Option Generator's Monthly Portfolio Update: A New Buy And Hold Position

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Includes: AAPL, ABBV, AVGO, CMCSA, CSCO, ELIAF, EQIX, JNJ, MLXSF, MMM, MO, MSFT, PG, PM, S, SBUX, SPG, SPY, UNH, WDPSF, WJPLF
by: Option Generator
Summary

We've collected our first dividends of the year, with much more to appear in May.

Chasing new long-term promising investment cases, I've made a first investment in Watkin Jones Plc, which I discussed in my first Top Idea here on Seeking Alpha.

Fresh option premiums will be re-invested in our buy and hold positions, mainly in Watkin Jones to secure future dividend income streams used for living expenses.

Besides assessing our real-life portfolio, I will also be looking at the fictive American buy and hold portfolio.

Introduction

Welcome to my monthly portfolio review, which highlights my parents' (and partially my own) real-life buy and hold portfolio made of small caps that pay out steadily growing stocks. Though, that's just one part of my overall investment philosophy. I love buying dividend growth stocks, especially when they're trading at depressed multiples whereby I always prefer a considerable portion of safety margin. The goal of these monthly reviews is to share updates I've made to the portfolio and also what I'm doing with the premiums from selling covered calls, which is another part of my 'business'. Year to date, including the option premiums and dividends received, our total portfolio is up 14.86%, in line with my expectations. I've made an initial investment (worth approximately €24,000) in Watkin Jones (OTCPK:WJPLF).

Important to note, before I'll get right into the numbers, is that I stopped tracking a benchmark as most of my real-life holdings don't match the companies that an index like the S&P 500 (SPY) consists of. Nevertheless, in the long run, I'll certainly take a look at how my value investing approach has fared and how my long-term performance stacked up against passively managed ETFs on a worldwide scale. At this stage of the economic cycle, I couldn't care less if I was lagging the indices as the most important element to me is to protect my principles and option premiums at all costs (number one rule of investing). In this monthly series, I'll share with you how I detect my long-term hidden gems and what I think about their current valuation as it relates to the stretched multiples we're seeing in the blue chip space.

A New Buy And Hold Position

Portfolio Review

Last month, our total portfolio value hit a new record of €784,036.78 while we collected €17,543 in option premiums and our very first dividends of the year (€186). Future option premiums will be re-invested in our buy and hold positions to secure future dividend income streams used for living expenses. Once we've crossed the line of earning €21,000 in dividends, excess dividend streams will be re-invested automatically to play out the virtue of compound interest. I expect that situation to occur in 2021. For the time being, we will enjoy our lives and collect the option premiums of which 90% is utilized to opportunistically load up on existing or new buy and hold positions.

Year to date, including the option premiums and dividends received, our total portfolio is up 15.13%. The market value of our positions is now €754,589.13. Our buy and hold positions are now worth €383,589.13, excluding all the dividends received along the way. That's up 1.52% compared to March of last year when the portfolio was fully established.

Right now, barring unforeseen developments, our annual projected dividend income totals to €8,576, representing a net yield on cost of 2.23%. For sure, that yield doesn't seem that spectacular compared to the returns that other contributors harvest here on Seeking Alpha, but keep in mind that we, unfortunately, have a devastating withholding tax of 30% in Belgium.

(Source: Author's work)

Watkin Jones Joined The Club

Just a few days before the end of April, I added a new very promising investment to our long-term value-oriented portfolio: Watkin Jones Plc, a British development company specializing in student accommodation and benefiting from the rapidly-emerging Build to Rent market. After assessing its risk/reward ratio and the type of the business, I mulled over going long, and I'm quite determined to purchase even more shares. My intention is to at least make this British building company second largest holding of our portfolio.

(Source: Author's work)

Furthermore, I discussed Watkin Jones in my first Top Idea here on Seeking Alpha. You can read it here.

