Seeking Alpha

My Dividend Growth Portfolio: Q3 2019 Summary

|
Includes: AAPL, ABBV, ABT, ADM, AFL, AMP, B, BA, BAC, BDX, BP, C, CA, CAT, CCL, CVS, CVX, D, DIS, DLR, DUK, EMR, EPD, ETN, FB, GD, GIS, GOOG, H, IBM, JNJ, JPM, K, KMI, KO, KTB, LMT, LVS, M, MCD, MDT, MMM, MMP, MO, MSFT, NEE, NKE, NSC, O, OHI, PEP, PFE, PG, PK, PM, RCL, RDS.B, RTN, SBUX, SO, T, TGT, TROW, TXN, UNP, V, VFC, VLO, VTR, VZ, WEC, WFC, WMT, WPC, XOM
by: Khen Elazar
Khen Elazar
Value, dividend growth investing
Summary

In 2015, I started publishing quarterly updates regarding my dividend growth portfolio.

I believe that someone who writes about financial assets should share his main holdings with his readers.

In this article, I will share my portfolio, changes in the past 3 months, and stocks that are currently on my wish list.

Introduction

It's time to summarize another quarter. The last quarter was again volatile. July saw the indices rising up only to go down in August, and September ended roughly at the same point where it started. Year to date, the S&P 500 is up 18.5%, and my portfolio showed gains consistent with the broader market. While the third quarter didn’t contribute much, we cannot complain over such significant gains. While it's not my ultimate benchmark, I still compare my performance to the S&P 500 as it shows an alternative way of investing.

My main goal is to achieve a growing stream of dividends, which will give me some more financial freedom. In Q3 2019, my dividend income rose by 11.8% QoQ. This is a major decline from the 25.2% growth in Q1, and the 17.6% in Q2. I attribute it to the fact that I contributed less funds to my dividend growth portfolio, and as the portfolio grows, it's harder to make non organic dividend growth. I still hope to eventually achieve a 25% dividend income growth in 2019, but it seems a little far-fetched now as I won't be able to allocate significant amount of fund in Q4. In order to achieve it, I will also need to add more funds to the portfolio, 6-7% overall dividend growth and reinvesting received dividends. This is an ambitious goal, and I will do my best to achieve it.

Investors shouldn't be surprised by the volatility. On the contrary, they should prepare for its continuation. The Brexit is still undecided, and while PM Johnson is trying to leave the European Union, without an agreement, he is facing fierce opposition. In the United States, Congress has initiated impeachment proceedings against President Trump, and the trade war with China doesn't seem to end soon. The Federal Reserve is bracing for impact, and investors should prepare for a slowdown in earnings.

I believe that, in the short term, we will keep seeing higher volatility and some weaker economic data around the world, and after 10 years of expansion, many economic experts expect a recession, or at least a slowdown. Investors should take this option into consideration.

When we look forward into the short-term future, we should ignore the noise. Nobody knows what the markets will do in the coming month or year, but it will probably be much higher in a decade. While I monitor the markets and follow the short-term events like the elections, rate hikes and trade tensions, I see it as a long journey.

My plan for the next quarter is to keep executing my investment thesis. I will keep allocating funds to my portfolio monthly. I will invest in stocks I believe are cheap or fairly valued. I will try to achieve higher dividend income and high total return. I see no reason to amend my investment thesis at the moment, as it has worked for me over the past several years. So far, I see any sign for volatility as an opportunity that allows me to buy future income for cheaper prices. If the market will be volatile due to real economic slowdown or even a recession, I will stick to the safest blue chips, which are usually expensive. Their dividend is usually extremely safe, and any price change is a possible opportunity. I will also try to take advantage of significant drops and buy some of the stocks that I find expensive right now. I wish you all a great quarter.

(Source: Freepik)

Investment Allocation

In Q4 2016, I liquidated my LendingClub (NYSE:LC) position as well as a short-term deposit I had. Since then, I put my emphasis on my three accounts: the brokerage account, the pension fund, and my medium-term account. While I manage my own portfolio in the brokerage account, I use the services of two investment firms to manage my other two accounts.

My dividend growth portfolio was more than 83% of my assets. In order to try to balance it, I allocated more funds to my other accounts. I want to balance it to hedge myself against possible failures in my strategy. Being overconfident in the financial world can lead to devastating results. Therefore, I am making some effort to allocate my funds and make sure that my assets stay diversified.

I want to get my dividend growth portfolio closer to the 75% figure. While I try to get it to 75%, I will have no problem with any figure between 75% and 80%. As my dividend growth portfolio grows and becomes more diversified, I will feel more comfortable with it accounting for even more than 80%. Yet, in the future, I believe that, when I buy a house as an investment or to live in, it will lower the percentage of the dividend growth portfolio in my assets. Right now, I am allocating mainly to the pension fund.

