March To Freedom Fund 2018 Review

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Includes: AAPL, ABBV, ABT, AFL, BA, CMI, COST, CSCO, CVS, CVX, D, DIS, GIS, HON, JNJ, JPM, KO, LMT, MA, MKC, MMM, MO, MSFT, NKE, O, PEP, PG, PM, QCOM, SBUX, SO, T, TGT, V, VFC, VTR, VZ, XOM
by: The Dividend Bro
Summary

The March to Freedom Fund ended the year ever so higher than it began.

Still, our total return topped that of the S&P 500.

We made 20 purchases during the year, many of which declined in value by the end of 2018.

We had another record year for dividend income.

With 2018 now complete, it is time to look back at how our portfolio performed during the year. The March to Freedom Fund, which will cover expenses for my wife and I in retirement, had a total return of... 0.06%. This includes just dividends received and not our contributions. Not exactly the best total return, but it beats the S&P 500, which was down 4.38% this year when you factor in dividends.

Since I began tracking our portfolio against the S&P 500 in 2015, our total return is 41.67%. The market index has a total return of 24.55% during this time frame. We’ve beaten the S&P 500 each of the past four years.

Below is how each of our positions performed during the year.

Stock

Opening Price 2018

Closing Price 2018

Gain/Loss

3M (MMM)

$235.37

$190.54

-19.05%

AbbVie (ABBV)

$96.71

$92.19

-4.67%

Abbott Laboratories (ABT)

$57.07

$72.33

26.74%

Aflac (AFL)

$43.89

$45.56

3.80%

Altria (MO)

$71.41

$49.39

-30.84%

Apple (AAPL)

$169.23

$157.74

-6.79%

AT&T (T)

$38.88

$28.54

-26.59%

Boeing (BA)

$294.91

$322.50

9.36%

Chevron (CVX)

$125.19

$108.79

-13.10%

Cisco Systems (CSCO)

$38.30

$43.33

13.13%

Coca-Cola (KO)

$41.46

$45.88

10.66%

Costco (COST)

$186.12

$203.71

9.45%

Cummins (CMI)

$176.64

$133.64

-24.34%

CVS Health Corp. (CVS)

$72.50

$65.52

-9.63%

Dominion Energy (D)

$81.06

$71.46

-11.84%

Disney (DIS)

$107.51

$109.65

1.99%

Exxon Mobil (XOM)

$90.26

$83.64

-7.33%

General Mills (GIS)

$59.29

$38.94

-34.32%

Honeywell International (HON)

$153.36

$132.12

-13.85%

Johnson & Johnson (JNJ)

$139.72

$129.05

-7.64%

JPMorgan (JPM)

$106.94

$97.62

-8.72%

Lockheed Martin (LMT)

$321.05

$261.84

-18.44%

Mastercard (MA)

$151.36

$188.65

24.64%

McCormick & Co. (MKC)

$101.94

$139.24

36.59%

Microsoft (MSFT)

$85.54

$101.57

18.74%

Nike (NKE)

$62.55

$74.14

18.53%

PepsiCo (PEP)

$119.92

$110.48

-7.87%

Philip Morris (PM)

$105.65

$66.76

-36.81%

Procter & Gamble (PG)

$91.88

$91.92

0.04%

Qualcomm (QCOM)

$64.02

$56.91

-11.11%

Realty Income (O)

$57.02

$63.04

10.56%

Southern Company (SO)

$48.09

$43.92

-8.67%

Starbucks (SBUX)

$57.43

$64.40

12.14%

Target (TGT)

$65.25

$66.09

1.29%

V.F. Corp. (VFC)

$74.00

$71.34

-3.59%

Ventas (VTR)

$60.01

$58.59

-2.37%

Verizon (VZ)

$52.93

$56.22

6.22%

Visa (V)

$114.02

$131.94

15.72%

This table only includes the stocks we have held since the beginning of 2018. Just 17 out of 38 of these positions ended the year higher than they began.

McCormick & Company was up almost 37% for the year. The company’s purchase of RB Foods, which includes Frank’s Red Hot and French’s Mustard, continues to drive sales growth. The market reacted poorly when the deal was announced in July of 2017, but investors have warmed to the additional sales this acquisition has provided.

Abbott Laboratories was the second best performer in our portfolio, climbing 26.7%. Abbott Laboratories continues to see innovation in its product lines. For example, the company’s FreeStyle Libre, which allows patients to measure glucose levels without finger sticks, gained approval from the FDA for its 14-day sensor. This device is now the longest-lasting wearable glucose sensor on the market.

Mastercard, the lone holdover from last year’s top five performers, continues to see gains in both transaction and dollar volumes. The stock was up almost 25% in 2018 after gaining 47% in 2017.

