March To Freedom Fund 1st Quarter Update: 12%+ Portfolio Growth And 31% Increase In Dividends

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

The March to Freedom Fund is higher by more than 12% through the first three months of 2019.

Even more impressive to us is the growth in dividend income year-over-year.

We were able to add to nine total companies in the first quarter.

Now that the first quarter of 2019 has ended, it is time to review how the March to Freedom Fund performed during this time. The March to Freedom Fund will provide income for my wife and I in retirement, which is 20 years or so away. The goal is to live off the dividends from the portfolio in retirement.

Through the end of the first quarter, our portfolio gained 12.4%. As always, this includes dividends received, but not contributions that we have made. By comparison, the S&P 500 had a total return of 13.7% according to Morningstar. Our primary goal is to increase dividend income, but it is nice to see that our portfolio has returned double digits in just three months.

Let's look at how some individual names performed in our portfolio in the first quarter.

I like to look at which stocks were our best and worst performers. I was surprised by some of the names in our top performers group this quarter.

The top performing position for us was Philip Morris (PM). The stock returned almost 34% through the end of the first quarter. This was striking, because the stock lost nearly 37% in 2018, making it our worst performer last year. It’s almost as if sentiment regarding Philip Morris changed as soon as the calendar turned to 2019.

Much of this return could be attributed to that the company’s fourth quarter and full year results weren’t as bad as the market had been expecting. Revenues declined 9.5% year-over-year, but this was less than analysts had predicted. Adjusting for a stronger U.S. dollar, revenues were down just 4%. Earnings-per-share declined 5.3% from Q4 2017 to $1.25, but this was $0.09 above consensus estimates. Adjusting for changes in inventory levels, unit volumes were down less than 1% year-over-year. Adding it all up, “not that bad” results have been enough to send the stock surging so far in 2019. I consider Philip Morris to be a half position and would look to add at a lower price.

Like Philip Morris, General Mills (GIS) was one of our biggest laggards last year. The stock declined more than 34% in 2018 as it was unable to gain any traction with investors. So far this year, however, is a different story as the stock has increased 33.3%.

Again, better quarterly results have added fuel to this gain. Released on 3/20/219, third quarter earnings-per-share improved 5.1% to $0.83 and topped estimates by $0.14. Revenue grew 8.1% to $4.2 billion, missing estimates by less than $7 million. Sales growth was due in large part to the company’s purchase of Blue Buffalo Pet Products. Adjusted gross margins were higher by 1.7% to 34.2%. We own shares of General Mills through shareowneronline.com. We make a small monthly purchase each month regardless of price.

The performance of Philip Morris and General Mills are a reminder that just because a certain stock has performed poorly over a given time period doesn’t mean that they cannot rebound. Sometimes sentiment from the market becomes too negative (or, in some cases, too positive) and the stock can surprise you.

Our third best performing position in the first quarter was Cisco Systems (CSCO). Cisco finished just outside our top five best performers last year as the stock was higher by 13% in 2018. The stock has followed that up by returning almost 28% this year.

Cisco released earnings results for the second quarter of fiscal 2019 on 2/13/2019 that has helped propel the stock higher in 2019. Adjusting for a divestiture, earnings-per-share grew 16% to $0.73 from the same time during the previous year. Revenue increased 7% to $12.5 billion. Cisco saw growth in almost every major product category. Cisco is just over the half position mark. The return over the last 15 months makes the stock seem expensive to me, so we will wait for a pullback before adding more of the tech giant.

I wrote about Cisco for Sure Dividend as I think it is one of the best mega cap stocks in the market.

MasterCard (MA) has been one of the top performers in our portfolio in the three years that I have documented our investments here on Seeking Alpha. After returning 47% and 25% in 2017 and 2018, respectively, MasterCard is up 27% in 2019.

The company released fourth quarter results on 1/31/2019. MasterCard earned $1.55 per share during the fourth quarter, 36% above the previous fourth quarter and $0.03 above expectations. Gross dollar volumes improved 14% to $1.6 trillion while dollar volumes in the U.S. were up 10%. Cross border volumes were up 17%.

