Seeking Alpha

9 Great Companies I Just Bought For My Retirement Portfolio

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Includes: AMZN, BTI, CAT, ET, IIPR, JNJ, MMM, MPLX, SPG
by: Dividend Sensei
Dividend Sensei
Dividend growth investing, master limited partnerships, REITs, long-term horizon
Summary

Earnings season is a great time to profit from short-term volatility.

This earnings season I've been putting my dry powder to good use in quality dividend stocks trading at highly attractive valuations.

I've made 18 buys in nine companies over the last three weeks: SPG, CAT, BTI, JNJ, IIPR, MMM, AMZN, ET, and MPLX.

Each of these companies is still reasonably to extremely attractively priced, and offering generous, safe income, as well as the potential for good to spectacular long-term total returns.

My remaining buying power is sufficient for two more opportunistic buys after which I'll have to rely exclusively on $500 to $750 weekly buys until my elephant gun has time to reload.

(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:

The Retirement Portfolio Buys In The Last 3 Weeks

  • 7 shares of Simon Property Group (SPG) at $147.03
  • 8 shares of Caterpillar (CAT) at $127.99
  • 8 shares of Caterpillar at $133.21
  • 30 shares of British American Tobacco (BTI) at $34.57
  • 30 shares of British American Tobacco at $35.15
  • 8 shares of Johnson & Johnson (JNJ) at $128.74
  • 14 shares of Innovative Industrial Properties (IIPR) at $72.47
  • 14 shares of Innovative Industrial Properties at $72.41
  • 11 shares of Innovative Industrial Properties at $70.91
  • 12 shares of Innovative Industrial Properties at $67.83
  • 11 shares of Innovative Industrial Properties at $69.34
  • 22 shares of Innovative Industrial Properties at $69.70
  • 7 shares of 3M (MMM) at $160.55
  • 1 share of Amazon (AMZN) at $1,698
  • 62 units of Energy Transfer (ET) at $12.31
  • 29 units of MPLX (MPLX) at $26.61
  • 29 units of MPLX at $26.32
  • 29 units of MPLX at $26.06
Company Quality Score Yield Current Price 2019 Fair Value Discount To 2019 Fair Value 5-Year CAGR Total Return Potential
Simon Property Group 11- Super SWAN 5.6% $151 $206 27% 10% to 22%
Caterpillar 11- Super SWAN-dividend aristocrat 3.0% $138 $172 20% 0% to 27%
British American Tobacco 8-above average quality 7.7% $35 $51 31% 18% to 28%
Johnson & Johnson 11-Super SWAN-dividend king 2.9% $132 $128 -3% 7% to 15%
Innovative Industrial Properties 7-average quality-speculative 4.1% $77 $105 27% 57% CAGR through 2021
3M 11-Super SWAN-dividend king 3.5% $165 $188 12% 0% to 21%
Amazon 11-Super SWAN NA $1,777 $3,049 42% 19% to 40%
Energy Transfer (uses K-1 tax form) 8-above average quality 9.7% $13 $30 57% 19% to 46%
MPLX (uses K-1 tax form) 8-above average quality 10.2% $26 $50 47% 12% to 20%
Average 9.6- blue chip quality 5.8% 29%

(Sources: Dividend Kings Master List, F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, analyst consensus, management guidance, Gordon Dividend Growth Model)

It's been a busy earnings season for me. Many of the earnings predictions I made for Dividend King members regarding guidance cuts came true, including CAT and 3M. Sometimes that resulted in a single day crash (like with 3M) and sometimes it didn't (CAT went up the day it cut guidance 12% for 2019).

I've been buying some companies ahead of earnings (like IIPR, ET, and BTI), while others, like my initial position in JNJ, was due to the 6% single-day crash over its talcum powder recall freakout. JNJ is the classic "wonderful company at a fair price" that Buffett is so famous for advocating long-term investors buy.

Dividend Kings was pounding the table on JNJ, explaining in detail the reasons why this is the safest dividend stock in the world, and as close to "unsinkable" a dividend growth thesis as exists on Wall Street.

Both I, Dividend Kings, and several members (per our chat board) loaded up on this 11/11 quality Super SWAN dividend king (and 1 of 2 AAA credit-rated companies in the world) at the best valuation in six years.

