Q1 Portfolio Review

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Includes: ABBV, ADX, APLE, BCE, BEP, BIP, BLK, BNS, BPR, CMI, CSCO, ENB, EPD, ETN, IBM, IFN, ITW, JNJ, MAIN, MFC, MMM, OXY, PEP, PFE, PG, PPL, QCOM, RDS.A, RDS.B, RMT, RVT, RY, SKT, SPG, T, TD, TXN, UPS, VTR, WPC, XOM
by: Dividend Sleuth
Summary

The portfolio was up 13.66% in Q1, aided by the market rebound from the December 24 lows.

A few positions were trimmed, resulting in an increased cash position from 0.96% to 3.28%.

I closed my Exxon position and opened a position in Occidental Petroleum.

The portfolio yield at the end of Q1 was 4.52%.

Q1 was a good quarter

The purpose of this 30-stock portfolio is to provide supplemental retirement income. The portfolio rose along with the broader market, gaining 13.66% in the first quarter. In Q1, I began taking monthly disbursements from the portfolio.

During the December market decline, I lowered the cash position to less than 1% to take advantage of some unusual bargains. By the end of Q1, the cash position rose to 3.28%. The current portfolio yield is 4.52%.

In Q1, I trimmed a few shares of seven holdings:

Holding Reduction in Size Sale Price
Cummins (CMI) 3.23% to 2.69% 150.35
Eaton Corporation (ETN) 2.85% to 2.25% 80.80
International Business Machines (IBM) 3.07% to 2.68% 140.16
Brookfield Property REIT (BPR) 2.46% to 2.08% 19.91
Manulife Financial Corporation (MFC) 3.04% to 2.69% 17.07
Main Street Capital (MAIN) 2.40% to 2.04% 38.97
Cisco Systems (CSCO) 3.28% to 3.04% 53.43

In Q1, I added a few shares of three holdings:

Holding Increase in Size Buy Price
PepsiCo (PEP) 2.71% to 3.06% 113.03
Johnson & Johnson (JNJ) 3.03% to 3.24% 137.27
Pfizer (PFE) 2.72% to 3.07% 41.69

I traded Exxon Mobil for Occidental Petroleum

For the past several months, I've considered replacing Exxon (XOM) with Occidental (OXY). I've looked at OXY from time to time, but this is my first purchase. For the past year I've followed Kirk Spano, and for the past few weeks I have done some writing for his Margin of Safety Investing. Much of Kirk's market analysis has been with oil-related companies. Kirk believes we are in the beginning stages of the "end of the oil age," and he sees oil stocks primarily as trading vehicles. You can read his thesis in a (non-paywalled) March 1, 2019, article, "The Dirty Dozen Oil Stocks for 2019."

Kirk sees OXY as one of the best-managed energy companies, and he likes its position in the Permian Basin. From the "Dirty Dozen" article:

"Occidental Petroleum is among the top producers in the Permian and in America. They pay a strong dividend and are buying back shares while reducing debt for a very solid shareholder yield. I see Occidental as a better dividend play than Exxon or Chevron as the company has better growth prospects and does not have the legacy issues or potential for stranded assets of the majors. Occidental's carbon capture business is a potential very big deal and" underpriced catalyst. See recent Occidental Petroleum presentations."

Exxon's credit is rated AA+ by Standard & Poor's, and for that reason alone, I was slow to sell XOM. Occidental's S&P credit rating is A. Exxon has raised the dividend for 36 consecutive years, and Occidental has raised the dividend for 15 consecutive years. Simply Safe Dividends gives XOM a "very safe" dividend safety score of 85 (out of 100), and OXY has a "safe" dividend safety score of 61. I think both dividends are relatively safe. Exxon's current yield is 4.06%, and Occidental's current yield is 4.61%.

I'll provide a more detailed study of OXY in another article. I'm impressed with the company's "low carbon emissions" environmental profile and its commitment to growing the dividend. For a good introduction to OXY, see its investor presentation PDF from the March 25, 2019, Scotia Howard Weil Energy Conference.

Occidental appears to be more proactive than Exxon about environmental concerns, but Exxon has the financial strength to re-shape itself over time by moving more into renewable, sustainable energy. Due to their deep pockets, it also seems likely that Exxon and Chevron (CVX) will continue to be targets for lawsuits from environmental groups and/or judicatories.

For background, read:

"The Energy 202: Why New York's new climate lawsuit against ExxonMobil is different," an October 25, 2018 PowerPost article by by Dino Grandoni.

