Fireside Chat: Mid-Quarter Update

Includes: PEP, PFE
by: Dividend Sleuth

Q4 was a whirlwind. No new or deleted positions thus far in 2019.

I knew some stocks were screaming buys, but I didn't realize the severity of the Q4 mini-bear.

Now that a few weeks have passed, I share some reflections about the quarter that saw a transformation of the portfolio.

So far in 2019, two positions have been trimmed slightly and a few shares were added to one position.

Where are dividend investors now as we move toward Q2 2019?

After the Q4 whirlwind

As we approached the mid-point of Q1, I reviewed my very active trading in Q4 2018, which I described in "Q4 2018 Portfolio Review." I'm very pleased that there has been virtually no portfolio activity in 2019. The investments made in Q4 have improved the portfolio, which has participated in the Q1 uptrend. As of February 15, the portfolio was up 11.15% from 12/31/2018. No new positions have been opened in 2019 and no existing positions have been closed.

The severity of the Q4 mini-bear market surprised me

I was so focused on picking up bargains that I didn't realize the depth and breadth of the Q4 mini-bear market. Between December 17 and 24, 2018, I added to 19 of the 35 positions in the portfolio. Things were moving so fast I was surprised to see how many purchases I made.

Holding Ticker Bought Price Feb 15 Price % Gain
Royal Bank of Canada RY Dec 17 69.92 76.59 9.5%
Toronto-Dominion Bank TD Dec 17 51.42 56.91 10.7%
Main Street Capital MAIN Dec 17 35.21 37.38 6.2%
Bank of Nova Scotia BNS Dec 17 53.48 56.47 5.6%
Eaton Corporation ETN Dec 20 68.18 78.73 15.5%
Main Street Capital MAIN Dec 20 33.37 37.38 12.0%
Johnson & Johnson JNJ Dec 20 127.30 136.38 7.1%
Exxon Mobil XOM Dec 20 69.23 77.71 12.2%
Cisco Systems CSCO Dec 20 42.55 49.43 16.2%
AT&T T Dec 20 28.77 30.47 5.9%
Internat'l Business Mach IBM Dec 20 113.23 138.03 21.9%
Illinois Tool Works ITW Dec 21 124.21 144.21 16.1%
Manulife Financial Corp. MFC Dec 21 13.87 16.23 17.0%
Simon Property Group SPG Dec 21 167.55 183.36 9.4%
BlackRock BLK Dec 21 369.34 431.95 17.0%
Pfizer Inc. PFE Dec 24 41.43 42.40 2.3%
3M Company MMM Dec 24 181.38 208.86 15.1%
Cummins CMI Dec 24 126.64 155.47 22.8%
Texas Instruments TXN Dec 24 89.48 107.57 20.2%
Royal Dutch Shell RDS.B Dec 24 57.30 63.83 11.4%

Reflections on Q4

My late father-in-law was a U.S. Navy Lookout who spent much of World War II in the "Crow's Nest" of a light cruiser in the Pacific. Through his binoculars, he saw the Marines plant the U.S. flag atop Iwo Jima's Mount Suribachi.

Seeking Alpha provides several "Lookouts" for me. Jeff Miller's "Weighing The Week Ahead" installments help me navigate my way through the noise to monitor data that matters. Brian Gilmartin's regular assessments of the S&P 500 performance and prospects provide bearings for the market's potential direction. Kirk Spano gives me glimpses into the long-term direction of energy. Simply Safe Dividends provides a good barometer of a company's dividend health. Custom Stock Alerts reminds me when a stock is nearing a target price.

These are just a few of the market watchers that gave me confidence that the December downdraft was overdone. But, even without these helpful lookouts, the drop during the short trading session on December 24 was so steep that I was convinced the available bargains should be snapped up, regardless of any future market decline.

One of my Q4 learnings is that the most important task is to design and maintain a portfolio of strong companies that have demonstrated the wherewithal to thrive during hard times. My portfolio isn't perfect, but I have a strong level of confidence in the companies as a group. Some will disappoint. Some will exceed my expectations. Most will likely perform within a reasonable range of success. If you have confidence in a company, a broad market downdraft is, indeed, like a Christmas present. The great companies are marked down along with companies that are struggling. This year we had a pre-Christmas "Store-Wide Sale."

So far in Q1 2019

In the first six weeks of 2019, I made three small transactions. On February 6, I sold a few shares of Cummins at $150.35 because it had become my second-largest position. Eaton had also become somewhat overweight, so I sold a few shares on February 7 at $76.43. On February 6, I bought a few shares of PepsiCo (PEP) at $113.03. This moved it from 2.71% of the portfolio to 3.06%. PEP closed at $115.91 on February 15.

What's ahead for dividend investors?

My outlook on the market is positive. I still believe what I wrote in October, that "This Is a Great Time to Build a Dividend Portfolio." There are headwinds aplenty, with uncertain trade policies, multiple political sword fights, the Fed in uncharted waters, and mountains of debt piling up in various places.

I'm lousy at market timing. December was a rare occasion. The market was lobbing softballs to hit. At other times, I swing and miss. The uncertainties of the future always temper my hubris. December's buys look good now, but if we re-test the market lows, the view may change.

The good news is that it isn't necessary to be a great market timer. The most important factor in portfolio design and management, in my opinion, is the quality of the companies and their managements. We cannot control the market's volatility, but we can control what we put in the portfolio.

Ten of the 35 companies in my portfolio have S&P credit ratings of AA- or better. Six others are rated A+. Seven others are rated A or A-. The average number of consecutive years of dividend increases is 19. The current portfolio yield is 4.70%, which includes small positions in four closed end funds.

The portfolio company nearest to my target buy price is Pfizer. My target for PFE is $40.00, which would be a 3.6% dividend yield.

F.A.S.T. Graph for Pfizer (From F.A.S.T. Graphs)

As some of my followers have noticed, I have not been writing as much in recent months. I appreciate your encouragement. I've been evaluating how to be most effective in writing for the Seeking Alpha community. I'm now working with Kirk Spano and Margin of Safety Investing. My goal is to make available to Seeking Alpha readers each week an article about dividend investing.

I'll provide a more complete portfolio review after the end of Q1.

I'm not advocating the purchase or sale of any security. My articles generally offer ideas for stocks to study. These articles form a journal of my effort to design and maintain a retirement income portfolio with a relatively safe stream of growing dividends. I seek companies with histories of rising dividends, strong financials and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long JNJ, XOM, PFE, PG, MMM, BLK, CSCO, RY, TD, PEP, ITW, IBM, TXN, CMI, UPS, BNS, RDS.B, QCOM, SPG, MFC, PPL, ETN, ABBV, SKT, ENB, EPD, BIP, BEP, VTR, BCE, T, WPC, MAIN, BPR, APLE, ADX, IFN, RMT, RVT. 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.