Microsoft gained 18.7% due in large part to the company’s continued strength in cloud computing. Microsoft makes up 4.8% of our portfolio, making the stock our largest position.

Nike takes the final spot in our top five performers with an 18.5% return. The company has returned to growth in the U.S. and continues to see strong demand in China. These two factors should help drive the stock even higher in 2019.

I consider McCormick, Abbott Laboratories and Nike to be three-quarters of a full position. I hope that 2019 gives us an opportunity to add to each of these names. I view Microsoft and Mastercard, which is our tenth largest holding, as full positions. A position is considered to be full if the value is ~$3,000.

Usually, I discuss our bottom five performers in our updates, but since Philip Morris, General Mills, Altria, AT&T and Cummins have been our worst acting stocks all year, not much has changed with the story for each company.

Instead, I’d like to highlight some additional names that are of interest to me. Honeywell International, which completed two spinoffs during 2018, lost nearly 14% during 2018. The spinoffs of its turbocharger and home units allow the company to focus on its areas of strength, aerospace. Honeywell International’s aerospace unit delivered 10% organic growth last quarter. We purchase a small amount of Honeywell International each month through shareowneronline.com.

Dominion Energy lost almost 12% last year, but the company has guided towards 10% dividend increases for the next few years. With a 4.6%+ yield, that type of growth is very attractive to me. I am also hoping to increase our utility exposure in 2019 as this sector makes up a very small part of our portfolio (see below). Dominion Energy is a utility stock I hope to purchase in 2019.

PepsiCo, which dropped just under 8% during the year, saw a return to sales growth in its North American Beverage unit during the last quarter. This unit is the largest in the company and had been showing year-over-year declines for the past several quarters. If PepsiCo can continue to grow North American Beverage, the company’s fundamentals should remain strong. While our PepsiCo position is above full position status, I consider the company a core holding and hope to add more shares during the new year

2018's Purchases

We were able to make 20 purchases during 2018. Below are the stocks we acquired and their performance from the date of purchase through the end of the year.

Stock

Date

Buy Price

Today's price

Gain/Loss

VTR

1/17/2018

$54.88

58.59

6.76%

D

1/30/2018

$75.51

70.29

-6.91%

PEP

2/26/2018

$111.41

110.48

-0.83%

MKC

3/28/2018

$106.05

139.24

31.30%

JNJ

4/13/2018

$130.07

129.05

-0.78%

T

4/19/2018

$35.03

28.54

-18.53%

LMT

2/25/2018

$328.20

261.84

-20.22%

VZ

5/2/2018

$48.03

56.22

17.05%

CVX

5/11/2018

$129.93

108.79

-16.27%

KO

5/14/2018

42.08

47.35

12.52%

CVS

5/15/2018

65.73

65.52

-0.32%

DIS

5/21/2018

104.7

109.56

4.64%

COST

6/6/2018

197.41

203.71

3.19%

DG

6/6/2018

94.23

108.08

14.70%

TGT

6/25/2018

76.31

66.09

-13.39%

D

6/29/2018

68.23

70.29

3.02%

SYK

7/25/2018

169.11

156.75

-7.31%

LMT

8/30/2018

321.23

261.84

-18.49%

O

10/18/2018

57.99

63.04

8.71%

MO

10/23/2018

62.07

49.39

-20.43%

McCormick gained more than 30% from our date of purchase. I thought that the company’s previously discussed acquisition of RB Foods would help grow revenues. It turns out that I have gotten that one right so far, though I didn’t fathom the growth the stock would see during the year. At the time we bought our latest batch of shares, I found McCormick’s stock to be slightly overvalued. This should serve as a reminder to myself that quality companies aren’t always the cheapest. Sometimes you have to overpay for stocks.

Dollar General, one of just two new positions we initiated during the year, gained almost 15% from the time of our June 6th purchase. I like that the company offers many products below $1 and has improved same-store sales for almost 30 consecutive years. Growing same-store sales over several recessions is a positive sign. We have already added to Dollar General in 2019.

Ventas and Realty Income are the two real estate investment trusts that we own. We added to each position in 2018. Both purchases were higher by the end of the year. The Federal Reserve raised interest four times during 2018. The smart money might have guessed that REITs would have suffered due to the rising costs related to higher interest rates, but this scenario never came to fruition during the year.

Aside from these purchases, most of our other buys during the year offered meager returns or declined after we added shares. Two of our buys, Altria and Lockheed Martin, suffered 20% drops after we bought them. We actually bought Lockheed Martin twice and both purchase prices were made in the $320 range. Given that the stock ended the year at $261, this was a fairly sizeable decline. Even so, defense spending continues to rise around the world and especially in the U.S. I wouldn’t mind adding more of Lockheed Martin at some point in 2019.