MasterCard has grown to be our sixth largest position. Even so, I am looking to add more of the stock as I discussed in this article. Growth of the electronic payments is expected to increase by at least a low double-digit rate worldwide over the next few years. This gives MasterCard, along with another March to Freedom Fund holding Visa (V), plenty of growth potential as these two companies combine to make up the bulk of electronic payments.

Taking the last spot in our top five performers is V.F. Corp (VFC). V.F. Corp has returned more than 24% through the end of the first quarter after losing nearly 4% in 2018.

The company expects to see a 21% increase in earnings-per-share for the current fiscal year, but that’s only part of the reason the stock has seen such a gain in just three months. V.F. Corp, as I discussed here, is spinning off its underperforming jeans businesses into a standalone entity. The company’s Lee and Wrangler brands continue to see declining revenues. This will allow the company to focus on its top performing brands Vans, The North Face and Timberland.

V.F. Corp is one of our smallest positions, but I am waiting to add until the company offers information regarding its dividend. With 46 years of dividend growth, I highly doubt V.F. Corp will cut its dividend, but I would like some information on how it will be positioned post spin off.

At the conclusion of the first quarter, there were just two companies in our portfolio that showed a negative return.

CVS Health Corp (CVS) has dropped 17% in 2019, following a 9.6% decline in 2018. Released on 2/20/2019, the company’s financial results were good. Earnings-per-share for the quarter grew 11.5% to $2.14. This was $0.05 above the market’s expectations. Revenue grew 12.5% to $54.4 billion, though this was $190 million below estimates. For the year, earnings-per-share grew almost 20% while revenue increased more than 5%. CVS saw prescription volumes improve 9% and the company’s acquisition of Aetna added 22 million members to its potential customer pool.

The reason that CVS has declined so much is that the company offered relatively weak guidance. CVS expects earnings-per-share in a range of $6.68 to $6.88, which was well below analysts’ expectations of $7.35. At the midpoint for estimates, this is a 4.2% decline from earnings-per-share for 2018. This drop in profitability is mostly due to integration costs associated with the Aetna acquisition.

While I find that CVS offers a great deal of potential return over the next five years, we have enough of the stock that I am not purchasing more at the moment.

The only other stock to show a decline in value over the first three months of the 2019 was AbbVie (ABBV). After losing 4.7% in 2018, AbbVie is down nearly 12% this year.

AbbVie’s fourth quarter results showed a 28% increase in earnings-per-share and a 7.4% improvement in revenue. It wasn’t past results that has spooked investors, but the company’s guidance, specifically on Humira. Humira, which remains the world’s top selling drug, grew just 0.5% to $4.9 billion in the quarter. An increase of biosimilar competition is expected to reduce Humira’s internationally sales by $2 billion or 30% in 2019. U.S. sales for the drug are expected to increase just 7%.

To illustrate the importance of this one drug to company, the AbbVie’s second best-selling drug Imbruvica generated $1 billion in the quarter. For comparison purposes, this was just 20% of Humira’s revenue.

AbbVie was one of our largest positons at the end of 2018, but the recent decline has dropped it to the middle of the pack. AbbVie was been one of our best performing positions since the company was spun off from its parent company Abbott Laboratories (ABT) in 2013. Humira has been the primary reason for this. I am reluctant to part ways with a stock because of short term issue. The performance of Philip Morris and General Mills in the first quarter is evidence that companies can produce results that the market finds attractive. I am keeping an eye on how AbbVie responds to the lack of growth from its top selling product.

Recent Purchases

If you’re not familiar with how I value stocks, I take the current price and compare it to fair values and price targets from a number of different sources to see how over or undervalued shares are compared to these estimates. I also use the stock’s expected earnings-per-share for the current year to determine a current price-to-earnings, or P/E, ratio. I then compare this to the stock’s five-year average P/E from F.A.S.T. Graphs. I then take the average of these values to determine a price target.

For a company with more than 10 years of dividend growth, I am willing to pay 5% above what I consider fair value. I am willing to do this because these types of companies have managed to raise their dividends through a variety of different economic conditions. This type of strength is what I want in our portfolio in the event of a recession.

Prior to making a purchase, I also consult Value Line for their safety and financial strength ratings. I am looking for at least a 2 for safety and a B++ for financial strength. These ratings are a sign that the company’s financials are solid.

