Seeking Alpha

Monthly Portfolio Update: December 2019

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Includes: AY, BEN, PEGI, SPG, TD
by: Danube Dividends
Danube Dividends
Dividend investing, long-term horizon
Summary

Highlight of the month: Pattern Energy's takeover deal.

Replacing part of our PEGI position with AY.

Summary of dividend payments and increases during December 2019.

Initiating a new position in SPG, TD and BEN.

Year-end status of the Danube Dividends DGI portfolio.

Highlight of the month: Pattern Energy's takeover deal

At the beginning of November 2019, one of our biggest holdings, Pattern Energy (PEGI) announced, that it had agreed to be acquired by Canada Pension Plan Investment Board. Stockholders will receive $26.75 per share in cash, with the transaction expected to close by the second quarter of 2020.

One month later, Pattern announced the expiration of the 35-day "Go-Shop Period" as well, citing that no further parties had expressed interest in pursuing a potential transaction deal.

Important to note, that as public shareholders we are definitely not aligned with management's decision on the 100% takeover deal, having looked at PEGI as a consistent high-income generator and one of the cornerstones of our dividend growth portfolio. Besides the tax implications of having to sell our shares with a significant gain, we also need to look for alternative investment opportunities to replace PEGI's dividend income.

The overall 155 shares (currently valued at $4139) produced $262 in gross annual dividends, implying a 6.33% yield threshold for alternative investments to replace PEGI by providing the same level of income in our portfolio.

Atlantica Yield plc (AY)

In search of alternative renewable energy stocks (mainly relying on Seeking Alpha's own peer comparison function), we identified Atlantica Yield as a potential investment candidate to reallocate a part of our PEGI holdings.

Atlantica is a well diversified integrated energy company that owns, manages and acquires renewable energy (68%), efficient natural gas (14%), electric transmission lines (14%) and water assets (4% of CAFD).

The company currently trades at a valuation multiple of 14x of FY 2019 midpoint CAFD (Cash Available for Distribution)/share guidance ($190M translating to $1.89 per share), which is still attractive despite its recent share price appreciation. Atlantica also offers a compelling ~6% dividend yield, that is well covered by CAFD with a payout ratio sitting at 83% of FY 2019 guidance. Management forecasts 8-10% CAGR until FY 2022, providing investors an attractive double-digit total return potential going forward.

Source: Atlantica Corporate Presentation

Accordingly, we initiated a position of 40 stocks in Atlantica in a dollar value of ca ~$1k during the month. We would like to increase our holdings up to $2k or 2% of our mid-term $100k portfolio size target financed from our current PEGI stake, should the yield stay around 6%.

Dividend payments and increases during the month

In December 2019, we received dividend payments from 21 companies totaling $227, in line with the current average gross monthly income forecast for our portfolio.

Source: Author's own illustration

Overall in 2019, we received dividends of $2538 in total, arriving at a monthly average gross payout of $212.

Source: Author's own illustration

Considering dividend increases, highlight of the month was AT&T's (T) announcement of a 2% increase, followed by W.P. Carey's (WPC) 0.2% raise along with Realty Income's (O) 0.2% dividend hike.

New cash allocation during the month

Toronto-Dominion Bank (TD)

In December, we started a net new position in Toronto-Dominion, a high quality Canadian dividend aristocrat bank, offering a ~4% dividend yield. The stock currently trades at a P/E level of ~11, providing a high probability of a double digit return going forward to 2022.

Source: FAST Graphs

A further catalyst for the company is the potential value creation of its future ~13.4% ownership stake in Schwab (SCHW) after the prestigious brokerage firm's recently announced merger with TD Ameritrade (AMTD) is completed.

Source: Impact for TD Bank of Schwab's Acquisition of TD Ameritrade

Based on the above reasoning, we initiated a position of 18 shares in TD Bank in a dollar value of ca ~$1k during the month. We would like to increase our holdings up to $3k or 3% of our mid-term $100k portfolio size target, should the yield stay around 4%.

Simon Property Group (SPG)

During December, we also added Simon as a net new member of our dividend growth stock portfolio, initiating a starting position of 7 shares in a dollar cost value of ca ~$1k. We would like to increase our holdings up to $3k or 3% of our mid-term $100k portfolio size target, should the yield approach 6%, translating to a share price of $140.

We do believe that premium malls will survive the "retail apocalypse", with Simon coming out as a winner from the consolidation of the industry. We also like the company's European exposure, frequently visiting the company's Parndorf, Austria location ourselves.

With the current P/AFFO valuation of ~13, investors can easily lock in a double-digit rate of return going forward to 2022, should the valuation return back to its historic mean level upon change of market sentiment.

Source: FAST Graphs

Franklin Resources (BEN)

As outlined in our recently published focus article, we initiated a 20-share position in BEN at an average price of $26.09 totaling $524 in dollar cost value, providing ca. $21.6 in forward annual dividend income at an above 4% starting yield. We consider Franklin to be a speculative turnaround bet at current levels, would therefore increase our holdings only up to $1000, or 1% of our mid-term target portfolio size of $100k.

Status of the Danube Dividends Portfolio

Looking at our overall portfolio, cash contributions and reinvested dividends since inception are totaling $54,290 as of December 2019. The current value of the portfolio sits at $68,971, producing $2,504 in forward annual net dividend income. The portfolio consists of 38 companies, with an average forward net yield on cost of 4.61%.

Source: Author's own illustration

Overall, 2019 was a strong year for the Danube Dividends portfolio, with a TWR (time-weighted rate of return) of 32.7%. Although this extremely short time frame makes it impossible to draw any conclusions on our performance, it is nice to see that our total returns are competitive with the overall market, with a significantly higher income component.

We would also like to take the chance to thank our readers for their support and valuable comments/messages since our debut at Seeking Alpha, and wish everyone of you a Successful and Happy New Year!

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Disclosure: I am/we are long AY, PEGI, O, WPC, T, BEN, TD, SPG. 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.