We added Altria near the end of October and the purchase turned out to have the sharpest decline of all of our buys. The company’s investment of almost $13 billion in July was deemed too rich by many investors. Combined with lower smoking rates amongst U.S. adults, the stock declined sharply towards the end of the year. For a long time, Altria has been our largest position, but it fell back to fourth by the end of 2018. I am not looking to add more of the company due to its size in our portfolio, but I am not selling either. The company has almost five decades of dividend growth and has weathered other threats to its business.

We sold just one position, Gilead Sciences (GILD), during the year. I felt that Gilead’s drop in revenues from its hepatitis C drugs was a bad omen for the company. We used the proceeds from this sale to add to Chevron and Coca-Cola.

2018's Dividends

While more than half of our stocks posted a loss for the year, I have always been primarily concerned with the amount of income that our holdings produce. This dividend income will be what covers expenses for us in retirement.

Let’s review November and December’s dividend totals before moving onto the full year results.

Month/Year

Month-Over-Month Increase

November 2014

273.84%

November 2015

104.39%

November 2016

114%

November 2017

54.36%

Compared to 2014, November had one of the lowest month-over-month increases that we saw this year. Still, our income for this month is up almost 300% from 2014. Interestingly, November is the first month to post at least a 100% increases from three different years. This is due to us making a few purchases in the last two years of some of the higher-yielding names, such as AT&T and Verizon, that pay dividends during this time.

Companies that paid us dividends in November include: AT&T, General Mills, Verizon, CVS Health Corp., MasterCard, AbbVie, Realty Income, Abbott Laboratories, Apple, Procter & Gamble, Starbucks and Costco.

Month/Year

Month-Over-Month Increase

December 2014

276.32%

December 2015

136.88%

December 2016

51.76%

December 2017

23.71%

December was a record month for dividend income. 18 of our 40 holdings paid a dividend during this time. We are nearing a 300% gain in month over month increases from 2014. The month-over-month increase from 2017 is actually the lowest that we saw in 2018. This is due to December 2017 being our record for dividends at that time. The companies that pay March-June-September-December dividends accounted for almost 42% of our total income in 2018.

Companies that paid us dividends in December include: Aflac, Cummins, Boeing, Southern Company, Visa, Honeywell International, Chevron, Target, Exxon Mobile, Johnson & Johnson, 3M, Microsoft, Coca-Cola, Realty Income, Qualcomm, V.F. Corporation, Dominion Energy and Lockheed Martin.

Year

Year-Over-Year Increase

2014

244.42%

2015

125.55%

2016

79.87%

2017

33.36%

For the year, our dividend income was higher by 244% from 2014. At the end of 2017, our dividend income was up 158% from 2014. In one year, our income comparison to 2014 was much improved. This was done simply through making regular contributions to our IRAs and share building accounts and buying names of companies with long track records for dividend growth.

We have reinvested dividends for the majority of the life of our portfolio. We elected to take dividends in cash in the second half of 2018 for two reasons, the first being that my wife resigned from her job to stay home with our son. We weren’t sure how the loss of a salary would impact our ability to invest. The second reason was so that we could add capital we could use to make additional purchases.

You’ll find the portfolio and dividend weights for all of our holdings as they were at the end of 2018 in the table below.

Portfolio Weight

Dividend Weight

AAPL

2.16%

1.53%

ABBV

3.06%

4.72%

ABT

1.93%

1.18%

AFL

2.04%

1.84%

BA

4.77%

4.01%

CMI

0.65%

0.81%

COST

1.22%

0.40%

CSCO

1.91%

2.23%

CVS

2.32%

2.49%

CVX

2.12%

3.25%

D

2.34%

3.71%

DG

0.71%

0.15%

DIS

1.95%

1.01%

GIS

0.81%

1.41%

HON

0.71%

0.61%

JNJ

3.93%

4.12%

JPM

2.49%

2.51%

KO

2.80%

3.44%

LMT

1.55%

1.52%

MA

2.67%

0.56%

MKC

1.75%

0.93%

MMM

1.39%

1.48%

MO

3.79%

7.84%

MSFT

4.79%

3.21%

NKE

1.59%

0.68%

O

2.96%

4.32%

PEP

2.57%

3.03%

PG

1.93%

2.21%

PM

1.46%

3.81%

QCOM

1.11%

1.88%

SBUX

2.36%

1.92%

SO

0.71%

1.51%

SYK

0.69%

0.08%

T

2.99%

7.06%

TGT

2.07%

2.73%

V

2.53%

0.67%

VFC

1.51%

1.59%

VTR

2.42%

4.84%

VZ

3.07%

4.53%

XOM

1.80%

3.21%

CLOSED*

---------------------

0.40%

403B

13.79%

---------------------

Cash

0.58%

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* This category contains the dividends we received from Gilead Sciences prior to selling the position.