We followed up a very active January, where we made five purchases, by making two purchases in both February and March.

We added to our Dominion Energy position on February 7th at $72.01.

I stated in our 2018 portfolio review that I wanted to increase our exposure to the utility sector. Companies in this sector tend to hold up better during recessions, because customers are likely to prioritize paying their energy bills over discretionary spending.

Dominion Energy is an electric utility that operates as a holding company for Virginia Power and North Carolina Power. The utility has more than six million customers across eight states. Dominion Energy also operates its Cove Point LNG facility in Maryland. The company has increased its dividend for 16 consecutive years.

Value Line awards Dominion Energy a 2 for safety and an B++ for financial strength. Both ratings qualify the stock for purchase.

Using our purchase price and the company’s midpoint for earnings-per-share guidance for 2019 of $4.23, shares of Dominion Energy were trading with a P/E ratio of 17. This is a 17.5% discount to the stock’s five-year average P/E of 20.

CFRA had a one-year price target of $77, putting shares at 6.9% undervalued at our purchase price. CFRA’s fair value was $72.24, offering potential upside of 0.3%.

Morningstar listed fair value at $84, a potential gain of 16.7% to what we paid for shares.

Value Engine also has a one-year price target of $73.60 for Dominion Energy, meaning the stock was trading at a 2.2% discount to this estimate at the time of purchase. Their fair value was $74.84, showing shares to be 3.9% undervalued at the time of purchase.

Average these values out and I found fair value for Dominion Energy to be $78 at the time of purchase. We were able to acquire more shares of Dominion Energy at a 7.9% discount to this estimate.

Dominion Energy offered a yield of 5.1% at the time of purchase, much higher than the average yield of 1.9% for the S&P 500.

The stock is now our 9thlargest position. I consider the position to be nearly three-quarters of a full position. I am not in a hurry to add more Dominion Energy since there are other areas I would like to add to first. However, I would consider buying additional shares if the stock were to pullback.

Next, we purchased shares of The Walt Disney Company (DIS) at a price of $113.72 on February 20th.

While the decline in subscriber base has hampered the company over the past few years. The decline in viewers for ESPN appears to have slowed, which should allow investors to focus on what the company does well, namely movies and theme parks. Disney has increased its dividend for the past nine years. Because the company has less than a decade of dividend growth, I require that shares trade at least at fair value prior to purchasing.

Value Line awards Disney a 1 for safety and an A++ for financial strength, the highest ratings a company can receive.

Using the company’s expected earnings-per-share for 2019 of $7.58, shares of Disney were trading with a P/E ratio of 15 at the time of our purchase. This is a 21.3% discount to the stock’s five-year average P/E of 18.2.

CFRA had a one-year price target of $130, putting shares of Disney at 14.3% undervalued at our purchase price. CFRA’s fair value was $111.19, 2.2% below our purchase price.

Morningstar listed fair value at $130 again, a potential gain 14.3% from where we purchased our shares.

Value Engine has a one-year price target of $113.82, very close to our purchase price. Their fair value was $112.51, 1.1% below our purchase price.

Averaged these values out and I found fair value for Disney to be $123. We acquired shares at a 7.8% discount to my fair value estimate.

Shares of Disney yield 1.6% at time of purchase. The stock is the 19th largest position in our portfolio.

Disney is just over a half position for us, so I may look to buy more of the company as the year progresses.

Our next purchase occurred on March 8th, when we added to our Target Corporation (TGT) position at a price of $75.36.

Target has been in existence since the early 1900s and is one of the largest discount stores in the country. The company’s stores offer consumers clothes, groceries, electronics and every day household items. Target has increased its dividend for the past 51 years, making the company a Dividend King.

Value Line awards Target 3 for safety and an A for financial strength. The financial strength rating qualifies the stock for purchase, but the safety rating is one notch below what I am looking for. The strong financial strength rating offsets the safety award in my view.

Despite Target’s 5+ decades of dividend growth, I want to buy shares at least at fair value when either the safety or financial strength rating isn’t at the purchase criteria.

Target expects to earn $5.90 in 2019. Based off of our purchase price, shares of the company were trading with a P/E ratio of 12.8. This is a 22.1% discount to the stock’s five-year average P/E of 15.6.

