The R.I.P. Portfolio's Q2 2020 Update
Summary
- This real-money portfolio was first introduced to the Seeking Alpha community in December 2015.
- The portfolio underperformed its benchmark in Q2 2020 and it is lagging the S&P 500's performance since late 2015.
- The portfolio was overweight Financials and Industrials heading into 2020 and that turned out to be a terrible decision given the fallout from COVID-19.
- However, I believe that this portfolio is still well-positioned for the next few years.
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.
Quarterly Market Update
After a terrible start to 2020, the last three months turned out to be a great quarter from a return perspective.
Source: Investing.com
Market volatility seems to be the new normal, at least as long as the COVID-19 headwinds are present, but in Q2 2020, investors were willing to look past the noise in the hopes of an economic recovery sooner rather than later. I tend to believe that a recovery is further out than current expectations. For example, according to FactSet, the bottoms-up estimate for Q2 2020 declined by 37%.
Source: FactSet
The remainder of 2020 is going to be a challenging business environment, in my opinion.
Looking back, from a sector perspective, the winners kept winning and the losers, well, kept losing during Q2 2020.
Source: Ziegler Capital Management
As shown, Energy, Financials and Industrials had lackluster quarterly performances - the three sectors have seen the largest declines on a YTD basis. I was overweight Financials and Industrials in the R.I.P. portfolio so this had a direct impact on the performance. Over the years I have been heavily invested in Technology (positive), Industrials (negative), Financials (negative, outside of late-2019), Materials (negative) and Healthcare (positive) so the portfolio performance has been subpar for an extended period of time. And the first three months of 2020 turned out to be a complete disaster, as such I will likely be playing catch up for a while now.
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 June 2020 (increased exposure to the Funds category and decreased exposure to the Industrial category).
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 |
| Industrials/Conglomerates | 10% | 5-15% |
| Healthcare | 10% | 5-15% |
| Financials | 10% | 5-20% |
| Insurance | 5% | 3-7% |
| Technology | 10% | 5-15% |
| Communication Services | 10% | 5-15% |
| Basic Materials | 5% | 3-7% |
| Funds | 25% | 20-30% |
| Consumer | 10% | 5-15% |
| Other* | 5% | 0-10% |
* 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.
Q2 2020 Update
Below you will find the portfolio and its performance, and the activity for the second quarter of 2020.
| Company | Ticker | # of shares | Price At 6/30/2020 | Beg. Value - 4/1/2020 | Activity - Purchases (Sales) | Quarterly Unrealized G/L | Quarterly Realized G/L | Current Value | Unrealized Gain (Loss) | Portfolio Weighting | YOC | Current Yield | Annual Income |
| General Electric | (GE) | 340.195 | $6.83 | $3,492 | $(795) | $(373) | $(595) | $2,324 | $(4,094) | 1% | 0.2% | 0.6% | $14 |
| Westinghouse Air Brake Tech. | (WAB) | 15.15 | 57.57 | 728 | - | 145 | - | 872 | (122) | 0% | 0.7% | 0.8% | 7 |
| Baker Hughes | (BKR) | 25.00 | 15.39 | 263 | - | 122 | - | 385 | (542) | 0% | 1.9% | 4.7% | 18 |
| Honeywell | (HON) | 49.28 | 144.59 | 6,555 | - | 571 | - | 7,126 | 1,620 | 4% | 3.2% | 2.5% | 177 |
| Berkshire Hathaway | (BRK.B) | 37.00 | 178.51 | 3,839 | 2,847 | (82) | - | 6,605 | (427) | 4% | 0.0% | 0.0% | - |
| Raytheon Technologies | (RTX) | 26.37 | 61.62 | 2,471 | (938) | 92 | - | 1,625 | (576) | 1% | 2.3% | 3.1% | 50 |