Amazon was an opportunistic buy of the only non-dividend stock I plan to own when the market freaked out over its extra spending for single-day Prime deliveries. After confirming that cash flow (in various forms) was growing like a weed (33% to 94% YOY) I moved up my next quarterly single share buy to the day Amazon opened down 6%. My father joined me in making his first retirement portfolio buy of the greatest growth story of our age at $1,698.

Innovative Industrial Properties is the fastest growing REIT in the world (FFO/share growth of almost 400% CAGR over the last three years) and can realistically grow 30% CAGR over the long-term.

It crashed 50% from its July bubble (when it was 25% overvalued and trading at 55 times FFO), and ferociously crashed below the Dividend Kings' $84 "good buy" price. 20% margin of safety is what we demand from such speculative companies and I picked up IIPR at an initial discount to fair value of 30%.

The most volatile stock I know of (2.88 1-year beta) then kept falling for a few more days, triggering numerous limits. And as predicted, eventually the pessimism (and 26% short interest) reversed, with very pleasant results.

High Volatility Is The Friend Of The Disciplined Value Investor

(Source: Ycharts)

IIPR is a REIT that, since January 2017, has soared or crashed 10+% about 33% of months.

Its declines tend to be short but brutal. And just as IIPR's monthly rallies are the stuff of legends, so too can its monthly corrections be very scary for anyone who doesn't know this stock's historical track record.

  • February 2017: -11.2% vs. market +4.0%
  • January 20018: -11.6% vs. market +5.7%
  • February 2018: -12.6% vs. market -3.7%
  • July 2018: -11.6% vs. market +3.7%
  • October 2018: -15.0% vs. market -6.9%
  • July 2019: -14.5% vs. market 1.4%
  • August 2019: -15.6% vs. market -1.6%

But the same volatility that scares some away, also makes for the best short-term rallies I've ever seen.

Take a look at how the high volatility of this REIT has benefitted long-term investors who bought it at reasonable to attractive valuations.

  • September 2017: +10.4% vs. S&P 500 2.1%
  • December 2017: +79.6% vs. market 1.1%
  • April 2018: + 27.6% vs. market 0.4%
  • May 2018: +10.1% vs. market 2.4%
  • August 2018: +40.2% vs. market 3.3%
  • October 2018: +20.4% vs. market 2.0%
  • January 2019: +36.4% vs. market 8.0%
  • February 2019: +27.6% vs. market 3.2%
  • June: +47.8% vs. market market 7.3%

As long as you understand the unique risk profile that IIPR possesses, and keep your position size small (2.5% of invested capital or less) IIPR's reward/risk profile is highly attractive at $84 or below (for 2019). I intend to invest 2.5% of all future savings into this hyper-growth REIT for as long as the thesis remains intact, but only at good valuations with high margins of safety.

Energy Transfer is the most undervalued stock on the Dividend Kings' 256 company Master List.

Over 14 years real investors, risking real money, weighing all the pros and cons of this MLP, have determined that it's worth four to five times EBITDA (on a per-unit basis) outside of bubbles and bear markets.

That's not my opinion of its value, that's market fact. ET is now trading at just 1.7 times EBITDA/unit, which is absolutely insane given that its organic growth potential is 3% to 8% and analysts expect it to grow at double-digits for the next five years.

According to Ben Graham, a company with stable cash flow that never grows at all is worth 4.6 times EBITDA. ET is a thriving business that's trading at one third that valuation. That's not just a "cigar butt" multiple, it's literally only seen in companies that are on their way to zero, or during the depths of the Great Depression.

(Source: F.A.S.T Graphs, FactSet Research)

Energy Transfer has the second-highest safe yield on the Dividend Kings Master list, and if it merely returns to fair value by the end of 2021, it could more than triple my investment, generating 72% CAGR total returns.

What's the highest safe yield on the Master List? That would be MPLX, which I also bought. MPLX is an anti-bubble stock that the market has determined over time is worth seven to nine times EBITDA. Its bear market average EBITA/unit multiple is 7.6.

(Source: F.A.S.T Graphs, FactSet Research)

I bought it 4.9 times EBITDA, a private equity/venture capital valuation that locked in safe 10.2% to 10.5% yielding distributions that will realistically grow at 4% to 6% CAGR.

MPLX's latest earnings (and 27th consecutive quarterly payout hike) were nothing less than spectacular.