CFRA had a one-year price target of $78, putting shares at 3.5% undervalued against our purchase price. CFRA’s fair value was $87.5, offering potential upside of 16.2% from where we added to Target.

Morningstar listed fair value at $68, meaning we paid a 9.8% premium to their estimate.

Value Engine has a one-year price target of $77.64 and their fair value was $78.01, meaning shares were 3% and 3.5% undervalued, respectively, at time of purchase.

Average these values out and I found fair value for Target to be $80. We were able to add to our position at a 7.8% discount to our fair value.

Target’s stock yielded 3.4% at the time of purchase and is the 10 th largest position in the March to Freedom Fund. I consider the stock to be three-quarters of a full position. I will likely look to build up other positions before adding to Target again.

Our final purchase of the first quarter was MacDonald’s Corporation (MCD). McDonald’s is a new position for us. The company is the largest publicly-traded restaurant company in the world. Thanks to All-Day Breakfast and menu innovation, McDonald’s has seen same store sales increase at a very solid pace. In the fourth quarter, same-store-sales grew 4.4%, higher than the 4% that analysts had expected. While U.S. sales were just 2.3%, high growth regions improved 4.8%.

McDonald’s has long been a stock that I’ve wanted to add to our portfolio as the company is one of the best, if not best, in its industry. The company has also increased its dividend for the past 43 years, meaning investors have received a raise through multiple economic cycles.

We added McDonald’s to the March to Freedom Fund on March 29 th at the price of $190.12.

Value Line awards McDonald’s a 1 for safety and an A++ for financial strength, the highest ratings a company can receive.

Using the company’s expected earnings-per-share for 2019 of $8.23, shares of McDonald’s were trading with a P/E ratio of 23.1 at the time of our purchase. This is a 6.1% premium to the stock’s five-year average P/E of 21.7.

CFRA had a one-year price target of $200, giving our purchase price 5.2% upside potential. CFRA’s fair value was $142.93, 24.8% below our purchase price.

Morningstar listed fair value at $195, meaning share were 2.6% undervalued at the time of purchase.

Value Engine had a one-year price target of $202.78, giving shares a potential gain of 6.7%. Their fair value was $166.56, 12.4% below our purchase price.

Averaged these values out and I found fair value for McDonald’s to be $181. We acquired shares at a 4.8% premium to my fair value estimate. With more than four decades of dividend growth, I am willing to pay 5% over fair value to acquire shares of McDonald’s.

McDonald’s our smallest position and I will be looking to add more as the year continues. The stock yields 2.4% currently.

Current Positions

After this quarter’s activity, our portfolio now consists of the following 41 companies:

3M (MMM), Abbott Laboratories, AbbVie, Aflac (AFL), Altria (MO), Apple (OTC:APPL), AT&T (T), Boeing (BA), Chevron (CVX), Cisco Systems, Coca-Cola (KO), Costco (COST), Cummins (CMI), CVS Health Corporation, The Walt-Disney Company, Dollar General (DG), Dominion Energy, Exxon Mobil (XOM), General Mills, Honeywell International (HON), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Lockheed Martin (LMT), MasterCard, McCormick & Company (MKC), McDonald’s Corporation, Microsoft (MSFT), Nike (NKE), PepsiCo (PEP), Pfizer (PFE), Philip Morris International, Procter & Gamble (PG), Qualcomm (QCOM), Realty Income (O), Southern Company (SO), Starbucks (SBUX), Stryker (SYK), Target, Ventas (VTR), Verizon (VZ), V. F. Corp and Visa.

Dividend Review

While seeing our portfolio grow and acquiring shares of what I consider to be undervalued companies is also a positive, increasing our dividend income month-over-month and year-over-year is the primary focus of our portfolio. The first three months of the year showed impressive gains.

Month / Year

Month-Over-Month Increase

January 2014

233.9%

January 2015

190.5%

January 2016

134.2%

January 2017

84.8%

January 2018

36.7%

Our dividends received compared to January 2014, the first year I really started tracking our portfolio, have increased more than 230%.