"Pay attention to the growing wave of climate change lawsuits," a March 26, 2019 Vox article by Umair Irfan.

"Understanding the #ExxonKnew controversy," a September 6, 2018 rebuttal available on Exxon's website.

Norway may provide a window into the future politics of oil. Oil revenue is crucial for Norway, while their European neighbors are moving away from fossil fuels. Norway's Government Pension Fund was originally known as the Oil Fund. One place to begin is a November 22, 2017, article by Tom Sanzillo article in the Institute for Energy Economics and Financial Analysis, "Norway Shows What to Do With Fading Oil and Gas Holdings."

While weighing the pros and cons of this trade, I decided to check with Pavel Molchanov, the Raymond James energy analyst. Molchanov rates XOM an "Underperform" while rating OXY a "Strong Buy."

OXY FAST Graph

(OXY Graph from F.A.S.T. Graphs)

So, I sold XOM at $80.64 and bought OXY at $66.09. My cost basis for the Exxon shares was $79.92.

35 individual equities

The portfolio's 35 individual equities are listed in the table below. S&P is the Standard & Poor's credit rating, where available. CCC is the number of consecutive years of dividend/distribution increases, as maintained by Justin Law and the DRiP Investing Resource Center. %Port is each holding's percentage of the portfolio's market value as of 3/29/19. Price is the 3/29/19 closing price. Div is the annual dividend per share (or distribution per unit). Yld is the dividend yield per share as of the close on 3/29/19. 4-Yr is the 4-year average yield for each holding, where available, from SA's Dividend tab in the Portfolio feature. DGR is the 5-year dividend growth rate. TDR is the total dividend return (Yld+DGR), aka the Chowder Rule Number. %Inc is the percentage of the portfolio's income contributed by each holding. SSD is the Dividend Safety number assigned to each holding (where available) by Simply Safe Dividends. Target is my target price for adding more shares.

