5 Great Stocks I Bought During The Tech Meltdown

by: Dividend Sensei

Last week Apple's shocking guidance cut sent tech into a meltdown with even Grade A quality companies plunging 5% to 11% in a single day.

Knowing such drastic declines are almost always overreactions, I took the opportunity to buy five great tech stocks for my new DVDGP portfolio.

Four of those stocks were existing positions (I moved up next week's schedule buy) and one, SWKS, is a new holding.

I've also added a "top 5 dividend kings" watchlist to this series because these are the bluest of dividend growth blue-chips.

This week there are 58 great undervalued dividend stocks worth buying, including high-yield blue-chips, fast growers, and dividend aristocrats and kings.

(Source: imgflip)

Note that due to reader requests, I've decided to break up my weekly portfolio updates into three parts: commentary, economic update, and the new "best stocks to buy right now" series. This is to avoid excessively long articles and maximize the utility to my readers.

This week's commentary explains 3 powerful and proven ways to make money in the stock market.

This week's economic update looks at when the next recession and bear market are most likely to begin.


As I explained in my portfolio update 63, I'm now focused on paying down margin and thus won't be making changes to my real money portfolio for the foreseeable future. In fact, I've now realized the wisdom of Buffett's warning against using margin.

My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage...Now the truth is - the first two he just added because they started with L - it's leverage... It is crazy in my view to borrow money on securities... It's insane to risk what you have and need for something you don't really need... You will not be way happier if you double your net worth." - Warren Buffett (emphasis added)

Now as with all Buffettisms this one needs clarification. Margin is not necessarily evil, it's merely a powerful financial tool that must be used with extreme caution. I know several investors who cap their leverage at 20% or maintain home equity lines of credit that can be used to pay down 100% of margin quickly in a market meltdown.

The reason that Buffett is warning the average investor against leverage is that it amplifies both financial gains/losses but also emotions.

Since emotions are the Achilles heel of most investors and results in terrible market timing that badly hurts long-term returns, for the vast majority of investors, margin is a tool that's best avoided.

Why am I personally not planning to use even modest amounts of margin in the future? The worst December for stocks since 1931 has shown me that it's not enough to minimize the risk of being wiped out (via a margin call). The risk of a total loss of capital must be zero. After all, even if the odds of losing 100% of your money is 1/1000, eventually, you'll still get wiped out. Thus, even decades of painstaking saving and smart investing could be lost, which is indeed insane.

Because while I'm unlikely to face disaster this time (I'm still a portfolio decline of 45% away from a margin call and have $60,000 in emergency funds I can tap if need be), the core of my investing strategy stems from being able to "be greedy when others are fearful" and take advantage of the market becoming insanely stupid and provide quality companies at obscene discounts to fair value.

You’re neither right nor wrong because other people (the market) agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”- Warren Buffett (emphasis added)

With margin, you absolutely have to worry about other people. If our leaders (specifically President Trump or Fed Chairman Jerome Powell) mess up badly enough, the economy and the stock market could be sent spiraling into a crash that could make even the smartest long-term strategy fail catastrophically.

In other words, to paraphrase Einstein, there are two things that are infinite, the universe and short-term market stupidity, and I'm not quite sure about the universe. On October 19, 1987 (Black Monday), the Dow fell 22.6% in a single day. That's a 20 standard deviation event that is theoretically (using standard probability theory) supposed to occur once every 4.6 billion years (roughly the age of the earth).

However, according to a 2005 Harvard study, a 1987-style one-day crash is actually a once in a 104-year event.

(Source: Market Watch)

What's more, 5% and 10% single-day crashes are expected to occur, on average, every 1.6 years and 13 years, respectively. And as Mark Hulbert, author the Hulbert Financial Digest points out, the last 5% single-day decline was in August 2011, and the last 10% daily decline was over 30 years ago.

So not just are we overdue for some even wilder single-day declines, but we can't forget how margin actually works at most brokers. Brokers borrow at very short-term rates to extend margin loans to clients. In the event of another 2008-2009 style financial crisis (a low probability but inevitable event over 50+ years), the brokers could change their margin rules overnight. That's because most margin agreements state that:

  • brokers can change their margin maintenance requirements at any time (potentially from 15% to 50% or higher).
  • brokers are able to liquidate your stocks to eliminate margin even without notifying you or providing time to send in additional funds.

