Challenging Q4 For The Dividend Growth TR Portfolio, But Well-Positioned For 2019

by: Jeff Paul

The Dividend Growth Total Return (DGTR) portfolio returned -16.4% in Q4 and -5.8% for 2018, lagging the S&P 500 Total Return index by 2.2% and 0.6% respectively.

Since inception two years ago, the DGTR has outperformed the S&P 500 TR 27.7% to 15.5%.

The DGTR companies’ 2018 Q3 non-GAAP earnings were 27.3% higher on average than in 2017, supporting double-digit dividend growth rates.

Year-end valuation based on PEG and yield is attractive, reflecting Q4 price declines and strong dividend and earnings growth.

Q4 Review

Q4 2018 was a volatile quarter. Between rising interest rates, concerns about the trade war with China, and our government shutting down, equities declined sharply; the S&P 500 Total Return index was down 14.3%. The DGTR portfolio underperformed with a 16.4% decline, caused in part by its lower-yield, higher-growth focus and sharp pullbacks in a few specific holdings. For 2018, the DGTR had a -5.8% return compared to -5.2% for the S&P 500 TR. However, since its 2017 inception DGTR is ahead 27.7% to 15.5% versus the S&P.

The DGTR portfolio received $1477.53 in dividends in Q4 for a total of $5491.23 in 2018. Compared to 2017 Q4 and full year dividends, these represent gains of 13.6% and 7.6% respectively based on dividends received. The portfolio percentages are lower than the dividend growth of the individual stocks because of trades that exchanged higher yielding stocks for lower yielders. Excluding trade impacts, the intrinsic median dividend growth for all stocks held by the portfolio during Q4 was about 20%.

Q4 Laggards

There was no shortage of concerns in Q4 particularly the slowing economy due to the impacts of the on-going, escalating trade war with China and toward the end of the year, the US Government shutdown. Several DGTR positions declined by double-digit percentages; I’m actually a bit surprised the overall portfolio only lagged by 2 percentage points in Q4. The decliners were generally smaller positions to begin with, so that mitigated the negative performance. Given the portfolio’s growth focus, the volatility does not surprise me and in fact, most positions have already had a significant bounce upward in 2019. Some highlights (returns as of 12/31/18):

  • Air Lease (AL) down 34%: Despite strong quarterly earnings in November, AL cratered in December as the stock market declined. Similar to another SA author’s view, I believe AL was oversold in mid-December, selling well below book value at a PE around 5, with a forward yield nearing 2% and strong earnings growth forecasts. AL has rebounded in Q1 2019.
  • FedEx (FDX) down 33%: FDX’s initial decline started in early December on analyst concerns about the long-term impact of Amazon’s emerging air delivery service on FDX and United Parcel Service (UPS). More growth concerns arose when FDX reduced 2019 earnings guidance by about $3/share (20%) on weaker global economic conditions and a delay in benefits from its TNT Express acquisition. Excluding charges, the decline was still around 10%. Relative to this, the stock was oversold. I still like FDX long-term, but expect more short-term volatility especially if global economies weaken.
  • Principal Financial Group (PFG) down 24%: PFG missed earnings estimates slightly and declined as interest rates increased. Parts of PFG’s business benefit from the rise in rates (insurance), other parts (asset management) may not. While its valuation and yield are attractive, I now view PFG as more of an income and value play. See the Portfolio Changes section for an update on this position.

These large declines were offset by smaller declines of 1.5% in Abbvie (ABBV) and 6% in UnitedHealth (UNH). American Tower (AMT) led with a gain of 9.5%.

2-year Top Performer Summary

Since inception, 5 stocks representing 5 different industries have contributed significantly to the outperformance of the DGTR Portfolio relative to the S&P 500 TR with total returns ranging from 47% to 111%. They are all leaders in industries with just a few major players and have yields in the 1% to 2% range with double-digit dividend growth. I do not plan to add nor trim these positions at this time, as the earnings and dividend growth have been strong and are likely to continue based on these companies’ leadership position and favorable macro trends.

  • Boeing (BA), up 111%
  • Visa (V), up 70%
  • UnitedHealth Group (UNH), up 57%
  • American Tower (AMT), up 52%
  • Nike (NKE), up 47%


The DGTR portfolio is a variation of a dividend growth portfolio that I managed for 3 years while working for an RIA, and represents growth holdings in my personal portfolio. The DGTR portfolio is designed for investors who seek total return and are comfortable with a lower yield than an income investor may require. Dividend growth stocks are used based on the research showing this class of equities outperforms the S&P 500 over the long term. Information on the portfolio’s rationale and screening process can be found in the original article. This model portfolio started on January 1, 2017 with $200,000 as its initial principal and was worth $255,182 as of December 28, 2018 for a total return of 27.7% vs 15.5% for the S&P 500 TR since inception.

The portfolio composition as of December 28, 2018 is listed below.



