1 Sale And 7 Buys I Just Made In My Retirement Portfolio

by: Dividend Sensei

It's been a busy two weeks for my retirement portfolio.

I made one sale, trimming Enbridge to 5% (NOT an indication of any fundamental troubles) with the company and used the proceeds to buy ET, MPLX and BTI.

I bought MO as my weekly undervalued/opportunistic investment, moved up next week's buy to acquire more BMY on its 7% one day crash.

Under my 10% dividend aristocrat rule I bought $1,200 more ABBV on its 16.5% AGN acquisition announcement, at 7.4 times forward earnings and cash flow (and a 40% discount to fair value).

My portfolio now has a 5.3% yield ($15,300 annual dividends), has 7% long-term expected dividend growth, is 19% undervalued and should be capable of long-term total returns of 12% to 20% CAGR over time.

(Source: imgflip)

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts.

One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be a portfolio update.

To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

To minimize reader confusion, I will be providing portfolio updates on a rotating tri-weekly schedule. This means an update every three weeks on:

A Very Busy Few Weeks For My Retirement Portfolio

It's been a busy few weeks for my retirement portfolio.

  • June 18th bought 143 units of Energy Transfer LP (ET) @ $14.08 ($0.67 commission with Interactive Broker's tiered pricing)
  • June 24th bought 31 shares of Altria (MO) @ $48.37 ($0.36 commission) - winner of my "Which of These 4 Stocks Am I Buying Next" competition.

But June 24th was also the day I did a major rebalancing of my portfolio, with the goal of

  • improving my diversification (and thus risk management)
  • boosting my portfolio's overall safe yield
  • maintaining or improving my portfolio's overall valuation and total return potential

Which is why on Monday, June 24th I made the following trades.

  • Sold 318 shares of Enbridge (ENB) @ $35.28 ($1.76 commission) - took position down to my long-term target of 5% of portfolio
  • Bought 100 units of MPLX (MPLX) @ $32.53 ($0.47 commission) - took stock to 5% of my portfolio
  • Bought 100 units of Energy Transfer @$14.49 ($0.47 commission) - took stock to 5% of my portfolio
  • Bought 200 shares of British American Tobacco @ $35.24 ($0.94 commission)

These trades were made because I was previously deeply overweight Enbridge, which is still a fantastic company and in no way is my trimming it an indication you should sell or avoid buying.

I still have 5% of my entire life savings invested in Enbridge and plan to hold onto those shares forever, or until the thesis breaks, whichever comes first.

Trimming Enbridge at a roughly 10% profit meant I was able to fill out my positions in ET and MPLX (higher yielding safe MLPs growing at the same rate). I was also able to quadruple my position in BTI, which offers superior total returns (higher yield + 2% faster long-term growth per management guidance and slightly more undervalued).

I don't often recycle capital, except for overweight positions, only at a profit and only if I can boost my portfolio's safe yield AND put the money into roughly equally undervalued blue-chips with similar or superior long-term return potential.

Also on June 24th, came another trade, which I funded by moving up the following week's buy.

BMY crashed 7% on a disappointing drug trial result (headline risk of this nature is inherently baked into this industry's risk profile) allowing me to increase my position 25% while lowering my cost basis slightly and increasing my yield on cost.

(Source: F.A.S.T Graphs)

Over the past 20+ years, BMY's average PE (a good estimate of fair value) has been 20.0. Even using the current analyst growth forecast of 5.5% (I consider that a low estimate given 40+% EPS growth in year one on Celgene acquisition closing) then Bristol is likely to deliver close to 20% CAGR total returns over the next five years.

If I (and Morningstar) are right that growth will be much stronger, then 25% CAGR total returns are possible, meaning hedge fund/private equity-style returns from a perfectly liquid and high-quality blue-chip.