While brokers normally provide two to five days to cover a margin call, in the event of either a seizing up of credit markets (that could put the broker's survival in jeopardy) or a full-blown market panic (like 1987), even modest amounts of margin could become dangerous and trigger forced selling at ludicrously low valuations of even the highest quality, low-risk stocks.

Since my time horizon is 50+ years, I must not just minimize my portfolio's risk of succumbing to a critical point of failure by eliminating all such risks of a permanent loss of capital (across the entire portfolio).

This is why my new plan is to pay off all the margin as quickly as possible ($9K per month in savings and net dividends) and then initiate a new capital allocation strategy. This should be accomplished by the end of Q1 2020.

  • Only buy deeply undervalued blue chips (off my watchlists) during a market decline.
  • Save up all weekly cash and wait for pullbacks/corrections/bear markets.
  • During a pullback (average one every six months since WWII), deploy 50% of cash in stages.
  • If the pullback becomes a correction, deploy 50% of remaining cash (in stages).
  • If the correction becomes a non-recessionary bear market (what we might be facing now), deploy the remaining 50%.

This approach ensures that I'll be able to avoid hoarding cash for years on end (because 5-9.9% pullbacks are frequent) but avoid situations like now when I'm forced to sit back and watch the best bargains in a decade (or ever in some cases) pass me by.

But while I may be suffering from my foolish and risky use of leverage, that doesn't mean I can't help others cash in on the golden opportunities now raining down all around us.

This is why I've launched a new series, the "best dividend stocks you can buy today." This is my collection of watchlists for Grade A quality dividend growth blue chips that make fantastic buys right now. If you've wondered "where should I put my money today?" this list is it. The goal is to highlight stocks that can realistically deliver 13+% long-term total returns (over the next decade) via a combination of yield, long-term cash flow/dividend growth, and valuation returning to fair value. Every single stock on these watchlists is one I consider a sleep-well-at-night, or SWAN, stock.

I use the same valuation-adjusted total return model that Brookfield Asset Management (BAM) uses, and they have a great track record of delivering 12-15% CAGR total returns (in fact, it's their official goal as a company, and they usually exceed that target).

There are four carefully curated lists designed to focus on:

  • Quality companies
  • Safe dividends (they are all low-risk stocks)
  • Strong long-term growth potential
  • The maximum margin of safety (dirt-cheap valuations)

The portfolio also has 25% firm sector caps, to minimize the chances that, no matter how great the bargains, we'll never become so concentrated in one sector (a mistake I made with my real money portfolio) as to be at risk of industry-wide devastation harming the portfolio's long-term income or returns.

And to show the power of long-term, deep-value dividend growth investing (and live vicariously through this new portfolio while I pay off margin on my real money one), I'm also going to be tracking these recommendations going forward. That's in my Deep Value Dividend Growth Portfolio or DVDGP. Note that when my margin paydown is complete in 2020, the approach I'm using in these articles will become my official policy for deploying all of my own real money.

This is currently a paper portfolio I'll be maintaining on Morningstar and Simply Safe Dividends to not just provide in-depth portfolio stats but also the total returns over time. The rules for the portfolio are:

  • Each month, I buy $500 worth (rounded up to the nearest whole share) of any existing portfolio positions that remain on the buy list (still insanely undervalued).
  • Each week, I buy $500 worth of any new stocks that make it onto the list (stocks rotate on and off).
  • Dividends are reinvested.
  • Stocks are only sold if the thesis breaks or a stock becomes 25% overvalued (then sell half) or 50% overvalued (sell all of it), and the capital is reinvested into new recommendations.

Again, this is purely a tracking (paper) portfolio. I'm not yet putting real money into it until the first pullback of 2020, once I've eliminated all risk from my actual portfolio (margin hits zero and cash starts piling up). The purpose of this series is to try to show the power of this approach, which I've adapted from Investment Quality Trends, which has been using it to sensational effect since 1966.

However, since good investing is never 100% rules-based and requires some judgment calls, I took the opportunity to move up next week's scheduled monthly buy for five great tech stocks. That was on the day when Apple's bombshell guidance cut caused the entire market, but tech stocks in particular, to crash.

That move allowed us to benefit from one of the biggest single-day industry crashes we've seen in years and lock in grade A tech names at some truly mouth-watering prices.