My dividend growth portfolio is very well-diversified and contains a collection of 73 blue-chip companies. While I am proud of my achievements as a young investor, I must stay humble and diversify my investments wisely.

(Source: graph made by author)

My Goals

At the end of 2018, I have set my goals for 2019. On the financial side, I hope to achieve significant growth in my net worth and my dividend income. I believe that as long as I keep executing my strategy, I will be able to achieve these goals. I will probably won't get close to the 2018 dividend growth of 27%, even after the strong Q1 increased my net worth and dividends significantly. Unfortunately, Q2 and Q3 delivered slower dividend growth, so my ambitious goal is harder to get. In addition, I allocate less funds in 2019 towards my portfolio, and it will also make it harder for me to achieve 100% of this goal.

I am also on track to achieve personal goals in 2019. I am doing well in a great MBA program, and I have only two more semesters left to complete it. I enjoyed two trips this year, one to Germany and one to the United. I hope that I can read more books to gain some more knowledge. This way I will become an even better investor.

By setting goals, you can organize your time better. I highly recommend it to everyone. It allows you to see your progress during the year. Just set some goals that are challenging but achievable, and make sure they are quantifiable.

Sector Allocation

As my brokerage account is my largest asset, I keep allocating money there according to my optimal sector allocation. As I am still accumulating, I don't mind buying stocks from sectors I am over-allocated to. I don't want to totally ignore my optimal allocation. Over the past quarter, I bought some healthcare and industrial stocks.

Over this quarter, I haven't changed my optimal allocation at all. It seems to work for me well. The real estate sector is an overachiever, so I probably won't add to this sector unless a great opportunity arises. In the coming quarter, I will probably invest more in consumer staples, industrials, and energy.

I usually write articles regarding companies that I find attractive. I bought shares in some of them, while others are still on my radar. In Q4, I will try to add some more dividend growth companies. I hope that the volatility in the Nasdaq index will increase, so I may have an opportunity to buy some tech companies for better prices. However, I have been hoping for it for a very long time, and so far without success.

Sector

Current Allocation

Optimal Allocation

Consumer Staples

19.6%

20.0%

Health Care

11.8%

12.5%

Industrials

10.6%

12.5%

Financials

12.5%

12.5%

Consumer Discretionary

11.2%

10.0%

Energy and Materials

9.3%

10.0%

Information Technology

7.6%

8.0%

REITs

9.5%

7.5%

Telecommunications

4.3%

4.0%

Utilities

3.6%

3.0%

My Portfolio

The following table shows the current holdings in my brokerage account. All the companies below are part of my dividend growth portfolio. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) don't pay dividends. However, they both enjoy steady growth in their free cash flow. This metric is the base of any dividend payment. As a long-term investor, I don't mind waiting until they are ready to share some of this wealth with their investors. Alphabet and Facebook have already started buyback programs. I hope that both will offer dividends in the years to come. You can read my articles about investment in Google or Facebook for the future dividends here and here.

Sector

Company

Ticker

% of portfolio

% of income

Information Technology

Apple Inc.

(NASDAQ:AAPL)

1.98%

0.81%

Health Care

AbbVie Inc.

(NYSE:ABBV)

0.87%

1.51%

Health Care

Abbott Laboratories

(NYSE:ABT)

2.32%

1.13%

Consumer Staples

Archer-Daniels-Midland

(NYSE:ADM)

0.91%

0.98%

Financials

Aflac Incorporated

(NYSE:AFL)

2.40%

1.52%

Financials

Ameriprise Financial

(NYSE:AMP)

0.61%

0.55%

Industrials

The Boeing Company

(NYSE:BA)

1.29%

0.87%

Financials

Bank of America Corporation

(NYSE:BAC)

1.94%

1.52%

Health Care

Becton, Dickinson and Company

(NYSE:BDX)

0.86%

0.33%

Energy

BP plc

(NYSE:BP)

1.08%

2.16%

Financials

Citigroup

(NYSE:C)

0.97%

0.90%

Health Care

Cardinal Health Inc.

(NYSE:CAH)

1.31%

1.69%

Industrials

Caterpillar

(NYSE:CAT)

1.86%

1.96%

Consumer Discretionary

Carnival Corporation

(NYSE:CCL)

0.23%

0.35%

Information Technology

Cisco Systems, Inc.

(NASDAQ:CSCO)

0.68%

0.62%

Health Care

CVS Health Corp.

(NYSE:CVS)

0.35%

0.35%

Energy

Chevron Corporation

(NYSE:CVX)

1.63%

2.09%

Utilities

Dominion Energy, Inc.

(NYSE:D)

0.33%

0.45%

Consumer Discretionary

The Walt Disney Company

(NYSE:DIS)

3.01%

1.24%

REIT

Digital Realty Trust, Inc.