  • 1.42 coverage rate in Q2 and 1.54 YTD (1.2 or higher is safe for self-funding midstreams)
  • Debt/EBITDA of 4.0, 5.0 or less is safe according to credit rating agencies
  • 34% DCF growth in Q2, 47% YTD growth
  • $1.4 billion in annualized retained cash flow (sufficient to cover 70% of 2020's growth capex budget)

The market continues to ignore objectively fantastic fundamentals, but I'm not upset. Because I know that as long as this above-average quality MLP continues growing cash flow and payouts steadily, then I'll ultimately be vindicated.

A company's value and long-term stock price is a function of earnings, cash flow, and dividends. That's not my opinion; it's as close to the gospel truth as exists on Wall Street. While I wait and continue to build on my position during the best MLP buying opportunities in history, I get to collect safe and growing double-digit income. Income that all on its own will beat the market's historical 9.1% CAGR total returns, much less crush the much weaker returns the S&P 500 is likely to deliver in the coming years.

All My Retirement Portfolio Buys Since March 13th, 2019

(Source: Morningstar)

Here are all my cumulative buys since I switched to my blue chip dividend stock strategy.

That doesn't mean every single company has to pay a dividend (Amazon doesn't), or that every company needs to be 9+/11 quality. It merely means that the weighted portfolio must have a generous, safe and growing yield, a weighted quality scores of 9.0+ and a weighted dividend safety score of 4+/5 (above average).

My current retirement portfolio achieves those goals.

My Retirement Portfolio Today

Company Ticker Yield Quality Score Dividend Safety Score Weighting Weighted Quality Score Weighted Dividend Safety Weighted Dividend Yield Weighted Margin Of Safety
AbbVie - dividend aristocrat ABBV 5.4% 9 4 10.5% 0.945 0.42 0.57% 3.60%
Altria - dividend king MO 7.5% 9 4 8.5% 0.765 0.34 0.64% 2.46%
Brookfield Property Partners (uses K-1 tax form) - BPR is non-K1 equivalent REIT BPY 7.0% 9 4 7.5% 0.675 0.3 0.53% 1.34%
MPLX (uses K-1 tax form) MPLX 10.4% 8 4 5.1% 0.408 0.204 0.53% 2.41%
Iron Mountain IRM 7.4% 8 4 4.9% 0.392 0.196 0.36% 0.31%
Texas Instruments TXN 3.1% 11 5 4.8% 0.528 0.24 0.15% -1.04%
Walgreens - dividend aristocrat WBA 3.4% 8 4 4.8% 0.384 0.192 0.16% 1.81%
Enbridge - dividend champion ENB 6.2% 10 5 4.2% 0.42 0.21 0.26% 1.31%
British American Tobacco BTI 7.5% 8 4 3.9% 0.312 0.156 0.29% 1.23%
Energy Transfer (uses K-1 tax form) ET 9.7% 8 4 3.9% 0.312 0.156 0.38% 2.26%
Brookfield Infrastructure Partners (uses K-1 tax form) BIP 4.0% 10 4 3.6% 0.36 0.144 0.14% -1.15%
NextEra Energy Partners NEP 3.9% 9 4 3.1% 0.279 0.124 0.12% -0.79%
A.O Smith - dividend aristocrat AOS 1.9% 11 5 2.9% 0.319 0.145 0.06% 0.42%
3M - dividend aristocrat & king MMM 3.5% 11 5 2.7% 0.297 0.135 0.09% 0.33%
UnitedHealth Group UNH 1.7% 11 5 2.5% 0.275 0.125 0.04% -0.45%
CVS Health CVS 3.0% 8 4 2.2% 0.176 0.088 0.07% 0.83%
Apple AAPL 1.3% 9 5 2.2% 0.198 0.11 0.03% -1.08%
Illinois Tool Works - dividend aristocrat ITW 2.6% 11 5 2.0% 0.22 0.1 0.05% -0.16%
Antero Midstream - speculative AM 18.9% 7 3 1.9% 0.133 0.057 0.36% 0.79%
Lazard LAZ 5.1% 8 4 1.9% 0.152 0.076 0.10% 0.90%
BlackRock BLK 2.9% 11 5 1.9% 0.209 0.095 0.06% 0.10%
Bristol-Myers Squibb BMY 2.8% 9 4 1.9% 0.171 0.076 0.05% 0.32%
Innovative Industrial Properties - speculative IIPR 4.1% 7 3 1.9% 0.133 0.057 0.08% 0.52%
Imperial Brands - speculative OTCQX:IMBBY 10.9% 7 3 1.8% 0.126 0.054 0.20% 0.64%
Broadcom AVGO 3.6% 9 4 1.7% 0.153 0.068 0.06% 0.34%
Simon Property Group SPG 5.6% 11 5 1.1% 0.121 0.055 0.06% 0.30%
EPR Properties EPR 5.8% 8 4 1.0% 0.08 0.04 0.06% -0.08%
Amazon AMZN 0.0% 11 NA 1.0% 0.11 NA 0.00% 0.42%
Caterpillar - dividend aristocrat CAT 3.0% 11 5 1.0% 0.11 0.05 0.03% 0.20%
Albemarle - dividend champion ALB 2.4% 10 5 0.9% 0.09 0.045 0.02% 0.34%
Skyworks Solutions SWKS 2.0% 8 4 0.8% 0.064 0.032 0.02% 0.11%
Lowe's - dividend aristocrat & king LOW 2.0% 11 5 0.7% 0.077 0.035 0.01% -0.13%
Texas Roadhouse TXRH 2.1% 9 5 0.6% 0.054 0.03 0.01% 0.02%
Philip Morris International PM 5.8% 10 4 0.3% 0.03 0.012 0.02% 0.02%
Johnson & Johnson - dividend aristocrat & king, AAA rated credit rating JNJ 2.9% 11 5 0.3% 0.033 0.015 0.01% -0.01%
Average 4.8% 9.3 4.3 100.0% 9.1 4.2 5.6% 18.4%