Last Week's Buys

$500 initial positions were purchased in each of these stocks, which effectively doubled the portfolio's position in each (other than for SWKS which is a new holding).

  • Apple (AAPL) - existing position
  • Lam Research (LRCX) -existing position
  • Broadcom (AVGO) -existing position
  • Texas Instruments (TXN) -existing position
  • Skyworks Solutions (SWKS) - new position

These were all purchases I made Thursday towards the end of the tech meltdown. Am I 100% sure that this represents the bottom for these tech stocks? Heck no, no one can be sure how low stocks can fall in the short term.

However, I have strong confidence in the quality of each company and so when they sell off 5% to 11% in a single day on what's likely to be an Apple growth scare that is transitory (will reverse once the trade war ends), I'm more than happy to buy more at discounts to fair value ranging from 16% to 42%. In four cases we lowered our cost basis and on Skyworks, we started with a fantastic cost basis that should result in excellent long-term total returns.

In addition, due to stocks still being attractively priced in general (about 10% below historical valuations) I went ahead and added $500 into the following stocks to achieve the stated portfolio diversification goal of owning 50 to 60 top quality names in all sectors.

  • Philip Morris (PM)
  • Citigroup (C)
  • Brookfield Asset Management (BAM)
  • JPMorgan Chase (JPM)
  • Bank of America (BAC)
  • Antero Midstream GP (AMGP)
  • LyondellBasell Industries (LYB)
  • British American Tobacco (BTI)
  • Telus (TU)
  • Simon Property Group (SPG)

LYB is our first basic materials stock and Telus our first communication stock. Thus the portfolio now owns quality income growth stocks, bought at great prices, in all sectors.

The opportunistic buying of the five tech names has temporarily boosted tech's sector concentration to 21%, our biggest sector by far. However, next week's regularly scheduled monthly buy of every stock active on these watchlists (dollar cost averaging) will restore the balance closer to previous levels.

Note that since I bought those five stocks with the funds that were coming for January's buy I won't be adding to them until mid-February when the next big monthly buy is scheduled to occur.

Plan For The Next Week

Since the portfolio's diversification goal is now reached, I'm slowing down the pace at which I add stocks to the bear market buy list from five per week to two to three per week (will cap the list at 75 stocks).

This week's additions include:

  • TD Ameritrade (AMTD)
  • Boeing (BA)
  • CyrusOne (CONE)

Any stock whose yield is at target yield or better will be added to the portfolio as will Lowe's (LOW) which is the only undervalued dividend king on our watchlist to achieve our 13+% portfolio minimum total return potential hurdle.

The Best Dividend Growth Stocks You Can Buy Today

This group of dividend growth blue chips represents what I consider the best stocks you can buy today. They are presented in five categories, sorted by most undervalued (based on dividend yield theory using a 5-year average yield).

  • High yield (4+% yield)
  • Fast dividend growth
  • Dividend Aristocrats
  • Dividend Kings
  • My Bear Market Buy List (my master watchlist of quality low-risk dividend stocks worth owning)

The goal is to allow readers to know what are the best low-risk dividend growth stocks to buy at any given time. You can think of these as my "highest-conviction" recommendations for conservative income investors represent what I consider to be the best opportunities for low-risk income investors available in the market today. Over time, a portfolio built based on these watchlists will be highly diversified, low-risk and a great source of safe and rising income over time.

The rankings are based on the discount to fair value. The valuations are determined by dividend yield theory, which Investment Quality Trends, or IQT, has proven works well for dividend stocks since 1966, generating market-crushing long-term returns with far less volatility.

(Source: Investment Quality Trends)

That's because, for stable business income stocks, yields tend to mean-revert over time, meaning cycle around a relatively fixed value approximating fair value. If you buy a dividend stock when the yield is far above its historical average, then you'll likely outperform when its valuation returns to its normal level over time.

For the purposes of these valuation-adjusted total return potentials, I use the Gordon Dividend Growth Model, or GDGM (which is what Brookfield Asset Management uses). Since 1956, this has proven relatively accurate at modeling long-term total returns via the formula: Yield + Dividend growth. That's because, assuming no change in valuation, a stable business model (doesn't change much over time) and a constant payout ratio, dividend growth tracks cash flow growth.