(NYSE:DLR)

1.95%

1.98%

Utilities

Duke Energy Corporation

(NYSE:DUK)

0.56%

0.66%

Industrials

Emerson Electric Co.

(NYSE:EMR)

1.79%

1.65%

Energy

Enterprise Products Partners

(NYSE:EPD)

0.32%

0.62%

Industrials

Eaton Corp. PLC

(NYSE:ETN)

0.81%

0.90%

Information Technology

Facebook, Inc.

(FB)

1.25%

0.00%

Industrials

General Dynamics Corporation

(NYSE:GD)

0.21%

0.14%

Consumer Staples

General Mills, Inc.

(NYSE:GIS)

1.26%

1.38%

Information Technology

Alphabet Inc.

(GOOG)

1.39%

0.00%

Information Technology

International Business Machines Corporation

(NYSE:IBM)

0.97%

1.37%

Health Care

Johnson & Johnson

(NYSE:JNJ)

3.85%

3.34%

Financials

JPMorgan Chase

(NYSE:JPM)

1.63%

1.58%

Consumer Staples

Kellogg Company

(NYSE:K)

0.44%

0.48%

Consumer Staples

Kimberly-Clark Corporation

(NYSE:KMB)

2.42%

2.17%

Energy

Kinder Morgan, Inc.

(NYSE:KMI)

1.17%

1.76%

Consumer Staples

The Coca-Cola Company

(NYSE:KO)

2.19%

1.97%

Consumer Discretionary

Kontoor Brands Inc.

(NYSE:KTB)

0.06%

0.12%

Industrials

Lockheed Martin Corporation

(NYSE:LMT)

0.45%

0.34%

Consumer Discretionary

Las Vegas Sands Corp.

(NYSE:LVS)

0.32%

0.54%

Consumer Discretionary

McDonald's Corporation

(NYSE:MCD)

3.69%

2.64%

Health Care

Medtronic plc

(NYSE:MDT)

1.85%

1.14%

Industrials

3M Company

(NYSE:MMM)

1.06%

1.22%

Energy

Magellan Midstream Partners

(NYSE:MMP)

1.71%

3.21%

Consumer Staples

Altria Group Inc.

(NYSE:MO)

1.48%

3.55%

Utilities

NextEra Energy, Inc.

(NYSE:NEE)

0.54%

0.35%

Consumer Discretionary

Nike

(NYSE:NKE)

1.07%

0.31%

Industrials

Norfolk Southern Corporation

(NYSE:NSC)

1.86%

1.26%

REIT

Realty Income Corp.

(NYSE:O)

2.27%

2.39%

REIT

Omega Healthcare Investors Inc.

(NYSE:OHI)

2.96%

5.57%

Consumer Staples

PepsiCo, Inc.

(NASDAQ:PEP)

3.21%

2.69%

Health Care

Pfizer Inc.

(NYSE:PFE)

0.41%

0.51%

Consumer Staples

The Procter & Gamble Company

(NYSE:PG)

2.13%

1.57%

REIT

Park Hotels & Resorts Inc.

(NYSE:PK)

0.27%

0.63%

Consumer Staples

Philip Morris International Inc.

(NYSE:PM)

2.68%

4.94%

Information Technology

Qualcomm Incorporated

(NASDAQ:QCOM)

0.86%

0.87%

Consumer Discretionary

Royal Caribbean Cruises Ltd.

(NYSE:RCL)

0.42%

0.38%

Energy

Royal Dutch Shell plc

(NYSE:RDS.B)

0.67%

1.32%

Consumer Discretionary

Starbucks Corporation

(NASDAQ:SBUX)

1.00%

0.51%

Utilities

The Southern Company

(NYSE:SO)

1.07%

1.31%

Telecom

AT&T Inc.

(NYSE:T)

2.18%

3.59%

Consumer Staples

Target Corporation

(NYSE:TGT)

1.78%

1.30%

Financials

T. Rowe Price Group

(NASDAQ:TROW)

0.63%

0.53%

Information Technology

Texas Instruments Incorporated

(NASDAQ:TXN)

0.44%

0.38%

Industrials

Union Pacific Corporation

(NYSE:UNP)

1.25%

0.96%

Financials

Visa Inc.

(NYSE:V)

2.02%

0.35%

Consumer Discretionary

V.F. Corporation

(NYSE:VFC)

1.37%

0.82%

Energy

Valero Energy Corporation

(NYSE:VLO)

0.49%

0.63%

REIT

Ventas, Inc.

(NYSE:VTR)

0.86%

1.12%

Telecom

Verizon Communications Inc.

(NYSE:VZ)

2.08%

2.60%

Utilities

Wisconsin Energy Corp.

(NYSE:WEC)

1.10%

0.83%

Financials

Wells Fargo & Co.