Yield (%)



Current Value


Boeing Co






Visa Inc






JPMorgan Chase






UnitedHealth Group Inc






American Tower Corp






Nike Inc






FLIR Systems Inc






Stryker Corp






Texas Instruments Inc






Home Depot Inc






Walt Disney Co












Accenture PLC






Marathon Petroleum Corp












CoreSite Realty Corp












Principal Financial Group Inc






Air Lease Corp
















Total Portfolio



Portfolio Changes

There were no changes to the portfolio in Q4, however two exchanges were made during the first week of 2019 and noted on my blog. After reevaluating PFG, I decided that it was more of a value play and didn’t belong in the DGTR. To be clear, I still own PFG in my personal portfolio, as a high-yield, low-PE position with average long-term growth expectations. There is also a lot of competition in the investment finance industry, and as noted in the Top Performer section, one common trait for top DGTR companies is belonging to oligarchy industries. Thinking along these lines, I elected to replace PFG with Nasdaq (NDAQ), one of the major stock exchanges and financial technology service companies. NDAQ continues to increase revenues and earnings through acquisitions and growth in trading volume and data analytic services. NDAQ has had 30% annual dividend growth over the last 5 years. With its current payout below 50% and projected long-term earnings growth of 13%, I expect continued double-digit dividend growth.

The other trade was selling COR, a data center REIT, with the proceeds going to Microsoft (MSFT). Similar to the PFG-NDAQ trade, I view COR as more of a value stock, but wanted to keep a cloud-focused company in the portfolio. Despite its size, MSFT grew revenues by 12% in the last quarter and earnings per share increased 14%. Its shift to cloud-based software and services has fueled growth, and demand continues to increase. MSFT is not “cheap”, but I took advantage of a pullback to $98 per share. Short-term, COR is likely to bounce back, but longer-term, I believe this is the correct move for this growth-focused portfolio. I still own COR for its income in my personal portfolio.

Portfolio Statistics

On an equally-weighted basis, the average year-over-year increase in DGTR’s non-GAAP EPS was 25.6%, slightly below the 26.0% average earnings growth for the S&P 500 as reported by FactSet. Negative EPS growth at MPC contributed to the shortfall; excluding this one stock, the portfolio averaged 27.4% EPS growth. FFO growth was substituted for EPS growth for the REIT positions. 80% of the DGTR portfolio’s companies beat analyst Q3 EPS expectations, slightly more than the S&P 500’s 77% based on FactSet’s tracker. The portfolio was designed to emphasize growth and the results are meeting this goal.

S&P 500 Earnings Above, In-line, Below Estimates Q3 2018

With the Q4 market correction, the DGTR’s portfolio has a very favorable profile. Obviously this assumes forecasts are in the ballpark, which is uncertain as recent government actions have hindered economic growth and the path forward remains unclear. 2019 earnings growth forecasts continue to decline, though remain positive near 5% based on Zacksestimates.

Zacks 2019 Earnings Growth Forecast Trend As of December 31, 2018, the DGTR portfolio had a 2.3% dividend yield, a low 38% payout ratio, and a PEG value near 1.5. Earnings forecasts are in the double digits and historical DGRs are above 20%; the portfolio’s valuation looks pretty good assuming growth forecasts hold. Strong dividend growth should continue in 2019.

DGTR Portfolio Statistics 2018 Q4

Closing Thoughts

While the DGTR portfolio underperformed during the market correction, it started 2019 at a good valuation and with its highest yield since the 2.4% at inception two years ago. This despite several stock trades over the last two years that replaced higher-yielders with lower yielders. After the latest trades in January, the yield is at 1.9%. With an average intrinsic dividend growth rate near 20%, supported by double-digit earnings growth, the portfolio’s yield generally kept pace with price appreciation. If we can get resolution to some of the political and economic concerns, growth will continue, but even if we don’t, the macro trends that the portfolio was based onappear to be intact and should provide support for DGTR companies.

  • Population Trends: By 2030, 20% of US residents will be at least age 65. Seniors utilize more healthcare services, creating growth opportunities for medical products (SYK), pharmaceuticals (ABBV) and health insurance (UNH) providers. In addition, over half of the world’s population is now considered middle class or above according to a Brookings Institute report. Brookings forecasts by 2030 the middle-class markets in China and India will account for $14.1 trillion and $12.3 trillion, compared to $15.9 trillion in the US. Middle class growth should fuel consumer spending on discretionary items (NKE), travel (BA, AL, MPC), homes (HD), and entertainment (DIS). Financial services should also benefit from the larger middle class (JPM, NDAQ, V), and more internet purchases will benefit FDX.
  • Technology: Gartner forecasts 17.3% growth in worldwide public cloud revenues in 2019 to $206B, reaching $278B by 2021 or 16.5% annualized growth over 3 years. The addition of MSFT to the portfolio provides more direct cloud service exposure, and I also expect continued growth in consulting service (ACN), processors (TXN), sensor devices (FLIR), and cell services (AMT).

Brookings middle class graph With support from the macro trends, and reasonable current valuation thanks to the market pullback, I believe the DGTR portfolio is in a great position for the longer-term though there may be more volatility in the near-term. The DGTR companies continue to deliver strong dividend growth; 10 companies raised dividends beginning with the Q1 2019 dividend payment, and all but DIS are 10%+ increases, a couple in the 20%-30% range. What a nice way to start 2019!

Disclosure: I am/we are long NKE, DIS, HD, MPC, PFG, SYK, UNH, FLIR, BA, V, ACN, TXN, AMT, COR, JPM, ABBV, CE, FDX, ALL, AL, MSFT, and NDAQ. 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.