The valuation adjustment assumes that a stock's yield will revert to its historical norm within 10 years (over that time period, stock prices are purely a function of fundamentals). Thus, these valuation total return models are based on the formula: Yield + Projected 10-year dividend growth (analyst consensus, confirmed by historical growth rate) + 10-year yield reversion return boost.

For example, if a stock with a historical average yield of 2% is trading at 3%, then the yield is 50% above its historical yield. This implies the stock is (3% current yield - 2% historical yield)/3% current yield = 33% undervalued. If the stock mean-reverts over 10 years, then this means the price will rise by 50% over 10 years just to correct the undervaluation.

That represents a 4.1% annual total return just from valuation mean regression. If the stock grows its cash flow (and dividend) at 10% over this time, then the total return one would expect from this stock would be 3% yield + 10% dividend (and FCF/share) growth + 4.1% valuation boost = 17.1%.

Top 5 High-Yield Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Tanger Factory Outlet Centers (SKT) REIT 6.7% 3.5% 2.2% to 6.8% 47% 4.7% 17.2%
Kimco Realty (KIM) REIT 7.6% 4.1% 2.7% to 24.5% 46% 3.8% 18.0%
Enbridge (ENB) Energy 6.4% 3.8% 2.3% to 6.6% 41% 6% 19.3%
Altria (MO) Consumer Staples 6.4% 4.0% 3.1% to 14.4% 36% 8% 18.4%
Brookfield Property REIT (BPR) REIT 7.4% 5.0% 1.2% to 7.4% 32% 6.5% 17.4%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model)

Top 5 Fast-Growing Dividend Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

FedEx (FDX) Industrial 1.6% 0.7% 0.3% to 1.2% 51% 11.9% 19.4%
A.O. Smith (AOS) Industrials 2.0% 1.1% 0.8% to 3.4% 44% 9.9% 16.4%
Thor Industries (THO) Consumer Discretionary 2.9% 1.6% 0.8% to 2.7% 43% 12.0% 19.6%
Snap-on (SNA) Industrials 2.5% 1.6% 1.2% to 5.6% 36% 11.0% 17.6%
Illinois Tool Works (ITW) Industrial 3.2% 2.1% 1.5% to 4.5% 34% 9.8% 16.7%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

Top 5 Dividend Aristocrats To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Cardinal Health (CAH) Healthcare 4.2% 2.1% 0.9% to 3.9% 48% 8.5% 18.9%
Leggett & Platt (LEG) Consumer Discretionary 4.2% 3.0% 2.4% to 9.7% 28% 8% 15.7%
AbbVie (ABBV) Healthcare 4.8% 3.6% 0.9% to 5.5% 26% 10.3% 18.2%
Walgreens Boots Alliance (WBA) Consumer Staples 2.5% 1.9% 1.0% to 3.1% 27% 10.4% 16.2%
Exxon Mobil (XOM) Energy 4.6% 3.5% 1.5% to 4.8% 24% 6.5% 13.9%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

Top 5 Dividend Kings To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Colgate-Palmolive (CL) Consumer Staples 2.8% 2.2% 1.8% to 2.9% 21% 6.5% 11.7%
Federal Realty Investment Trust (FRT) REIT 3.5% 2.8% 2.2% to 6.4% 19% 4.2% 9.8%
Lowe's (LOW) Consumer Discretionary 2.1% 1.7% 1.1% to 2.5% 16% 15.9% 19.8%
Target (TGT) Consumer Discretionary 3.9% 3.2% 0.9% to 4.7% 16% 5.3% 11.0%
Dover (DOV) Industrials 2.6% 2.2% 2.1% to 6.4% 15% 8% 12.3%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

My Bear Market Buy List

These are the blue chips which I expect to generate 13+% total returns at their target yields. Note that all total return estimates are for a 10-year annualized basis. That's because total return models are most accurate over longer time frames (5+ years) when prices trade purely on fundamentals and not sentiment. This allows valuations to mean-revert and allows for relatively accurate (80% to 95%) modeling of returns.

The list itself is ranked by long-term CAGR total return potential from target yield. Stocks at their target yield or better are "Strong Buys."