(Source: Seeking Alpha)

Notable Movers And News

(Source: Author's work)

Business as usual in April, with VGP continuing its rally after CEO Jan van Geet expressed his optimistic view of this year. Furthermore, on the first of April, the pan-European logistic real estate developer announced the fifth closing with Allianz worth €203 million, allowing it to recycle a net €130 million. Just like last year, I will be attending the annual general shareholders meeting of VGP, and I've arranged an interview with its CEO to dig deeper into the company's fundamentals and the thriving logistic real estate market.

A notable winner so far this year is Melexis (OTC:MLXSF), a global supplier of micro-electronic semiconductor solutions despite ongoing weakness in the automotive industry and a pretty soft outlook for the first half of the year.

One of the most forgotten stocks housed in our portfolio, Moury Construct, announced it's going to pay out a special dividend equal to its ordinary dividend of €5.2 per share to celebrate its 100th anniversary. As a result, our savings account will be funded by another €637 in June and €637 in September. A very nice surprise that attracted other investors as well since shares are hovering near all-time highs. I consider this stock to be a perfect bond proxy to allocate some money to when I'm in a defensive mode. For this year, a total FCF of 4.4 million euros is certainly reasonable and implies a yield of over 7% without factoring the large cash portion. Shares don't move that much, which is very fine by me.

As you'll notice below, I'm a big fan of companies operating in the real estate space (Moury Construct, VGP, WDP (OTC:WDPSF), Watkin Jones) courtesy of their predictable cash flows and smart management. Additionally, Moury Construct and Watkin Jones (pure building constructors) have a fat net cash position and have proven to keep up very well during times of economic uncertainty. So, I'm not in the least concerned about this highly concentrated but rather defensive portfolio.

(Source: Author's work)

Our First Dividends Of The Year

We clipped our first coupon of Melexis (€186) last month, and there's definitely more to come in May as, for instance, VGP and WDP will pay out a tasty €1,900 and €880, respectively.

(Source: Author's work)

Below, you'll find a snapshot of today's dividend yields. More detailed information about their fundamentals can be found in my quarterly update.

Name Current Gross Dividend Yield
Ter Beke 2.93%
Moury Construct 6.71%
Sioen Industries 2.31%
Kinepolis 1.75%
VGP 2.84%
Warehouses De Pauw 3.56%
Melexis 3.02%
Watkin Jones Plc 3.16%
TINC 4.11%
Elia (OTC:ELIAF) 2.76%

(Source: Author's work)

Fictive American Buy And Hold Portfolio

15 SWANs You Should Own For The Long Run

Besides elaborating on my real-life buy and hold portfolio, I also wanted to come up with an American version consisting of 15 decent blue-chip stocks that have pampered their shareholders over the past decade(s). Living off dividends is a dream shared by many investors, but few are actually capable of achieving that goal. That's why I put this list together: to provide you with the best buy and hold ideas, helping you sleep well at night while outsized monthly payouts are coming your way.

I'm intended to follow up this selection, track their dividends and earnings, and point out why these companies are supposed to generate market-crushing returns over the ultra-long run. I took March 25, 2019, as starting point to set up this portfolio.

So far, this defensive portfolio has unperformed the S&P 500 by 2.07%, which can be easily explained by weak first-quarter results of 3M (NYSE:MMM), mixed results for Altria (NYSE:MO), and the broad sell-off in healthcare industry that dragged UnitedHealth (NYSE:UNH) down as well. Fortunately, Comcast (NASDAQ:CMCSA) that came through its earnings report very well and Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) that smashed analyst expectations have made up for some of these setbacks. Unfortunately, Trump's tariff threat has wiped out most of these gains.

(Source: Author's work)

The ability of literally printing cash, allowing these companies to pay out secured dividends and even to repurchase own stock, is the main reason why you should own them regardless of how fickle investor sentiment is. Backing out the two REITs, namely Simon Property (NYSE:SPG) and Equinix (NASDAQ:EQIX), they all have robust FCFs that keep up well during economic turmoil and manageable debt burdens (or in Cisco's (NASDAQ:CSCO), Apple's, and Microsoft's case, cash piles), which are obviously vital factors for sustainable value creation and market-crushing returns. Adding to those two factors, they also have a long streak of superior Returns On Invested Capital, underpinning management's competence of spending cash flows wisely.