Company S&P CCC %Port Price Div Yld 4-Yr DGR TDR %Inc SSD Target
Johnson & Johnson (JNJ) AAA 56 3.30% 139.79 3.60 2.58% 2.8% 6.7% 9.3 1.88% 99 123.33
PepsiCo (PEP) A+ 46 3.21% 122.55 3.71 3.03% 3.0% 8.5% 11.5 2.15% 94 109.09
Pfizer (PFE) AA 9 3.12% 42.47 1.44 3.39% 3.7% 7.8% 11.2 2.34% 82 38.30
Procter & Gamble (PG) AA- 62 3.09% 104.05 2.87 2.76% 3.5% 4.4% 7.2 1.88% 98 97.30
3M (MMM) AA- 60 3.09% 207.78 5.76 2.77% 2.6% 14.8% 17.6 1.89% 86 189.47
Cisco (CSCO) AA- 9 3.07% 53.99 1.40 2.59% 3.2% 25.7% 28.3 1.76% 92 45.33
BlackRock (BLK) AA- 10 2.99% 427.37 13.20 3.09% 2.5% 10.8% 13.9 2.04% 95 377.78
Royal Bank of Canada (RY) AA- 8 2.97% 75.55 3.06 4.05% 4.3% 8.8% 12.8 2.66% 86 68.00
Texas Instruments (TXN) A+ 15 2.97% 106.07 3.08 2.90% 2.5% 24.5% 27.4 1.90% 90 94.44
United Parcel Service (UPS) A+ 10 2.93% 111.74 3.84 3.44% 3.1% 7.8% 11.2 2.25% 72 100.00
Occidental Petroleum Corp. (OXY) A 15 2.89% 66.20 3.12 4.71% 4.5% 5.4% 10.1 3.01% 61 61.82
Illinois Tool Works (ITW) A+ 44 2.88% 143.53 4.00 2.79% 2.2% 13.3% 16.1 1.78% 86 130.77
Royal Dutch Shell (RDS.B) AA- 0 2.85% 63.95 3.76 5.88% 7.7% 0% 5.9 3.70% 61 58.62
The Toronto-Dominion Bank (TD) AA- 8 2.85% 54.33 2.22 4.08% 3.9% 10.2% 14.3 2.57% 86 50.75
Brookfield Renewable Partners (BEP) BBB+ 10 2.79% 31.95 2.06 6.45% 6.8% 6.4% 12.8 3.98% 53 25.00
Cummins (CMI) A+ 13 2.76% 157.87 4.56 2.89% 3.0% 18.5% 21.4 1.76% 93 147.83
Bank of Nova Scotia (BNS) A+ 8 2.75% 53.28 2.61 4.90% 4.8% 6.8% 11.7 2.97%65.22 75 51.52
AT&T (T) BBB 35 2.74% 31.36 2.04 6.51% 5.8% 2.2% 8.7 3.94% 55 25.00
W.P. Carey (WPC) BBB 22 2.74% 78.33 4.13 5.27% 7.0% 11.4% 16.7 3.19% 62 65.22
International Business Machines (IBM) A 23 2.71% 141.10 6.28 4.45% 4.0% 10.5% 15.0 2.67% 65 128.00
Simon Property Group (SPG) A 10 2.71% 182.21 8.20 4.50% 4.1% 13.3% 17.8 2.69% 72 160.00
Manulife Financial Corp. (MFC) A 5 2.66% 16.91 0.75 4.43% 3.8% 11.1% 15.5 2.61% 49 16.00
BCE Inc. (BCE) BBB+ 10 2.56% 44.39 2.376 5.35% 5.6% 5.9% 11.3 3.03% 42 37.50
Enterprise Products Partners (EPD) BBB+ 22 2.54% 29.10 1.74 5.98% 6.5% 5.7% 11.7 3.36% 81 24.56
Enbridge Inc. (ENB) BBB+ 23 2.53% 36.26 2.21 6.10% 4.9% 10.5% 16.6 3.42% 54 31.11
Brookfield Infrastructure Partners (BIP) BBB+ 12 2.49% 41.87 2.01 4.80% 5.1% 11.7% 16.5 2.64% 65 37.50
Qualcomm (QCOM) A- 16 2.34% 57.03 2.48 4.35% 4.0% 18.3% 22.6 2.25% 50 50.00
AbbVie (ABBV) A- 7 2.32% 80.59 4.28 5.31% 3.7% 15.5% 20.8 2.73% 65 75.00
Eaton Corp. (ETN) A- 9 2.25% 80.56 2.84 3.53% 3.4% 9.6% 13.1 1.76% 87 75.00
Ventas Inc. (VTR) BBB+ 9 2.23% 63.81 3.17 4.97% 5.2% 7.6% 12.6 2.45% 65 56.60
PPL Corp. (PPL) A- 18 2.22% 31.74 1.65 5.20% 5.1% 3.1% 8.3 2.55% 74 3000
Brookfield Property REIT (BPR) BBB- 0 2.15% 20.49 1.32 6.44% 3.8% new new 3.06% NR 17.14
Apple Hospitality REIT (APLE) NR 0 1.99% 16.30 1.20 7.36% 6.4% 0% 7.4 3.24% 42 15.00
Main Street Capital (MAIN) BBB 8 1.95% 37.20 2.40 6.45% 7.1% 5.5% 12.0 2.78% 65 34.29
Tanger Factory Outlet Centers (SKT) BBB 26 1.83% 20.98 1.42 6.77% 4.9% 10.3% 17.1 2.74% 66 19.76
35 equities 93.45% 4.43% 91.59%

4 Closed-End Funds

Fund %Port Price Div Yld %Inc
Adams Diversified Equity Fund (ADX) 0.94% 14.44 2.00 13.85% 2.88%
India Fund (IFN) 0.75% 21.37 2.36 11.04% 1.82%
Royce Micro-Cap Trust (RMT) 0.76% 8.33 0.72 8.64% 1.45%
Royce Value Trust (RVT) 0.82% 13.76 1.16 8.43% 1.52%
4 CEFs 3.26% 10.64% 7.68%

The cash position on 3/29/19 was 3.28%, which provides 0.73% of the portfolio's income.

Conclusion

From a trading perspective, Q1 was relatively quiet. The big event was replacing Exxon with Occidental. The purchase of additional shares of JNJ, PEP and PFE continue my plan to make occasional additions to the higher-quality stocks. The trims were done to take advantage of some strong price appreciation after the December lows and to begin to build some cash for future dips. I use Custom Stock Alerts to notify me when a stock's price nears the target buy price.

I'm not advocating the purchase or sale of any security. These quarterly updates 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. If you'd like to receive notices of future article posts, hit the "Follow" button.

Disclosure: I am/we are long JNJ, PFE, PG, MMM, BLK, CSCO, RY, TD, PEP, ITW, IBM, TXN, CMI, UPS, BNS, RDS.B, QCOM, OXY, 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.