The March To Freedom Fund Second Quarter Review

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

The S&P 500 is off to its best start in more than 20 years.

The March to Freedom Fund isn't that far behind and offers a higher dividend yield.

Only four of our 43 positions have decreased in value since the start of the year.

More important to us, our dividend income shows no signs of slowing down.

The S&P 500 finished the first half of 2019 having a total return of 18.5%. This is the markets best first half since 1997. A good portion of this performance was due to a 7% total return for the S&P 500 in the month of June alone.

The March to Freedom Fund, which will provide the income needed for my wife and I in retirement, performed beyond my expectations. Including dividends, but not new money added to our accounts, the March to Freedom Fund total return for the first six months of 2019 was 18.1%. Slightly behind the market index, but still up nicely from the beginning of the year.

If this return held through the end of the year, this would be our second best performance behind only our 21.7% total return in 2017.

As usual, this update will examine the stocks providing these gains, those stocks that underperformed during the first half of the year and our dividend income results.

Top and Bottom Performers

Only two names remain from our top performers from the first quarter. The first of which is MasterCard (MA), which has been among our leaders for the past three years, is up more than 42% year-to-date.

MasterCard released earnings results at the end of April and produced another blowout quarter. Earnings-per-share increased 19% from previous year and revenue grew 8.6%. Gross dollar volumes were up 12%, while the U.S region grew 8% and international markets climbed 13%. Cross border volumes increased 13%.

MasterCard has grown to be our fifth largest holding. While I find the company very attractive, I consider the position to be nearly full. On a market wide pullback, however, I wouldn’t mind purchasing more of the name.

Lockheed Martin (LMT) has been our second best performer in 2019, returning nearly 41%. The world’s largest defense contractor reported results on April 23rd. Earnings-per-share increased 49% while revenues grew 23%.

All of the company’s business segments had revenue and operating profit growth, with the Aeronautics division, which houses the F-35, posting especially strong numbers.

I recently had an article on Lockheed Martin published here on Seeking Alpha. I continue to find the company and stock attractive even as shares are within striking distance of their all-time high.

Our third best performer year-to-date and the second holdover from last quarter’s top performers is General Mills (GIS). Shares of the company, which were one of our worst performers last year, has increased 35.3% so far in 2019.

The packaged foods company reported results for the fourth quarter of fiscal 2019 results on June 26th. Earnings-per-share improved 5% while revenue was up 7%. The purchase of Blue Buffalo was the primary contributor to growth. General Mills’ organic sales growth was down 1% during the quarter, with a 2% decline in North American snack foods.

General Mills has been a winner so far in 2019, but we own the company for its dividend and not necessarily capital gains. The company hasn’t cut its dividend in nearly 120 years.

Microsoft (MSFT) is up 34.6% this year. Microsoft has been one of the best purchases we have ever made. Our average purchase price is ~$41 and the stock is now our largest holding.

Microsoft reported results for the third quarter of fiscal 2019 at the end of March. Earnings-per-share increased 20%. Revenues were higher by 14%. Growth was seen in every segment. Intelligent Cloud, which has been the driver of Microsoft’s growth in recent years, grew 22% in the quarter. Azure revenue increased 73%, though this is below previous growth results.

I don’t consider technology companies to be core holdings in our portfolio as technology is a rapidly changing industry. Supporting holdings are eligible to be trimmed if they grow too large.

At $156 our position in Microsoft would be larger than even what we have accumulated in our workplace retirement program. Therefore, I plan to trim between 20% to 25% of our position if the stock reaches the mid-150s. This will the scale the position back to a more comfortable level while also providing cash to redeploy into other names that are not yet a full position.

With a 34.6% first half return, Honeywell International (HON) moves into fifth place on our best performers list. The diversified industrial company reported second quarter results on April 18th. Adjusting for the spinoffs of Garret Motion and Resideo Technologies, earnings-per-share improved 13% while organic growth was 8%.

All areas grew during the quarter, but Aerospace continues to be an area where Honeywell excels. Revenues for this segment increased 10% due to strong demand from business aviation original equipment manufacturers. Defense, both domestic and international, was also an area of strength.

Honeywell is a rather small position for us, but I hope to add more during the remainder of the year.

With more than 18% growth for our total portfolio, these top five performers weren’t the only strong performers that we had during the first half of 2019. Five additional names had at least 30% returns while nine more stocks were up at least 20%.

On the other hand, only four of our holdings declined through the end of the second quarter.