Name FCF Margin Leverage (Net Debt/EBITDA) (2019) ROIC
Apple (AAPL) 23.7% Net cash position of $101.6B 23.3%
Broadcom (AVGO) 41.4% 1.72x 13.6%
Altria (MO) 32.2% 2.0x 21.4%
Cisco (CSCO) 25.9% Net cash position of $12.8B 15.7%
3M (MMM) 14.8% 1.26x 22.2%
Johnson & Johnson (JNJ) 22.7% 0.01x 16.9%
Comcast (CMCSA) 13.3% 2.82x 9.2%
Procter & Gamble (PG) 17.2% 1.70x 12.1%
Microsoft (MSFT) 26.9% Net cash position of $58.1B 21.5%
Philip Morris (PM) 27.2% 1.88x -
AbbVie (ABBV) 39.1% 2.02x -
Starbucks (SBUX) 14.4% 1.26x 37.5%
UnitedHealth (UNH) 6.1% 0.73x 15.6%

(Source: Morningstar.com, marketscreener)

Apple's Cash Machine Is Roaring Higher

Apple remains the world's most impressive cash machine, and its first half year was no exception to that rule. In fact, the company generated a free cash flow of 34.7 billion dollars, which was enough to fuel the buyback program. Besides repurchasing own stock, the iPhone maker used some of its net cash to pay out dividends. Clearly, despite some weakness in its traditional business, its growth trajectory isn't drawing to an end with robust growth in Services. Shares are currently trading at an FCF yield of approximately 6%, indicating a lot of good momentum is already backed in today's valuation.

(Source: company results)

Dividends

The primary source of your total returns is derived from dividends. Let's take a look at how much yield you can get right now from these blue chips.

Name Forward Dividend Yield
Apple 1.52%
Broadcom 3.49%
Altria 6.16%
Cisco 2.62%
3M 3.23%
Johnson & Johnson 2.72%
Comcast 1.97%
Simon Property Group 4.74%
Equinix 2.05%
Procter & Gamble 2.84%
Microsoft 1.47%
Philip Morris 5.44%
AbbVie 5.49%
Starbucks 1.84%
UnitedHealth 1.51%

(Source: Author's work)

The table provided below gives you more color on when future dividends are scheduled to be paid out.

(Source: Author's work)

Conclusion

I'm satisfied with my performance and composition at this time, but I'll continue to look for opportunities in the small cap space to diversify and improve my portfolio's overall risk profile. I'm now more focused than ever on adding defensive names to our portfolio that have a safe dividend payout ratio, but also compelling growth in front of them. Granted, these opportunities are very rare these days, courtesy of stretched valuation multiples, but that's the job of every investor running his own portfolio, namely putting a lot of effort in thoroughly analyzing a company's cash flows, track record, threats, and opportunities. One of the best defensive names that caught my eye is Watkin Jones Plc, in which I've made an initial investment worth €24,0000. We're now at a point where stock-picking becomes even more important. My plan of only selecting stocks with sufficient margin of safety is moving along nicely.

We clipped our first coupon of Melexis (€186) last month, and there's definitely more to come in May as for instance VGP and WDP will pay out a tasty €1,900 and €880, respectively.

My fictive American buy and hold portfolio has lagged the S&P 500 so far due to 3M's weak guidance and the devastating sell-off in healthcare stocks. Though, I still expect this well-balanced portfolio filled with decent blue chips to outperform the broader market over the long run courtesy of their predictable cash flows, competent management, and healthy profit margins.

Thanks for reading, I hope you've enjoyed reading it as much as I've enjoyed writing it. I encourage you to follow me and my website, if you don't already!

Disclosure: I am/we are long ALL STOCKS MENTIONED IN OUR REAL-LIFE BUY AND HOLD PORTFOLIO. 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.