positive note, O was upgraded a notch to A-.

Portfolio Additions

There were two additions to the portfolio in the Roth IRA. Both were made in April 2018, MMM and KMB. Their performance has been subpar with KMB gain 1% and MMM losing 14%. Both of them had been on my watch list for some time, and I thought I was getting them at good prices.

KMB was close to 2017 low at $109.50 per share. It is in the Staples sector, and I did not have any stocks in this sector. I reviewed CFRA's April 2018 stock report, and they had a hold on the stock with it being priced at fair value or close to fair value at $107.75 per share. The dividend was on the high side at 3.6%, and the price per earnings was decent at 17. At the present time, the CRFA stock report seems to be on target with their analysis. Looking at the 5-year dividend growth rate, it has underperformed my 7% goal. Overall, I am content with the purchase and might consider adding more at these prices and dividend yield.

MMM was added to get me in the Industrials sector. I knew I was not buying it at a great value price, but it had declined noticeably and it was close to its 52-week midpoint for 2017. It had also been on my watch list for some time. The 2.5% dividend was acceptable, and I like the 14.8% 5-year dividend growth rate. I also reviewed CFRA's April 2018 stock report, and it definitely had a correct analysis. It indicated it was overvalued and had a fair value price of $170.68 per share. It still trades above their fair value price. If the dividend yield climbs above 3%, I will consider buying additional shares.

Watch List Resources for 2019

The portfolio does have cash to deploy and the Roth IRA will be getting its annual addition in early 2019. I anticipate 2019 will be a bear year, given the political climate and current earnings reports. As a dividend growth investor, this is not a bad thing as it creates buying opportunities. My strategy will be to look at dividend growth stocks with a minimum 3% dividend yield and a credit rating of at least A-. There will likely be some exceptions to the dividend yield, possibly Visa (V) and Mastercard (MA).

There are a number of Dow Industrial stocks that may pose some buying opportunities, like PG, American Express (NYSE:AXP), Walmart, WBA, AAPL, JNJ, JPMorgan Chase (NYSE:JPM), Home Depot (NYSE:HD), Travelers (NYSE:TRV), CVX, United Technologies (UTX), XOM, MMM, CAT, DowDuPont (DWDP), IBM, and Goldman Sachs (GS).

From The Drip Investing Resource Center, here is the current listing of Dividend Kings (50+ years of dividend raises):

COMPANY

SYM

STR

Commerce Bancshares

(OTC:CBSH)

Financials

California Water Service

(CWT)

Utilities

Federal Realty Inv. Trust

(FRT)

Real Estate

SJW Corp.

(SJW)

Utilities

Stanley Black & Decker

(SWK)

Industrials

Stepan Company

(SCL)

Materials

Target Corp.

TGT

Consumer Discretionary

ABM Industries Inc.

(ABM)

Industrials

Tootsie Roll Industries

(TR)

Consumer Staples

Hormel Foods Corp.

HRL

Consumer Staples

Colgate-Palmolive Co.

(CL)

Consumer Staples

Nordson Corp.

(NDSN)

Industrials

Coca-Cola Company

KO

Consumer Staples

Farmers & Merchants Bancorp

(OTCQX:FMCB)

Financials

Johnson & Johnson

JNJ

Health Care

Lancaster Colony Corp.

(LANC)

Consumer Staples

Lowe's Companies

(LOW)

Consumer Discretionary

Cincinnati Financial

(CINF)

Financials

Vectren Corp.

(VVC)

Utilities

3M Company

MMM

Industrials

Emerson Electric

(EMR)

Industrials

Genuine Parts Co.

(GPC)

Consumer Discretionary

Parker-Hannifin Corp.

(PH)

Industrials

Procter & Gamble Co.

PG

Consumer Staples

Dover Corp.

(DOV)

Industrials

Northwest Natural

(NWN)

Utilities

American States Water

(AWR)

Utilities

Source: The Drip Investing Resource Center

My emphasis will also be on stocks in the defensive sectors like Utilities, Healthcare, Real Estate, Financials, and Staples. However, as we all know, there is always risk in whatever stock you purchase.

Conclusion

As I look to 2019, I need to focus on quality stocks with at least an A- Standard & Poor's credit rating. Look at future stock purchases to bring the dividend yield to my minimum goal of 3% and examine their dividend growth rate relative to my goal of 7%. This is to ensure the dividend income is sufficient to meet future budgetary needs in retirement, which could be in as little as 4 years or as many as 14 years, depending on the market. As for diversification in future holdings, I will need to focus on those stocks that have dividend growth potential, are at least A- or better credit rating, and are in the defensive sectors of Utilities, Staples, Healthcare, Financials, and Real Estate. The watch list resources above will serve as a good starting point.

I will also need to pay closer attention to current holdings and consider selling when the dividend yield reaches the historical low side given the higher price.

Overall, I continue to be satisfied with the performance of the current combined portfolio. My biggest disappoint is truly in myself for not making the time to stay on top of it more. Although in all truthfulness, I do not have many shares of the poorer performers, and I do believe as time passes, they will be good dividend growers regardless of price action. My 2019 resolution is to work less and create the time to properly manage my portfolio.

Disclosure: I am/we are long ALL STOCKS LISTED IN COMBINED 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.