(NYSE:WFC)

2.23%

2.87%

Consumer Staples

Wal-Mart Stores, Inc.

(NYSE:WMT)

1.10%

0.60%

REIT

W. P. Carey Inc.

(NYSE:WPC)

1.21%

1.67%

Energy

Exxon Mobil Corporation

(NYSE:XOM)

2.16%

3.37%

I currently own 73 companies in my portfolio. Over the quarter, I didn't start any new position, but I added to existing positions. I am not worried at all about the number of positions I hold. These blue-chip companies don't need me to follow them daily. In fact, I wouldn't mind holding them even if the stock market is closed for a decade.

Acquisitions Made in Q3 2019

I bought shares in two sectors over the course of this quarter. In the healthcare sector, I bought more shares in Cardinal Health. I also added to this position it the past quarter. CAH raised its dividend by only 1% in Q2, but the dividend is safe, and the entry yield is attractive. While dividend growth will stay very low in the medium term, I believe that, in the long term, the company will be able to execute and take advantage of its growth initiatives. This is a good entry point in my opinion for patient investors who invest for the long term.

In the industrial sector, I bought shares in two companies. 3M and Emerson Electric. I wrote an article in the past quarter regarding investment in EMR, and I took my own advice, and added to my position. In addition, I also added to my MMM position, as the share price declined significantly. Despite some short-term weakness, I believe that, in the long term, this dividend king will keep performing.

Sales Made in Q3 2019

Over the past quarter, I have not sold any stock. I sell when a company cuts its dividend, and that didn't happen in Q3 2019. When I look at the near future, I try to find dividends that are relatively in danger. Right now, I believe that the dividends in my portfolio are adequately safe. The riskiest dividend, in my opinion, is the one paid by Omega Healthcare.

What Am I Looking For?

When I look at my portfolio, I see a great collection of companies. Every year, I feel more confident about some companies and less confident about others. Two years ago, I was concerned with BP, and last year, I became more concerned with OHI and UTX. That's why diversification is key. I am always looking for the weaker links in my portfolio, and I try to measure the effect of a possible dividend cut on my dividend income.

In Q4, I will keep following Omega Healthcare Investors closely. While the dividend seems adequately covered now, it should be monitored closely. I am looking forward to seeing how this situation will develop. Some investors may suggest that AT&T, Las Vegas Sands, AbbVie, and Altria are unsafe, but I disagree.

You probably recognize the chart below, as it is part of my stock analysis. Using this chart contributes to my analysis thesis. I keep looking for Type 2 stocks mostly, as they offer the best combination of growth and income. I will look for these Type 2 stocks in the consumer staples, industrials, and energy sectors.

In the past quarter, I bought companies that are Type 2 like Emerson Electric and 3M. In the next quarter, I will look to add more type 2 stocks, and type 1 and 3 if they are attractive enough.

https://static.seekingalpha.com/uploads/2019/1/1/20475971-1546344218102207.png

(Source: graph created by author)

These stocks have all passed my initial screening and should be thoroughly analyzed before I decide to add more or initiate a new position. In the energy sector, I am looking to add more to my position in Exxon Mobil. The dividend is safe, and the current yield is above 5%. Exxon proved to be resilient in 2009 and in 2015, and it can deal with any short-term weakness in earnings.

In the IT sector, I am still looking for an opportunity to buy Microsoft (MSFT). I will also consider buying shares in Texas Instruments if the share price gets closer to $100. I have been waiting for these two for over a year, and I still didn't have the opportunity to buy Microsoft.

In the consumer staples sector, I am looking to add more to my position in Archer-Daniels-Midland. I love the current valuation as the stock price is below $40, and I will happily add more to my position if stays there.

I will also be happy to add to companies in the Industrial sector. I am looking forward to adding to Eaton around $80 and Boeing around $300. Lockheed Martin, General Dynamics, and Raytheon (RTN) are also attractive options right now in the defense industry. At the moment, I will not rule our addition to 3M as well.

Conclusion

The first half of 2019 was fantastic for investors. The indices and my portfolio achieved double-digit gains. More importantly, I managed to increase my dividend income. The third quarter didn't bring capital gains, but offered decent dividend growth. I am looking forward to making the best out of the coming quarter as well. I will keep executing my investment thesis, as I invest in companies monthly. Hopefully, I will be able to achieve my goals and get closer to my long-term objectives.

It seems like more and more analysts and experts predict that the slowdown in the economy may continue. We already saw slower demands in some sectors, and the geopolitical atmosphere may have a negative impact as well. Investors should brace themselves, because, after 10 years of constant growth, the economy may hit some hurdles. In any case, dividend growth investors should stick to their plan and continue to execute it monthly.

Disclosure: I am/we are long ALL STOCKS IN MY 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.