Man oh man, it’s crazy to think about boiling down a year’s worth of portfolio management into a single article like this (especially, after a year like 2018). To be honest, I’d much rather be writing about the fundamentals of a given company that I’ve recently bought or sold. These recap articles are always difficult because I’m never quite sure where to start. But, for the sake of entertainment, I’m going to give it my best shot!
2018 was a pretty interesting year for me. It began with a bang as the market sold up exuberantly, bringing my personal wealth levels to an all-time high. However, late in January volatility reared its head like I’ve never seen before and was a constant companion throughout the year. This, alongside the fact that my wife if still in graduate school and isn’t working, forced me to manage my portfolio in a unique fashion that I don’t plan on adhering to forever.
It’s too bad, but money doesn’t grow on the trees that surround my house, so throughout 2018, if I wanted to buy something in the market, I was forced to either dip into my cash reserves or sell something to fund the sale. This means that in 2018, I made way more sales than I usually do.
In the past, I’ve spent the vast majority of my time as a portfolio manager buying equities. This is where I believe I am most proficient as a portfolio manager, yet I’m somewhat grateful for the recent changes that we’ve made in our lifestyle and portfolio management strategy because I think it’s forced me to grow as an investor.
In 2018, I made 98 trades. 46 of these were sales and 52 are buys.
I’m early on in the accumulation phase of my dividend growth portfolio’s life cycle. For years, my primary goal had been to collect high quality assets that contributed to my reliably increasing income stream. However, with only one income in our household for the last two years with my wife back in school, things have had to change.
These changes have made the accounting associated with my portfolio management tricky. To make ends meet, certain brokerage accounts sort of merged with our checking account. Money was coming and going from the brokerage accounts in an abnormal fashion. I did not re-invest many dividends this year. Most of the dividends that my portfolio generated went to replenish the cash reserves after making withdrawals.
With all of this cash movement, calculating my exact total return for 2018 was going to take entirely too much work (I’m not the most efficient record keeper, nor am I proficient at basic accounting skills which would have probably made the process of attempting find an exact total return possible). I was able to sort of subtract all of the cash from the equation and focus strictly on equity returns. In short, I have my portfolio’s price return, just not the total return with dividends included.
The equity (including the original cash amount that I started the year with; I factored this in so that the risk/reward of holding cash relative to equities wouldn’t have given me an unfair advantage against the market in our little competition) that I own generated a -4.94% return in 2018.
Obviously I’m not thrilled about a negative year. This is my first negative year since I began managing my family’s finances. It does leave a bit of a sour taste in my mouth when I think about the long-term compounding goals that I have. However, when I compare that -4.94% to the -6.23% that the S&P 500 generated o the year, I take a bit of solace in knowing that I did slightly better than I would have had I simply bought and owned the spy.
I also take solace in the fact that I did relatively well against the market in a down year. People always say that you don’t know yourself as a portfolio management until you’ve dealt with the stress of a down market. I know that 2018 wasn’t exactly a terrible bear market, though there was a lot of volatility and many sectors ended the year deep into the red. In hindsight, I am pleased with the intestinal fortitude that I showed through out the year.
I made mistakes, that’s for sure. However, for the most part, I kept my eye on the ball. I did not panic. I stuck to my long-term plan and I didn’t make any rash decisions that might have put my family’s financial freedom in jeopardy.
Because of the market volatility, I was hesitant to dip too far into my cash pile. Throughout the year I slowly brought down my cash weighting due to the combination of equity purchases and cash withdrawals to pay for tuition and books; however, I didn’t want to see it go below 5% of my overall portfolio with the market still hovering near the highs nearly a decade into an economic expansion.
Technically, I would have liked to keep my cash position somewhere in the double digits, but I’m a sucker for a good deal, especially when it contributes to my passive income stream.
Passive Income Stream
I want to grow my wealth. I want to beat the market. However, at the end of the day, what matters most to me with regard to my financial freedom is my income stream, which is why generating reliably increasing income is my number one priority.
My income was up, month over month, for 9 of the 12 months of the year. Overall in 2018, my portfolio increased 10.45% more income than it did in 2017. But, what’s best about my management in 2018 was that I’ve taken steps to position myself well for 2019 as well.
My focus on selling high and buying low has increased the yield of my portfolio significantly. Right now, my projected 2019 income is slated to come in nearly 17% higher than 2018’s total.
What’s amazing about this (to me, anyway) is that this 17% increase isn’t due to cash inflows, but instead active management. This 17% projected growth is also before many of my holdings announce their 2019 dividend increases. Once those are factored in, I wouldn’t be surprised to see 20% y/y passive income growth next year.
2018 Trading Recap
I’ve written about this numerous times, but an income oriented focus allows me to maintain a long-term view and avoid many of the emotional mistakes that those who only pay attention to total returns tend to make. When one of my holdings sells off 20-30% (which, unfortunately, happened several times in 2018) I don’t panic and sell at the bottom. There’s no need to do this so long as the company’s underlying fundamentals remain strong and support a sustainably growing dividend.