  • June 25th bought 18 shares of AbbVie (ABBV) at $66.97 @ $66.97 ($0.35 commission)

Normally I wouldn't buy a company I was overweight, per my risk management rules. But my 10% dividend aristocrat crash rule allowed me to make a standard position size opportunistic purchase when the company plunged 16.5% on the day it announced the $80+ billion (including debt assumption) acquisition of Allergan (AGN).

After considering the slide presentation, conference call, and press release, plus input from S&P, Moody's, Simple Safe Dividends, my fellow Dividend King Chuck Carnevale, and Morningstar I concluded

  • high debt (about 4.0 leverage) requires a dividend safety downgrade from 4/5 (above average) to 3/5 (average).
  • The quality score falls from 9/11 (SWAN) to 8/11 (Blue-Chip)
  • Tuesday's price of $66 to $67 represented about 40% discount to fair value (based on both DYT and Morningstar's conservative DCF model), and 7.4 times forward pro-forma PE and cash flow.

That kind of valuation is not justified for a company of this caliber, with a management team that has beaten its own guidance (and raised full-year guidance ) in 13/25 quarters it's existed.

S&P and Moody's both say they believe management can achieve its 3.0 or less leverage target (safe for the industry) by the end of 2021 and indeed it will be able to accomplish that with just 50% to 60% of pro-forma retained FCF (free cash flow minus dividend) going to repaying merger debt.

I'll do a detailed look at the AbbVie/Allergan merger in the coming weeks and what it means for AbbVie, and current and prospective investors.

(Source: F.A.S.T Graphs)

But basically, here's the reason I added to AbbVie is last week. Even assuming highly conservative 5.7% long-term EPS growth (management is guiding for at least two years of double-digit EPS growth and they almost always deliver on guidance), and the stock returning to its historical 14.5 PE, which is very low for this industry, the company could easily deliver close to 20% CAGR total returns.

The total return potential was even higher when I bought on Tuesday, plus I got to lock in a safe 6.6% yield that management is adamant will keep growing strongly over time.

My goal is to make Munger/Buffett like "consistently not stupid" investing decisions and buying a fast growing, excellently run dividend aristocrat on a 16.5% single day crash (and at 7.4 times cash flow and 20+% total return potential) seems like a classic Buffett/Munger style move.

Plan Going Forward

I'm expecting a good week due to great news from the G20 meeting between Trump and Xi in Osaka.

  • No 25% tariffs are going up on $300 billion in Chinese imports...for now (best we could have hoped for and good news)
  • Ban on US companies selling to Chinese tech companies has been lifted (Huawei is saved, great news for chip makers which make up 7.5% of my retirement portfolio)

7.5% of my portfolio is in chip makers, which are coiled springs ready to rally on positive trade news. AbbVie rallied 11% Wednesday through Friday and remains a coiled spring that might go much higher in the short-term.

This week I won't be buying anything given that I bought BMY last week, but next week I'll be buying $1,200 of a blue-chip dividend stock at a steep discount to fair value. I'll provide another preview article highlighting what high-conviction deep value stocks I'm considering in 2 weeks (Bunker Portfolio update coming next).

But rest assured that what I'll be buying in the coming weeks will be designed to improve my retirement portfolio's already impressive valuation stats

  • weighted price to cash flow: 8.0 (15.0 or less is good buying opportunity according to Chuck Carnevale)
  • forward PE: 12.8 (S&P 500 bottomed at 13.7 on December 24th)
  • Morningstar's estimated discount to fair value: 19%
  • Morningstar valuation rating: 3.83/5 stars

My Retirement Portfolio Buys Since March 13th (When I Switched to 100% Undervalued Blue-Chips)

(Source: Morningstar) -data as of June 28th

My new 100% focus on deep value blue-chips has meant I've been buying quality companies at some incredible bargains.