I'm rather pleased with my portfolio's fundamental stats

  • weighted yield: 5.6%
  • weighted quality score: 9.1/11 (average aristocrat and king is 9.6)
  • weighted dividend safety: 4.2/5 (average aristocrat and king is 4.7)
  • weighted discount to fair value: 18.4%
  • weighted expected long-term earnings/cash flow/dividend growth (Morningstar estimate): 7.6% CAGR
  • weighted forward PE: 12.1 (vs. 17.5 S&P 500)

And of course what I care most about is my safe and rapidly growing dividends.

  • Annual Dividend Income: $19,216
  • Average Monthly Dividends: $1,601
  • Average Daily Dividends: $52.65
  • Rate of dividend accruals: 1 cent every 16.4 seconds

(Source: Morningstar)

I've managed to make good progress in risk management, including getting under all my 25% sector caps. I have plenty of room for further opportunistic buying should something (like campaign 2020) cause healthcare or energy to crash.

During corrections and bear markets is when I will be able to make more rapid progress on my long-term goal, of a diversified portfolio by strategy, but that's 40+% Super SWANs.

That should eventually drive up my weighted quality score to 10+ and my weighted dividend safety score to 4.5+.

Bottom Line: Financial Success Isn't Achieved Overnight But Through Patience, Discipline And Years Of Reasonable And Prudent Decisions

A Vanguard study looking at 160 years of market data in the US, UK, and Australia found that investing all at once was the optimal strategy 65% to 70% of the time, regardless of your optimal asset allocation (mix of stocks/bonds).

(Source: Vanguard)

All investing is probabilistic because the future is uncertain. The best we can do is determine what's most likely to allow us to reach our individual long-term goals over time.

I need to "be greedy when others are fearful" but also keep in mind that "time in the market is more important than timing the market." So I use a balanced approach in which I use a comprehensive economic data analysis to decide what percent of my monthly savings goes into weekly buys (40% right now, with 12-month recession risk at 30%) with the remainder going towards opportunistic buys.

This earnings season has seen a lot of great opportunities in quality dividend stocks trading at reasonable to severely attractive valuations. Which is why I bought SPG, CAT, BTI, IIPR, JNJ, MMM, AMZN, ET and MPLX 18 times during the last three weeks.

I have 2 more buys' worth of dry powder and with about 30% of companies left to report, and trade and economic uncertainty still elevated, I'm confident that I'll be able to put that to good use.

When I do, you will be able to read about it in these retirement portfolio updates, which track my progress in achieving the goal of 100% dividend funded financial independence.

Disclosure: I am/we are long SPG, CAT, BTI, JNJ, IIPR, MMM, AMZN, ET, MPLX. 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.