This real-money portfolio was first introduced to the Seeking Alpha community in December 2015.
The portfolio outperformed its benchmark in Q4 2019, but it is still lagging the S&P 500's performance since late-2015.
I believe that this portfolio is in a great position to benefit from 3 major trends in 2020 and beyond.
The Retire In Peace portfolio, or R.I.P. portfolio, was first introduced to the Seeking Alpha community in December 2015 and I have published quarterly articles that captured the activity and performance of the portfolio since that point in time. The companies that I write about on SA are largely the holdings of the R.I.P. portfolio, so the main purpose for the quarterly articles is to allow for my SA followers to track the performance of the stocks that I write about on this platform.
See the article linked above for additional details on what I would like to accomplish with these quarterly updates. Additionally, the goals for the portfolio and my long-term strategy are identified in the sections below.
Year-End Market Update
After a down year in 2018, the S&P 500 finished the last 12 months up by over 30 percentage points. Additionally, the bull market that many fear is long in the tooth is set to cross the 11-year mark in March 2020.
Source: 2019 stock market report, Fidelity
Q4 2019 turned out to be a great (and volatile) quarter from a total return perspective, with Technology and Communication Services leading the charge.
Source: 2019 stock market report, Fidelity
Now bringing it back to the R.I.P. portfolio - I have been heavily invested in technology (positive), industrials (positive), financials (positive, especially in Q4 2019), materials (negative) and healthcare (negative) so the quarterly performance was pretty much in line with expectations, i.e., slightly underperformed the benchmark on a YTD basis.
And while the National Association of Business Economics, or NABE, sees slower growth and rising recession risks in the years ahead (see chart below), Goldman Sachs believes that the U.S. "is not close to a recession."
I tend to agree with the NABE in that I believe that the underlying fundamentals may be telegraphing a slight slowdown (but not a recession) in the nearish future. I have been in risk-off mode and repositioning the R.I.P. portfolio for a slowdown since mid-2018 (i.e., early or should I say wrong) so the next quarter or two should be more of the same from a total return standpoint.
In this article, I will highlight the recent changes to the R.I.P. portfolio and describe how the portfolio performed for the most recent period-end.
The R.I.P. Portfolio's Goals And Strategy
I am building this portfolio with retirement in mind, so I have 30-plus years to invest and make adjustments; therefore, the quarterly [and annual] volatility is not a major concern. These funds will stay in the market for the foreseeable future, so the portfolio will have the luxury of compounding for many years.
"Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't, pays it." - Anonymous
It is also important to note that this is a real-money portfolio. The R.I.P. portfolio consists of five different accounts: a Roth IRA, a Traditional IRA, and three taxable brokerage accounts. These are not my family's main retirement assets, but it is a portfolio that I hope will greatly contribute to a stress-free and relaxing retirement.
The Goals and Strategy section was last updated in January 2018.
Main Investments (i.e., core holdings) - The companies that are considered core holdings should have established management teams that have proven track records of creating value. Furthermore, the companies should have competitive moats and be above-average operators within the respective industries. The core holdings are mainly large cap companies that are widely held by the financial community and this is by design.
Goals & Strategy - The portfolio seeks primarily long-term capital appreciation by investing mainly in equity securities of high-quality companies that have already shown the ability to produce sustainable earnings growth.
The portfolio aims to beat the benchmark, the SPDR S&P 500 ETF (SPY) by at least 1% on an annual basis.
Missing out on short-term gains and/or having paper losses are not my main concerns, because I plan to stay committed to my long-term strategy of utilizing a bottoms-up investing philosophy to select companies that I plan to hold for many years.
The portfolio has the following allocation targets and acceptable ranges:
|Industry||Target Allocations||Acceptable Range|
* The Other category comprises of speculative investments in companies that have the potential to create outsized gains over the next three-to-five years (what I like to refer to as "investing in seedlings"). The investments within this category could eventually become longer-ranged holdings if after further analysis it is determined that the companies indeed have the attributes that I look for.
Contributions - I plan to contribute between $1,000 and $2,500 of new capital per month to the portfolio and I typically put the new capital to work each and every month, regardless of the performance of the broader market.