  • weighted price/cash flow: 8.8
  • 10.9 times earnings (S&P 500's March 9th, 2009 low was 10.3)
  • 26% discount to Morningstar's estimated fair value
  • 4.23/5 star Morningstar valuation rating
  • 4.7% yield (with 15.4% CAGR 5-year dividend growth, 6.4% conservative long-term dividend growth expected per Morningstar)

My Retirement Portfolio Today - 29 Holdings

(Source: Morningstar) - data as of June 29th

I've made good progress on my goal of decreasing overweight stocks and getting to my 5% position holding caps. ABBV might be trimmed in the future (at a nice profit) should I have appropriate replacement candidates for that capital.

BPY is unlike to get trimmed since my YOC is 7% and finding 8+% yielding blue-chips that fit within my risk management rules might be difficult.

Top 10 Income Sources

(Source: Simply Safe Dividends)

My portfolio income is dominated by my 10 biggest names, which I plan to diversify over time. But since all my holdings have stable cash flows and good balance sheets, I'm not losing sleep over this high income concentration.

(Source: Morningstar)

The portfolio has become far more diversified by stock style, especially compared to the early days, when it was pretty much 100% small-cap value. I'm now mostly focused on large-cap value blue chips, but have a nice amount of foreign exposure (mostly Canada where companies tend to follow the US style of steady dividend growth over time).

Due to my personal situation (very low monthly expenses and about $15,000 gross monthly income, $10,000 of that investable), I have a high-risk tolerance and 100% stock portfolio. Most investors need to diversify into cash/bonds in order to decrease portfolio volatility and avoid having to sell stocks during corrections/bear markets.

40% to 60% of your portfolio in cash equivalents (such as T-bills) and bonds is a good rule of thumb for most people. That balances the strong price appreciation of stocks but with far less volatility (making it easier to stay calm and avoid panic selling stocks during market declines).

(Source: UBS Bear Market Guidebook)

(Source: Morningstar) - Note the lack of speculative growth or distressed assets. I'm focused on a low-risk strategy that tries to avoid such companies.

I'm a big fan of hard assets (real estate, infrastructure, utilities, and renewable energy). That's because these businesses have highly stable cash flow that's ideal for paying generous, safe and steadily rising income. What's more, they are backed by large, decades-long secular economic megatrends.

Sector Concentration

I've managed to diversify down from 59% energy to just 21%, and am now within my personal sector cap limits.

(Source: Simply Safe Dividends)

25% is a high sector concentration that is at the extreme end of safe for most people, but a level I'm comfortable with given my high-risk tolerance (especially regarding volatility).

(Source: Morningstar)

As you can see, my portfolio has a very low forward P/E of just 13.2. For context, the S&P 500's forward P/E bottomed on December 24, 2018, at 13.7, roughly the typical recessionary bear market bottom valuation.

(Source: Simply Safe Dividends)

Even during the Great Recession, the worst economic downturn since 1946, my current holdings maintained their dividends. This is one reason I'm confident in what I own and am in no rush to achieve my long-term target of 5% company position sizes (I can be opportunistic and patient).

The S&P 500's 20-year median annual dividend growth rate is 6.6%. My goal is to have an overall portfolio yield about double that of the market, with long-term dividend growth of 7+% (at least slightly faster than the S&P 500's). Based on the Gordon Dividend Growth Model (highly effective at forecasting dividend stock total returns since 1954 and what Brookfield Asset Management and NextEra Energy use for their return models), that would ensure market-beating returns.

The portfolio's growth rate over the past decade has indeed been impressive, with 2018's tax cut funded payout boom resulting in sensational one-year organic income growth. The S&P 500's dividend growth over the past year is 9.9%, while I achieved nearly double that.

(Source: Simply Safe Dividends)

If I could maintain a 13.7% dividend growth for decades, my portfolio would become a cash-minting machine and within 20 years I'd be enjoying $200,000 per year in safe and rapidly growing passive income. That would equate to my dividend income putting me in the top 7% of all Americans by income.