In the name of diversification, I’ve tried to limit the size of each position to less than 5% of our portfolio. This helps to defend the portfolio as a whole from a single position suffering a sizeable loss of value. That doesn’t mean that I’ll trim positions if they grow too large. I only sell when I feel that the reasons I invested in the company in the first place have changed. Every position is below this threshold, with just Microsoft and Boeing each accounting for more than 4% of our total retirement accounts.

I also strive for diversification of where we get our income from. I would like each position to contribute less than 5% of total dividends so we wouldn’t feel as much pain if a company were to cut or eliminate its dividend. Only Altria and AT&T are over this threshold, though their contributions to income are down slightly from 2017.

I’ve sorted each sector into a “super sector” as assigned by Morningstar in the table below. The defensive super sector contains consumer staples, healthcare utilities and telecommunications companies. I include telco companies in this sector because their products, like smartphones and video content, have become a staple in the lives of its customers. My goal is to have this super sector occupy 50% of the portfolio and contribute 50% of our dividend income.

The cyclical super sector contains companies from the consumer discretionary, financial services, materials and real estate investment trusts sectors of the economy. We don’t own any stocks in the materials sector. The sensitive super sector consists of companies in the energy, industrial and technology fields. Our aim is to have 25% of income coming from both the cyclical and sensitive super sectors. The following table contains sector and dividend weights.

For this exercise, I’ve removed our 403(b) plans accounts and focus just on the stock portion of our holdings.

Super Sector

Portfolio Weight

Dividend Weight

Defensive:

Consumer Staples

17.51%

22.90%

Healthcare

13.84%

12.64%

Telecommunications

7.03%

12.17%

Utilities

3.53%

5.24%

Super Sector Total:

41.91%

52.96%

Cyclical:

Materials

0%

0%

Consumer Discretionary

13.24%

9.2%

Financial Services

11.29%

8.37%

REITs

6.25%

5.61%

Super Sector Total:

30.78%

23.19%

Sensitive:

Energy

4.55%

6.49%

Industrials

10.52%

8.47%

Technology

11.56%

8.89%

Super Sector Total:

26.63%

23.86%

Cash

0.58%

Overall Total:

100%

100%

While we fell short of our goal for consumer staples occupying 50% of our portfolio, this super sector did reach our desired threshold for dividend contributions. Our utility income more than doubled from 2017. As stated earlier, I would very much like to add more utility income to our portfolio. Companies in this sector often perform better in a recession, because people will do everything they can to keep the power on in their homes.

We will likely attempt to reduce the amount of exposure we have to the cyclical sector as a percentage of our portfolio. This will occur over time as we focus our purchases in other areas. Stocks deemed more sensitive are right about where I want them in terms of both percentages of value and dividend income.

When you include our 403(b) retirement plans through our employers, we ended the year with a 2.5% dividend yield. When you include just the stock portions of our portfolio, our yield jumps to 2.9%. Both totals are above the yield of the S&P 500.

Wrapping up income, 38 out 40 companies raised their dividends in 2018, with CVS Health Corporation and General Mills being the lone holdouts. By position, the average increase was 11.9%. By position weight, the average raise was 10.9%. This is our highest average rate by both position and weight that we have seen.

Based off the stocks we owned at the end of the year, I expect our income will grow by at least 12% in 2019. That doesn’t factor in any new purchases either.

Conclusion

The March to Freedom Fund squeaked out the tiniest of gains in 2018, but still managed to outperform the market. Less than half of our holdings had positive returns for the year. While some of our purchases worked out in the short term, many posted a loss. These results don’t bother me all that much as I most concerned with growing our dividend income. We had record year in terms of income received and dividend increases. This helps me sleep well at night.

More than 1,200 readers on Seeking Alpha decided to follow me this year. Thank you to those who deemed my work good enough to click the follow button. Writing for Seeking Alpha and interacting with readers has made me a better investor. I hope you have found an article or two to be informative and useful. Happy New Year everyone!

How did 2018 workout for you? What are you looking to buy in 2019? Feel free to leave a comment below.

Disclosure: I am/we are long ABBV, AFL, CMI, CVX, GIS, HON, JPM, KO, XOM, MA, MMM, MO, MSFT, PG, PM, QCOM, T, TGT, V, VFC, VTR, AAPL, BA, CSCO, CVS, DIS, JNJ, O, PEP, SBUX, VZ, NKE, LMT, D, COST, ABT, MKC, SO, DG, SYK. 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.