Q4 2019 Update
Below you will find the portfolio and its performance, and the activity for the fourth quarter of 2019.
|Company||Ticker||# of shares||Price At 12/31/2019||Beg. Value 10/1/2019||Activity - Purchases (Sales)||Quarterly Unrealized G/L||Quarterly Realized G/L||Current Value||Unrealized Gain (Loss)||Portfolio Weighting||YOC||Current Yield||Annual Income|
|Westinghouse Air Brake Tech.||(WAB)||15.10||77.80||1,083||-||91||-||1,175||180||1%||0.7%||0.6%||7|
|WisdomTree US Divi Growth ETF||(DGRW)||160.97||48.47||5,563||1,727||513||-||7,802||1,105||4%||2.4%||1.8%||142|
|iShares Core Divi Growth ETF||(DGRO)||99.20||42.07||3,861||-||312||-||4,173||681||2%||2.3%||2.3%||96|
|Fidelity MSCI Real Estate ETF||(FREL)||108.11||27.86||2,492||484||36||-||3,012||234||2%||4.8%||4.8%||145|
|Bank of America||(BAC)||397.81||35.22||12,478||(1,012)||2,544||450||14,011||8,061||8%||4.8%||2.0%||286|
|Fifth Third Bank||(FITB)||2.82||30.74||99||-||(12)||-||87||30||0%||4.8%||3.1%||3|
|Johnson & Johnson||(JNJ)||41.74||145.87||5,364||-||724||-||6,088||1,824||3%||3.5%||2.5%||150|
|Charles River Labs||(CRL)||11.00||152.76||1,456||-||224||-||1,680||546||1%||0.0%||0.0%||-|
|Principal Financial Group||(PFG)||1.06||55.00||60||-||(2)||-||59||4||0%||4.3%||4.0%||2|
|Procter & Gamble||(PG)||8.78||124.90||1,085||-||11||-||1,097||455||1%||4.1%||2.4%||26|
|Ollie's Bargain Outlet||(OLLI)||8.00||65.31||469||-||53||-||522||47||0%||0.0%||0.0%||-|
|Wabash National Corp||(WNC)||78.81||14.69||1,140||-||17||-||1,158||77||1%||2.3%||2.2%||25|
|Industry/Portfolio Companies||Value||Portfolio Weighting||Goal Weighting||Over (Under)|
|Industrials/Conglomerates - GE, HON, BKR, WNC, BRK.B, SFTBY, UTX, WAB||$26,172.20||14%||15%||-1%|
|Healthcare - JNJ, PFE, AMGN, CAH, MRK, CRL, TDOC||26,280.16||15%||10%||5%|
|Financials - BAC, C, KEY, FITB||19,962.32||11%||10%||1%|
|Insurance - AIG*, MET, BHF, PRU, PFG||4,563.55||3%||5%||-2%|
|Technology - AAPL, CSCO, INTC, ACN, CLDR||19,720.63||11%||10%||1%|
|Communication Services - T, VZ, DIS, TWTR, FB||22,199.86||12%||15%||-3%|
|Basic Materials - DD, DOW, CTVA||8,736.68||5%||5%||0%|
|Funds - FKINX, DGRW, DGRO, FREL||21,478.61||12%||15%||-3%|
|Consumer - KR, GM, TGT, UA, BABA, PG, SBUX, SYF, OLLI||19,441.85||11%||10%||1%|
|Other - XIN, RHE, FSI, MTZ, AVD, GPRE, KTOS, TSLA, GE call options, APPN, Z, NIO, GTX, REZI, APRN, LYFT, UBER||11,996.22||7%||5%||2%|
|*AIG TARP warrants included in value and weighting|
Sales, Purchases & Dividend Activity
Current Makeup Of Portfolio
Below is a graphic from Morningstar that captures a high-level snapshot of the R.I.P. portfolio as of the period-end.
Full Disclosure: The AIG Tarp warrants and GE options are not included in this Morningstar analysis.
There are a few data points that should be highlighted: the holdings of the R.I.P. portfolio are attractively valued when compared to the S&P 500 on both a price-to-book and price-to-prospective earnings basis, but, at the same time, the portfolio holdings also have significantly lower-than-average ROA and ROE ratios. More simply put, the portfolio is higher on the risk spectrum.
Lastly, the R.I.P. portfolio is highly levered to cyclical companies and Large Cap value still makes up approximately 52% of the total assets (down from 60% at the end of fiscal 2018).
Portfolio Performance for the current period and since the portfolio was first introduced to SA community (December 4, 2015)
|Return (Q4'19)||Return (YTD)||Return (Intro)||Return On Invested Capital (Review)|
|This period||YTD||Since Intro||Since Intro|
|Beg. Balance||$161,138||$124,676||$52,610||Initial Value||$46,042|
|Unrealized G/L||15,576||36,486||45,090||Realized G/L||5,284|
|Ending Balance||$180,559||$180,559||$180,559||Unrealized G/L||46,375|
|Realized G/L||624||1,681||5,284||Dividend Income||$12,113|
Full Disclosure: The American Association of Individual Investors, or AAii, prescribed calculation (The Beginning Vs. the End) was used for calculating the portfolio's return for each period-end.
From an income standpoint, the portfolio's annual dividend income has grown significantly since 2016 (portfolio was first introduced in December 2015).