But even at 7% projected dividend growth (my long-term goal), that still achieves great income growth. I consider 6% to 10% long-term dividend growth a reasonable goal for most people, depending on how you prioritize growth vs. yield and weight your portfolio.

(Source: Simply Safe Dividends)

$59,000 in dividends plus my $20,000 pension would allow me to comfortably live on and retire at the age of 52, should I wish to do so (I don't plan to ever stop doing this though, just cut back to four day work weeks).

Portfolio Statistics

  • Annual Net Dividends: $15,299 (vs $11,997 on March 13th when I switched to my 100% blue-chip strategy)
  • Monthly Average Dividends: $1,275
  • Daily Average Dividends (my business empire never sleeps): $40.92 (finally cracked two "free" $20 bills per day).

(Source: Simply Safe Dividends)

  • Portfolio Beta (volatility relative to S&P 500):1.01 (down from high of 1.29)
  • Dividend Yield: 5.5% (YOC 5.3%)
  • Projected Long-Term Dividend Growth (Morningstar's conservative estimate): 7.0%
  • Projected Annual Total Return (No Valuation Change): 12.5%
  • Morningstar's Estimated Weighted Portfolio Valuation: 19% undervalued
  • Projected Valuation-Adjusted Total Return Potential (including 20% historical margin of error): 11.7% to 19.9%

Bottom Line: I'm Slowly But Steadily Building My Dividend Empire...One "Consistently Not Stupid" Move At A Time

Again I need to point out that my retirement portfolio IS NOT meant to be modeled by most of my readers.

It's 100% deep value focus means that it can take a long time before beaten down blue-chips become Wall Street darlings once more. Deep value investing requires the patience of a saint and time horizons that most investors simple don't have.

The Bunker Portfolio is designed for more conservative investors, given its 100% focus on buying wonderful companies at fair prices (it's made up of the most undervalued aristocrats and kings per dividend yield theory).

Dividend Kings' Fortress Portfolio (which was unveiled to subscribers this week), which focused purely on level 11/11 quality Super SWANs, is the most appropriate portfolio to mirror precisely. That group of 21 companies (average of 6% undervalued) is a perfect example of Buffett's principle that "it's better to buy a wonderful company at a fair price than a fair company at a wonderful price" as well as Peter Lynch's motto that "time is on your side when you own shares in superior companies."

Dividend Kings Fortress Portfolio Since 1994 (Source: Portfolio Visualizer)

Those 21 Super SWAN stocks, over the past quarter century, have managed to outperform the S&P 500 in all but four years, and deliver 5.5% better annual returns (and with 8% lower volatility overall).

(Source: Portfolio Visualizer)

My retirement portfolio was never designed for the average investor to follow but is purely meant to meet my needs/goals/risk profile/time horizon.

I'm focused on maximum safe income over time, and buying quality companies at DEEP discounts to fair value, and am able to wait out multi-year bear markets in the stocks I buy.

Fortress, in contrast, was built from the ground up to offer an instantly diversified collection of the best dividend growth stocks in the world (in 9 out of 11 sectors) and minimize market envy created by long periods of underperformance.

By all means feel free to use my retirement updates as a source of ideas, but just remember that this portfolio is focused on deep value, a strategy that seven of the eight best investors in history used.

But some of these investments might not achieve strong returns for several years (Peter Lynch had some great investments that took four years to break even).

So make sure that you are doing what's right for you, and not blindly following me in a retirement portfolio that isn't appropriate for most people (such as my 100% stock allocation).

As Benjamin Graham (the father of value investing and Buffett's mentor) once wrote in "The Intelligent Investor"

The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

Disclosure: I am/we are long BPY, ABBV, ET, BIP, NEP, EPR, MPLX, IRM, AM, ENB, SPG, BLK, AOS, AAPL, UNH, MMM, ALB, LAZ, TXRH, BTI, LOW, WBA, SWKS, AVGO. 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.