Company Ticker Current Yield Fair Value Yield Target Yield Historical Yield Range Long-Term Expected Cash Flow Growth (Analyst Consensus, Expected Dividend Growth)

Long-Term Valuation Adjusted Annualized Total Return Potential At Target Yield

Antero Midstream GP (AMGP) 4.6% 2.4% 3.0% 0.1% to 5.7% 19.9% 31%
Mastercard (MA) 0.7% 0.7% 0.7% 0.1% to 0.8% 20.5% 21%
Brookfield Asset Management (BAM) 1.5% 1.5% 1.5% 1.1% to 4.2% 18.0% 20%
Skyworks Solutions (SWKS) 2.4% 1.2% 2.0% 0.1% to 2.5% 11.9% 19%
Lam Research (LRCX) 3.2% 2.4% 2.4% 0.3% to 3.6% 16.2% 19%
BlackRock (BLK) 3.2% 2.5% 3.0% 1.2% to 3.5% 13.7% 19%
British American Tobacco (BTI) 8.2% 4.0% 6.0% 2.7% to 8.6% 6.3% 18%
LeMaitre Vascular (LMAT) 1.2% 1.1% 1.1% 0.3% to 2.0% 17.5% 18%
Lazard (LAZ) 4.6% 2.8% 4.0% 0.8% to 4.8% 10.1% 18%
Citigroup (C) 3.3% 2.3% 3.0% 0% to 78.6% 12.4% 18%
Visa (V) 0.8% 0.7% 0.7% 0.1% to 0.8% 17.4% 18%
Philip Morris International (PM) 6.6% 4.5% 6.0% 0.8% to 6.8% 8.7% 18%
Texas Instruments (TXN) 3.3% 2.5% 2.9% 0.9% to 3.5% 12.6% 17%
NextEra Energy Partners (NEP) 4.0% 3.9% 3.9% 0.4% to 5.4% 13.5% 17%
Goldman Sachs (GS) 1.8% 1.3% 1.8% 0.7% to 2.6% 12.7% 17%
TransCanada (TRP) 5.5% 3.9% 5.0% 3.1% to 5.9% 8.2% 17%
Energy Transfer LP (uses K1) (ET) 8.6% 6.4% 7.0% 2.2% to 18.3% 7.0% 17%
Boeing (BA) 2.5% 2.4% 2.5% 1.4% to 5.4% 13.0% 16%
Illinois Tool Works (ITW) 3.2% 2.2% 3.0% 1.6% to 4.5% 10.0% 16%
A.O. Smith (AOS) 2.0% 1.1% 1.5% 0.8% to 3.4% 11.5% 16%
Broadcom (AVGO) 4.5% 3.0% 3.0% 0.2% to 4.6% 12.8% 16%
TD Ameritrade (AMTD) 2.4% 1.7% 2.0% 0.2 to 2.4% 11.5% 16%
JPMorgan Chase (JPM) 3.2% 2.6% 3.0% 0.4% to 7.6% 10.8% 15%
American Tower (AMT) 2.1% 1.9% 1.9% 0.6% to 2.1% 13.4% 15%
MPLX (uses k1) (MPLX) 7.8% 6.1% 7.0% 0.5% to 9.3% 5.3% 15%
Microsoft (MSFT) 1.8% 2.6% 2.6% 1.1% to 3.1% 12.7% 15%
3M (MMM) 2.8% 2.5% 3.0% 1.8% to 4.8% 9.5% 15%
Brookfield Infrastructure Partners (uses K1) (BIP) 5.2% 4.6% 5.0% 3.7% to 8% 9.0% 15%
ONEOK (OKE) 6.0% 5.1% 5.1% 2.4% to 12.8% 10.0% 15%
Apple (AAPL) 2.0% 1.7% 1.7% 0.4% to 2.8% 11.8% 14%
Home Depot (HD) 2.4% 2.1% 2.1% 1.6% to 5% 12.0% 14%
Brookfield Renewable Partners (uses K1) (BEP) 7.1% 5.7% 6.5% 3.8% to 8.4% 6.5% 14%
TerraForm Power (TERP) 6.7% 5.0% 6.0% 0.5% to 16.3% 6.5% 14%
Enterprise Products Partners (uses K1) (EPD) 6.5% 5.9% 6.5% 3.4% to 11.7% 6.0% 14%
Iron Mountain (IRM) 7.4% 6.0% 6.1% 0.2% to 8% 5.6% 13%
Bank of America (BAC) 2.4% 1.8% 2.0% 0.2% to 59.1% 9.4% 13%
Telus (TU) 4.8% 4.1% 4.5% 3.3% to 6.3% 8.0% 13%
LyondellBasell Industries (LYB) 4.6% 3.6% 4.3% 0.2% to 4.9% 7.1% 13%
CyrusOne (CONE) 3.6% 3.3% 3.3% 0.7% to 3.8% 10.0% 13%
Simon Property Group (SPG) 4.8% 3.4% 4.5% 2.4% to 14.6% 5.7% 13%
Crown Castle (CCI) 4.2% 3.9% 4.5% 0.5% to 4.4% 7.5% 13%
Realty Income (O) 4.3% 4.6% 5.5% 3.3% to 11.2% 5.9% 13%
Average 4.0% 3.1% 3.6% 10.7% 16%