The portfolio's dividend income was $997 in Q4 2019, which is slightly higher than the year-ago quarter ($920 in Q4 2018). The portfolio's dividend income for 2019 was approximately 15% higher than the total income received in 2018. It should also be noted that I do not have a specific income goal for the portfolio, but I have purposefully focused on investing in high-quality dividend paying stocks since late-2015.
For the most important metric, the R.I.P. portfolio has underperformed its benchmark (S&P 500) since the portfolio was introduced to the SA community on December 4, 2015. However, the portfolio outperformed its benchmark over the last three months.
There are two main factors that contributed to the portfolio's underperformance since its inception (let me stress that these are reasons, not excuses): the portfolio has a value-tilt and is overweight financials & healthcare - both factors have been out of favor for several years now. See my full-year 2018 article for additional detail on these contributing factors. However, these factors, in my opinion, will contribute to the portfolio outperforming in 2020 and beyond.
During the most recent quarter, the top performers and underperformers for the portfolio were: Performers -  Bank of America,  Apple, and  Pfizer; Underperformers -  Twitter,  DuPont, and  Cisco.
I consistently write about all of these positions so please see my current thoughts on each company/stock at my Seeking Alpha profile.
Noteworthy Quarterly News
Merger and/or Acquisitions:
- DuPont announced the spin-off and merger of its nutrition and bioscience division with International Flavors & Fragrances (NYSE:IFF). The $26.2B Reverse Morris Trust agreement will see current DuPont shareholders receive 55.4% ownership in the newly formed company, and DuPont the company will receive a cash payment in the amount of $7.3B when the deal closes.
Buybacks and/or Dividend:
- Starbucks increased its quarterly dividend by 13.9% (from $0.36 to $0.41), which brings the forward dividend yield to 1.84% based on today's price.
- Merck increased its quarterly dividend by 10.9% (from $0.55 to $0.61), which brings the forward dividend yield to 2.65% based on today's price.
- AT&T increased its quarterly dividend by 2% (from $0.51 to $0.52), which brings the forward dividend yield to 5.35% based on today's price. Additionally, the company entered into an accelerated buyback plan that calls for the company to retire ~100M shares, or $4B, in Q1 2020.
- Pfizer increased its quarterly dividend by 5.6% (from $0.36 to $0.38), which brings the forward dividend yield to 3.88% based on today's price.
Looking Ahead: It's Not About Tomorrow, It's About 10+ Years From Now
In a broader context, I have been positioning the R.I.P. portfolio to capitalize on 3 major trends:
- The digitalization megatrend, which includes artificial intelligence, autonomous cars and the Internet Of Things industry;
- a rising interest rate environment (although this trend may not actually happen in the next year or two); and
- the changing media space, which includes how companies will be structured and how content will be consumed by/distributed to customers.
See this quarterly update article for detailed explanations for my thoughts on each of the major trends. The following companies in my stock universe are the ones that I see being the biggest beneficiaries of these trends:
- Digitalization - Cisco, Intel, Apple, Accenture, General Electric, Honeywell, AT&T, and Verizon.
- Rising Rates - Bank of America, Citigroup, KeyBank, Fifth Third, AIG, Principal Financial, Prudential and MetLife.
- Media Shift - Disney, Twitter, AT&T, Facebook, and Verizon.
2019 was a great year for the market, but I do not expect the same type of performance in 2020. Again, I have been in risk-off mode since mid-2018 and I believe that it will pay huge dividends over the next 18-24 months. While the broader market may not rise as much as some experts are calling for, I do believe that the R.I.P. portfolio is positioned to post solid returns over the next 4 quarters, of course, barring an overall market meltdown.
The portfolio's value-tilt, including the heavy investments in the financial and healthcare sectors, has been out-of-favor for a while now (with the exception of Q4 2019), but I believe that it will be a different story in 2020. Bank of America and Pfizer will likely have the greatest impact to the portfolio's outperformance over the next few quarters, as both companies have promising business prospects in the current environment and are attractively valued.
Author's Note: I plan to still write about these companies on a regular basis so please consider following me if you would like to stay updated. And lastly, I always have these two quotes in mind whenever I make an investment decision:
"Behind every stock is a company. Find out what it's doing." - Peter Lynch
"Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time..." - Warren Buffett
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Disclosure: I am/we are long GE, WAB, BHGE, HON, BRK.B, UTX, T, VZ, FKINX, DGRW, DGRO, FREL, DIS, BAC, C, KEY, FITB, DD, CTVA, DOW, SYF, TGT, KR, SBUX, JNJ, AMGN, PFE, MRK, CRL, TDOC, CAH, MET, PRU, PFG, BHF, AAPL, TWTR, FB, CSCO, INTC, SFTBY, CLDR, ACN, GM, PG, OLLI, BABA, WNC, UA. 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.