While one might be drawn to the comparisons from several years ago because they are the largest, I am surprised by the increase in income from January 2018 to January 2019. In one year, we saw our January income grow almost 37%. Some of this gain income is due to purchases we made last year, such as Altria and PepsiCo, but much of this increase is attributed to sizeable dividend increases from companies like Altria, Philip Morris and others. It also helps that we were automatically reinvesting dividends up until the end of last year.

Companies that paid dividends in the month of January include: Nike, PepsiCo, Philip Morris, Altria, Disney, Ventas, Realty Income, McCormick & Company, Cisco, JPMorgan, Dollar General and Stryker.

Month / Year

Month-Over-Month Increase

Year to Date

Year-to-Date Increase

February 2014

302.7%

2014

263.5%

February 2015

192.3%

2015

191.3%

February 2016

126.1%

2016

130.2%

February 2017

68.5%

2017

76.6%

February 2018

23%

2018

29.8%

February was another solid month for dividend income. We received 23% more income this past February than we did in February of 2018. That is in just one year. We made only two purchases last year that would have impacted this month’s dividend income (AT&T and Apple), so much of this gain again comes from reinvested dividends and dividend growth.

Companies that paid dividends in the month of February include: AT&T, Verizon, General Mills, CVS Health Corporation, MasterCard, Apple, Realty Income, AbbVie, Procter& Gamble and Abbott Laboratories.

Month / Year

Month-Over-Month Increase

Year to Date

Year-to-Date Increase

March 2014

601.1%

2014

358.8%

March 2015

323.8%

2015

236.7%

March 2016

168.4%

2016

145.3%

March 2017

73.4%

2017

75.2%

March 2018

32.9%

2018

31.1%

While January and February showed growth month-over-month and year-over-year, March is much more impressive. Dividend income received last month was more than 600% above what was paid to us in 2014. Part of this is because only seven companies paid us a dividend in March of 2014. This past March, 20 companies paid us dividends. That just shows how adding to existing holdings and initiating new positions can, in a few short years, produce high levels of growth in dividend income.

Year-to-date increases were also very strong during the month of March. In fact, we have now received more income through the end of the first quarter of 2019 than we did in all of 2014. I expect that we will top all of 2015’s dividend income by the end of the second quarter of this year.

I don’t point out our increase in dividend income to brag or boast, but to show readers that creating an income generating portfolio isn’t that hard if you are willing to work for it. If you take some time to research and identify companies that you want to own, you can create a portfolio that produces the same type of results. I’ve found that dividend growth investing takes time and patience, but the reward is well worth it.

Let others chase the high growth names that seem to dominate financial programs and newspaper headlines and buy shares of companies that have decades of dividend growth, like Johnson & Johnson, 3M and Altria. These companies have seen multiple economic cycle and have managed to increase their dividends every year. Dividend increases when business is booming is great, but higher payments when the economy is tanking is even better. That shows strength and strength is what I want to own when retirement finally arrives.

Our annualized yield for the stock portion of our portfolio was 2.5%. If you exclude our 403b programs through our employer, which are only allowed to hold mutual funds, our yield increases to 2.9%. Either way, our yield is much higher than the average yield of the S&P 500.

Companies that paid dividends during the month of March include: Pfizer, Aflac, Boeing, Costco, Southern Company, Visa, Cummins, Microsoft, Exxon Mobil, Target, Honeywell, Chevron, 3M, Johnson & Johnson, Realty Income, V.F. Corp, Dominion Energy, Qualcomm, Lockheed Martin and PepsiCo

Conclusion

Our portfolio may trail the S&P 500’s return through the end of March, but we are still up double digits. More importantly, our dividend income is growing at a very high rate and our yield is more robust than the index average.

We were able to make nine total purchases in the first quarter of 2019. We were able to add to Dominion Energy, one of my favorite utility companies, and Disney, an entertainment powerhouse, in February. In March, we added to Dividend King Target and initiated a position in McDonald’s, a company I’ve wanted to own for quite some time.

One last note, by the time you read this article, there is a good chance that my wife and I will have welcomed a second little Dividend Bro into the world. I can’t wait to show him important things in life, like the importance of family and friends, tailgating at his dad’s alma mater, the University of Michigan, the double switch in baseball and why dividend growth investing is the best way to secure a source of revenue for retirement.

How has your portfolio performed so far in 2019? What have you bought or sold this year? Please 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, pfe, mcd. 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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