(Sources: Dividend Yield Theory, Gordon Dividend Growth Model, Simply Safe Dividends, GuruFocus, F.A.S.T. Graphs, Moneychimp)

Note that the bolded stocks are all at target yield or better, meaning it's a great time to either add them to your portfolio or add to an existing position.

The Deep Value Dividend Growth Portfolio

(Source: Morningstar) - data as of January 4th close (S&P 500 rose 3.4% that day)

Sector Concentration (25% Sector Caps In Place)

(Source: Simply Safe Dividends)

Eventually, this portfolio is going to be diversified into every sector. However, since the goal is to buy the best bargains at any given time, it will take a while for new names to rotate off each week's list and into the portfolio. I'm imposing a firm 25% sector cap for diversification purposes. No matter how undervalued a sector, it's not wise to go above 25% (your personal sector cap may vary and could be lower).

The heavy focus on tech will come down next week when I add to non-tech positions on stocks that are still active on the watchlist.

Income Concentration

(Source: Simply Safe Dividends)

The portfolio's income is likely to be highly concentrated into the highest-yielding names, at least until it becomes more diversified over time. A good rule of thumb is you want to limit income from any one position to 5% or less. We've now achieved that goal in DVDGP.

Annual Dividends

(Source: Simply Safe Dividends)

While we may never fully get to the dream of daily dividend payments, we're currently getting paid every week. And the monthly income flow will smooth out nicely over time.

(Source: Simply Safe Dividends)

Note that the 10-year dividend growth figures are artificially low because my tracking software doesn't average in anything that hasn't existed for those time periods. Some of these stocks have IPO-ed in the last five years, and so, the 1-year and 5-year growth rates are the most accurate. These figures are purely organic growth rates and assume no dividend reinvestment.

The dividend declines during the Financial Crisis were due to REITs (such as Kimco (NYSE:KIM)) which cut their dividend (as 78 REITs did during the Great Recession) as well as our large exposure to mega-banks. Fortunately, since then, the REIT sector has deleveraged and enjoys the strongest sector balance sheet in history.

(Source: Hoya Capital Real Estate)

This means that during the next recession, most REITs will not cut their payouts, especially Kimco, which has a BBB+ credit rating and will be getting an upgrade to A- in 2019 or 2020.

Similarly, I am confident that every bank we own (C, JPM, BAC, GS) will maintain its dividends through future recessions (though they are likely to be frozen).

There is no official dividend growth target, though I'd like to at least maintain long-term dividend growth (either 1-year or 10-year) which is above the market's historical 6.4% payout growth rate. The huge jump in the 1-year dividend growth rate is courtesy of the big tech adds last week several who raised their dividends by over 100% in the past 12 months.

(Source: Simply Safe Dividends)

While maintaining 12.4% long-term dividend growth is likely beyond our portfolio's ability, according to Morningstar the projected EPS (and thus dividend) growth rate is about 11%.

Fundamental Portfolio Stats

(Source: Morningstar)

The quality of these stocks can be seen in the far-above-average returns on assets and equity of this portfolio (good proxies for quality long-term management and good corporate cultures). What's DVDGP is also far more undervalued, offers a much higher yield, and should achieve far superior dividend growth compared to the broader market. While our EPS growth may match the S&P 500 (based on analyst expectations), the S&P 500's dividend growth rate is about half that of its earnings due to non-dividend stocks as well as corporate America's bigger focus on buybacks vs. dividend hikes.