AbbVie (ABBV) was our worst performer during the first half, dropping 20.3%.

The company released results for the first quarter on April 25th. Earnings-per-share was higher by 14.4%, but revenues declined 1.3%. AbbVie’s Humira, which is the top selling drug worldwide, is expected to see international revenues decline going forward even as U.S. sales are expected to increase. Humira is facing a patent cliff in Europe at the moment and in 2023 in the U.S. AbbVie’s management expects that revenues from the drug will be close to zero by the middle of the next decade.

AbbVie has made several large purchases in recent years in order to help offset this expected revenue decline. Most recently, the company announced that it agreed to purchase Botox maker Allergan (AGN) for more than $188 in cash and stock. This was a 45% premium to Allergan’s closing price the previous day. The market responded to news of the deal by sending AbbVie’s stock down by more than 16% in a single trading session.

For now, we are maintaining our position in the stock as it offers a generous yield. I am not in a hurry to add more to our holding given the uncertainty regarding post-Humira sales nor do I wish to sell. I think that selloff over the Allergan purchase is overdone.

Just a note, I wrote a script for Sure Dividend that explores how AbbVie’s dividend is also very safe using a number of different tests. If I deemed the dividend to be in trouble, I would likely sell the entire position. Since I feel the dividend is safe, I will hold our shares for now and collect the income.

CVS Health Corp (CVS) continues to be a drag on our portfolio. The stock is down 16% in 2019. The company released first quarter results on May 1st. Adjusted earnings-per-share increased nearly 10% from the prior year while revenue was up 35%. Much of the gain in revenue is due to the acquisition of Aetna.

Digesting this purchase has weighed on CVS. Though the company increased its projections for earnings-per-share to a midpoint of $6.83 for 2019, this is 3% below last year’s results. Still, CVS trades at just 8.1x projected earnings-per-share. I find the stock to be very cheap and it is the most undervalued name on my watch list.

We’ve been burned by CVS before (our average purchase price is ~$83), but I like the addition of Aetna, and its 23 million members, and think that the stock is just too cheap at the moment. There is a good chance that we add to the position in the near future.

3M (MMM) has been our third worst performer to date. The stock has decreased 7.7% since the start of the year. The company released results for the first quarter of April 25th. Earnings-per-share declined 11% while revenues were down 5%.

Several of 3M’s business segments struggled in the first quarter. The Industrial segment was down almost 3% due to declines in several businesses. The Electronics & Energy segment was down 3% due to weakness in electronics-related sales. The Consumer and Health Care segments grew modestly (0.9% and 0.8% respectively), but not enough to overcome weaknesses in other areas.

3M also lowered its guidance for 2019 and now expects earnings-per-share of $9.50. This would be a 9% drop from 2018’s results. 3M is one of our smallest holdings and with 61 years of dividend growth, I am not too concerned with short term performance. The company has been through several economic cycles and still managed to grow its dividend. Shares yield 3.3%, well above the 10-year average yield of 2.6%. I want to buy more of this Dividend King in 2019.

Altria (MO) is the only other stock that we own to show a decline this year, losing 3.2% through the end of June. The company reported financial results for the first quarter at the end of April. Earnings-per-share was down 5.3% while revenues dropped 6%. Cigarette volumes were lower by 14.3% from the previous year. Cigarette volumes are expected to be down at least 4% this year. Altria also lowered its full year earnings guidance.

Tobacco usage continues to decline, but Altria has taken steps to diversify its business. The company owns 10% of Anheuser Busch Inbev (BUD) as well as has a 45% equity stake in marijuana producer Cronos Group (OTC:CRON). Altria also has a 35% stake in e-cigarette manufacturer JUUL.

While it used to be our largest position, Altria has fallen to sixth in our portfolio as the share price has decreased over the past few years. I consider the position to be full and, as I wrote in this script for this video from Sure Dividend, the dividend appears to be safe.

Purchases and Current Holdings

Thanks in part to a work place retirement plan rollover, we were able to make 20 purchases in the first half of 2019. We normally do 20-22 purchases in a year so this was a very active period for trading. We also elected to sell one position, Qualcomm (QCOM), during this time. In order to save space, our most recent purchases were discussed here.

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

Dividend Income Review

Despite the performance of our portfolio so far this year, I am more impressed with the amount of dividend income the March to Freedom Fund produces. While this income stream isn’t yet at a place where we can retire, the growth since 2014 has been remarkable.