Every now and then I’ll sell something because of dividend cut fears. And even worse, I’ve been forced to sell something that did cut its dividend (this happened once in 2018 with Anheuser-Busch InBev (BUD). But, for the most part, I’ve been more than happy to ride out the rough waters lately, knowing that the vast majority of my holdings offer safe dividend yields and strong dividend growth prospects.
I rarely ever sell something when it’s down because the way I see it, losses on paper aren’t actual losses until you lock them in. Sure, sometimes a dog will prove to have much more than fleas and continue to fall and fall. However, in the DGI world, I tend to only invest in the highest quality companies. This is another benefit of the DGI strategy; to pay a reliably increasing dividend a company must have sales, earnings, and cash flows that have trended upwards over the long-term. So, when investing in high quality companies like this, I take solace in the fact that more often than not, they not only recover from weakness, but prosper, if given ample time.
With this in mind, we’ll move on to the second graphic that I’ve put together for my 2018 portfolio review.
To be honest, I wasn’t exactly sure how to format this piece. I went back and forth a few times on a few different graphics because I wasn’t sure which information would be most pertinent for readers/followers. In the end, I settled on this relatively simple chart that lists all of the sales that I made during the year. I usually talk about my purchases in articles, yet the sales sometimes get overlooked. The third, and final graphic (which you will see in just a bit) shows my current portfolio’s positions, weightings, and cost basis.
I’m pleased to say that locked in profits on 38 of those 46 sales (or 82% of them).
I know many say that investors should cut their losers and hold onto their winners, but I don’t really subscribe to that strategy. Sure, there are core positions in my portfolio that I don’t really have any plans to sell (ever), but in general, I’m more than happy to take profits when I want/need to raise cash. Just as losses can turn to profits, profits can turn into losses.
Oftentimes, I’m doing so with equity that I believe to the overvalued at the time. There have been many occasions where I sell something and the market is gracious enough to give me the opportunity to buy it back lower at a later date. This doesn’t always happen, of course. There have been stocks that I’ve sold only to watch them sky rocket. No one is perfect. You’ll never hear me claim to be, that’s for sure. No one has a crystal ball, making it impossible to know what will happen in the future. Yet, one thing I know for sure is that once I take profits from the market, they’re permanent. I’ve made money, which, at the end of the day, is the point of all of this…isn’t it?
Current Portfolio Weightings
And, as far as all of the purchases that I made, instead of taking the time to list them again (I’ve already posted them all in real-time as stock talks here at SA and discussed many in individual ticker pieces or monthly portfolio updates, I thought it was best to simply skip right to the portfolio weightings and overall cost basis reviews since this seems to be what most readers are most interested in anyway.
Core Dividend Growth
|Johnson and Johnson||JNJ)||$113.52||1.98%|
|United Parcel Service||UPS)||$106.79||1.97%|
|Illinois Tool Works||ITW)||$130.90||0.98%|
|National Retail Properties||NNN)||$37.54||0.79%|
High Dividend Growth
|Bristol Myers Squibb||BMY)||$46.79||1.51%|
So, there you have it. I’m pleased with my 2018 results and I’m looking forward to seeing what 2019 has in store. From a personal finance standpoint, I’m really looking forward to the second half of 2019 when my wife will once again be receiving a paycheck, which might enable us to begin adding new money to the portfolio again. I’m not sure if that will be the case in 2019 because we have some debt to pay off related to her degree, but either way, it will be a relief knowing that we have more cash flows coming into the household and I don’t have to be so concerned with raising cash organically from within the portfolio what I want to make trades in the market.
I’ll be really excited when I get to turn back on the re-investment faucet. Dividend re-investment is key to the compounding process associated with any dividend growth portfolio. I’ve missed those monthly re-investments because it always felt like I was investing “free money”. However, in 2018 I quickly realized that this money wasn’t free after all. I realized just how important it was to have an extra source of income coming into the household should I need it. This is the beauty of a DGI portfolio. It can serve as a safety net when needed. Luckily our situation was by choice (grad school) and not necessity (some sort of unexpected job loss or emergency). However, either way, I’m so happy that I’ve chosen to go down the DGI route as a portfolio manager because my income stream gives me peace of mind now, more than ever.
Best wishes to all! May 2019 be a more positive year than the last!
Disclosure: I am/we are long AAPL, DIS, MSFT, UPS, BLK, CSCO, KO, AMGN, QCOM, PEP, HON, PFE, INTC, TXN, NVO, ITW, MMM, HSY, MDT, DEO, UTX, MKC, T, MO, WPC, STOR, NNN, VTR, D, VZ, BIP, DLR, O, BEP, ENB, IVZ, VER, SBRA, BA, SBUX, V, AVGO, NVDA, NKE, FDX, CMCSA, STZ, C, MA, GOOGL, AMZN, BRK.B, BABA, JD, BMY, TCEHY, REZI, GTX, GIS. 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.
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