As an added benefit, the average market cap is smaller, providing yet another alpha factor (smaller stocks tend to outperform). Note that the overall focus is on blue chips, which means that the average market cap is likely to rise over time (but remain far below the market's $100 billion average).

Portfolio Performance

  • CAGR Total Return Since Inception (December 12, 2018): 4.8%
  • CAGR Total Return S&P 500: -2.5%
  • Market Outperformance: 7.3%
  • Long-Term Expected Total Return (assuming no valuation changes and using Morningstar projected earnings/dividend growth rates): 15.1%

Worst Performers

Note that I'm adding one new slot to these tables every week until it shows our top 10 best and worst performers.

Stock Cost Basis % Gain
SKT $23.56 -11.1%
FDX $184.11 -10.7%
CAH $50.00 -10.2%

(Source: Morningstar)

FedEx was one of our earliest buys and continues to suffer over its weak 2019 guidance. Tanger is similarly in the doghouse because the turnaround isn't expected to show positive FFO/share growth until 2020 (negative growth in 2018 and 2019). Should Tanger's 2020 FFO/share guidance be negative, that would break the thesis (three consecutive years of negative growth = sell). Cardinal is still in turnaround mode and waiting for generic drug prices to stabilize in 2019 (as is the industry's expectation).

The good news is that due to our monthly additions to all stocks that remain active buy recommendations, the more any stock falls in the short term, the lower our cost basis will become.

Best Performers

Stock Cost Basis % Gain
AMGP $11.18 12.7%
BIP $32.52 11.0%
BEP $25.17 10.1%

(Source: Morningstar)

Antero is benefiting from fortunate timing of my purchase (during the fastest oil crash in decades). Brookfield LP's BEP and BIP were similarly bought at deep discounts, making them coiled springs that are now popping nicely and strongly.

Note that during each month's big buy week (the middle of the month) some of our winners will see their cost bases increase just as the losers will see their cost bases fall.

This is why, while I'm thrilled for the portfolio to be crushing the market to such an extent thus far, I realize that double-digit outperformance is mostly a result of luck and is not sustainable over the long term. The portfolio's goal is to outperform the market by 2% per year over time, which would leave it running circles around almost all actively managed mutual funds. Based on the valuation-adjusted total return model I use in constructing this portfolio, even if my error bars are wide, we should easily achieve that goal.

Bottom Line: Major Market Overreactions To Guidance Cuts Are A Great Time For Opportunistic Buying

Again I'm not a market timer in the traditional sense. I don't use technical analysis to try to absolute bottoms in any stock. Instead, I focus on the fundamentals of a company, first determining if a dividend growth stock is worth owning at all, and then looking at its valuation to see if it's offering a high enough margin of safety to make it worth recommending and adding to this portfolio.

Ultimately, history has shown that a long-term fundamentals driven and value-focused approach to high-quality companies is not just a great way to build a diversified dividend portfolio, but also achieve great market-beating returns.

That's what DVDGP has delivered so far and to an impressive (though surely not sustainable) degree. This is thanks to opportunistic buying of great names when they are most undervalued, such as AAPL, SWKS, AVGO, LRCX, TXN, and SWKS were on Thursday during the one-day tech meltdown. While it's possible that all these stocks end up falling even further, over the long term, I'm confident that the total returns my buys will generate will be excellent.

Which also highlights the point I made in the introduction, that because the market's short-term stupidity can be infinite, cash is one of the most important assets you can hold in your portfolio. This is why my new long-term investing strategy is predicated on building up large cash stores in three buckets (one each for pullbacks, corrections and bear markets), to be deployed during market downturns (or one-day freakouts like we just saw, which comes out of the pullback bucket).

While something great is always on sale, and thus you can potentially always put your savings to work (hold no dry powder in reserve), cash is king because of the incredible opportunities it lets you take advantage of when the market greatly overreacts to temporary bad news.

Disclosure: I am/we are long ENB, KIM, BPY, BLK, ITW, TXN, AOS, AAPL, ABBV, BEP, MMM, LEG, WBA, EPD, MMP, ET, GS, XOM, MPLX, V, MA, BIP, TERP, IRM, HD, SWKS, PM, OKE, C, AMT, BAM, LRCX, JPM, BAC, AMGP, LYB, BTI, TU, SPG. 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.