Just a reminder, we currently have dividend reinvestment turned off in most positions so that we more quickly add to stocks that we find undervalued now.

Month / Year

Month-Over-Month Increase

Year to Date

Year-to-Date Increase

April 2014

179.7%

2014

302%

April 2015

107.9%

2015

196.2%

April 2016

90.2%

2016

130.5%

April 2017

60.8%

2017

71.8%

April 2018

23.6%

2018

29.4%

2014 was the first year that I started tracking our dividend income and the results since have very good. Every month since except one has seen higher income on a month-over-month basis.

April income this year is nearly 180% higher than it was in April of 2014. Year-to-date dividends have increased by more than 300%. In one year, our income for April has increased nearly 24%. Of the companies that paid out dividends this quarter, we’ve only purchased JPMorgan, Stryker and Dollar General in the last year. Much of this increase is due to reinvested dividends and dividend increases given by the companies we own.

April’s dividend payers include a combination of high yield, like Ventas and Altria, and lower yields, such as Nike and Stryker. Most of the companies that paid dividends during the month have multiple decades of dividend growth. For example, Coca-Cola has increased its dividend for 57 consecutive years while McCormick & Company’s dividend growth streak numbers 33 years.

Companies that paid dividends in the month of April include: Coca-Cola, Nike, Philip Morris International, Altria, Ventas, Realty Income, McCormick & Company, Cisco Systems, JPMorgan, Dollar General and Stryker.

Month / Year

Month-Over-Month Increase

Year to Date

Year-to-Date Increase

May 2014

326.3%

2014

306.3%

May 2015

162.5%

2015

189.2%

May 2016

139.4%

2016

132.1%

May 2017

47.3%

2017

66.6%

May 2018

23.1%

2018

28.2%

May’s dividend haul is even more impressive than April’s results. Income for May has sky rocketed in recent years. Part of this is due to dividend reinvestments, but also to new purchases. For example, we didn’t own Verizon in May of 2014, but we have opened and added to the position several times. We received in May of this year more than double the dividends we saw in 2015 or 2016.

We have added once each to AT&T and Abbott Laboratories since last May. Results from last year, both for the month and year-to-date, are primarily due to reinvested dividends and dividend increases.

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

Month / Year

Month-Over-Month Increase

Year to Date

Year-to-Date Increase

June 2014

662.9%

2014

357.2%

June 2015

289.2%

2015

208.1%

June 2016

166.1%

2016

139.4%

June 2017

81.7%

2017

70.0%

June 2018

44.4%

2018

31.7%

June helps illustrate how buying income producing stocks and the snowball effect of reinvested dividends can lead to a growing income stream. June was our best month ever for dividends. To put this in perspective, the income we received during this month was nearly half of all the dividends we received for the entire year in 2014. 19 of the 43 stocks we own paid out dividends, helping us reach the results that we did.

I never highlight our income results to brag, but to help show readers that it doesn’t take long for dividend income to grow. Adding to stocks when you find them attractively valued and reinvesting dividends can add up even over a short period of time.

One argument I hear against dividend growth investing is that it takes way too long to grow a reliable income stream. The results that we have produced from 2014 to now show that this is not true. I project that our dividends for the current year will be more than 4x what we received in 2014. Imagine what this will look like in 10 years or 20 years from now.

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

The March to Freedom Fund yields 2.5% presently, or 2.7% when excluding workplace retirement accounts that do not allow for individual stock purchasing. By position weight, our average dividend increase has been nearly 9.3% so far this year.

Final Thoughts

The markets have been on fire on 2019 and the March to Freedom Fund trails by the S&P 500 by a slight amount. Almost half of our positons are up by at least 20% to start the year. Only four of our holdings have seen a decline in the first six months of the year.

Still, it has always been a rising dividend income stream that has motivated us when it comes to investing. The gains made in April, May and June show high levels of growth from previous years. This confirms our belief in the importance in purchasing stocks that offer a good value and a rising dividend.

How has your portfolio performed during the first half of 2019? Feel free to leave a comment below.

Disclosure: I am/we are long ABBV,AFL,CMI,COST,CVX,D,DG,GIS,HON,JPM,KO,XOM,LMT,MA,MMM,MO,MSFT,PG,PM,T,TGT,V,VFC,VTR,AMGN,NEE,MCD,PFE,AAPL, ABT,BA,CSCO,CVS,DIS,JNJ,MKC,NKE,O,PEP,SBUX,SO,SYK,VZ. 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.