| AT&T | (T) | 216.72 | 30.23 | 6,237 | - | 315 | - | 6,552 | 1,223 | 4% | 8.5% | 6.9% | 451 |
| Verizon | (VZ) | 74.81 | 55.13 | 3,773 | 215 | 137 | - | 4,124 | 675 | 2% | 5.3% | 4.5% | 184 |
| Franklin Income | (FKINX) | 2841.06 | 2.05 | 5,429 | - | 395 | - | 5,824 | 990 | 3% | 7.1% | 5.9% | 341 |
| WisdomTree US Divi Growth ETF | (DGRW) | 240.78 | 45.49 | 8,083 | 1,474 | 1,396 | - | 10,953 | 961 | 6% | 2.8% | 2.8% | 301 |
| iShares Core Divi Growth ETF | (DGRO) | 132.04 | 37.60 | 4,275 | - | 689 | - | 4,965 | 461 | 3% | 2.9% | 2.9% | 146 |
| Fidelity MSCI Real Estate ETF | (FREL) | 72.34 | 23.38 | 3,510 | (2,064) | 246 | (344) | 1,691 | (93) | 1% | 4.5% | 4.5% | 77 |
| Vanguard EM ETF | (VWO) | 21.00 | 39.61 | - | 761 | 71 | - | 832 | 71 | 0% | 4.2% | 4.2% | 35 |
| Schwab US Dividend ETF | (SCHD) | 51.22 | 51.75 | - | 2,700 | (49) | - | 2,651 | (49) | 2% | 3.7% | 3.7% | 99 |
| Schwab US Large-Cap ETF | (SCHX) | 18.00 | 74.10 | - | 1,319 | 15 | - | 1,334 | 15 | 1% | 2.0% | 2.0% | 27 |
| Walt Disney | (DIS) | 34.27 | 111.51 | 3,311 | - | 511 | - | 3,821 | 1,238 | 2% | 0.0% | 0.0% | - |
| Bank of America | (BAC) | 404.17 | 23.75 | 8,517 | - | 1,082 | - | 9,599 | 3,649 | 5% | 4.9% | 3.0% | 291 |
| Citigroup | (C) | 56.73 | 51.10 | 2,365 | - | 534 | - | 2,899 | 305 | 2% | 4.5% | 4.0% | 116 |
| KeyCorp | (KEY) | 87.92 | 12.18 | 899 | - | 172 | - | 1,071 | 195 | 1% | 7.4% | 6.1% | 65 |
| Fifth Third Bank | (FITB) | 51.87 | 19.28 | 770 | - | 230 | - | 1,000 | 268 | 1% | 6.8% | 5.0% | 50 |
| DuPont | (DD) | 9.14 | 53.13 | 311 | - | 175 | - | 486 | (384) | 0% | 1.6% | 2.9% | 14 |
| Corteva | (CTVA) | 54.99 | 26.79 | 1,286 | - | 187 | - | 1,473 | (66) | 1% | 1.9% | 1.9% | 29 |
| Dow Chemical | (DOW) | 72.77 | 40.76 | 2,070 | 32 | 864 | - | 2,966 | (742) | 2% | 5.5% | 6.9% | 204 |
| Synchrony Financial | (SYF) | 125.61 | 22.16 | 1,996 | - | 788 | - | 2,783 | (99) | 2% | 3.8% | 4.0% | 111 |
| Target | (TGT) | 11.76 | 119.93 | 1,090 | - | 321 | - | 1,411 | 750 | 1% | 4.7% | 2.2% | 31 |
| Kroger | (KR) | 139.16 | 33.85 | 4,179 | - | 532 | - | 4,711 | 1,161 | 3% | 2.8% | 2.1% | 100 |
| Starbucks | (SBUX) | 14.93 | 73.59 | 977 | - | 122 | - | 1,099 | 389 | 1% | 3.5% | 2.2% | 24 |
| Johnson & Johnson | (JNJ) | 42.31 | 140.63 | 5,510 | - | 439 | - | 5,949 | 1,685 | 3% | 4.0% | 2.9% | 171 |
| Amgen Inc. | (AMGN) | 8.97 | 235.86 | 1,805 | - | 310 | - | 2,115 | 689 | 1% | 3.6% | 2.5% | 52 |
| Pfizer | (PFE) | 286.55 | 32.70 | 10,266 | (1,073) | 177 | 107 | 9,370 | (113) | 5% | 4.6% | 4.6% | 436 |
| Merck | (MRK) | 20.82 | 77.33 | 1,589 | - | 21 | - | 1,610 | 552 | 1% | 4.8% | 3.2% | 51 |
| Charles River Labs | (CRL) | 11.00 | 174.35 | 1,388 | - | 530 | - | 1,918 | 784 | 1% | 0.0% | 0.0% | - |
| Teladoc | (TDOC) | 32.00 | 190.84 | 4,960 | - | 1,147 | - | 6,107 | 4,370 | 3% | 0.0% | 0.0% | - |
| Cardinal Health | (CAH) | 6.66 | 52.19 | 316 | - | 31 | - | 348 | (91) | 0% | 2.9% | 3.7% | 13 |
| AIG warrants | AIGWS | 27.00 | 1.40 | 23 | - | 14 | - | 38 | (454) | 0% | 0.0% | 0.0% | - |
| MetLife | (MET) | 75.93 | 36.52 | 1,780 | 501 | 492 | - | 2,773 | 481 | 2% | 6.1% | 5.0% | 140 |
| Prudential Financial | (PRU) | 36.98 | 60.90 | 1,068 | 865 | 319 | - | 2,252 | (178) | 1% | 6.1% | 6.6% | 148 |
| Brighthouse Financial | (BHF) | 4.00 | 27.82 | 97 | - | 15 | - | 111 | (79) | 0% | 0.0% | 0.0% | - |
| Principal Financial Group | (PFG) | 1.10 | 41.54 | 34 | - | 12 | - | 46 | (9) | 0% | 4.4% | 5.3% | 2 |
| Apple | (AAPL) | 22.20 | 364.80 | 5,631 | - | 2,468 | - | 8,099 | 5,629 | 5% | 2.9% | 0.9% | 73 |
| (TWTR) | 128.00 | 29.79 | 3,144 | - | 669 | - | 3,813 | 1,366 | 2% | 0.0% | 0.0% | - | |
| (FB) | 8.00 | 227.07 | 1,168 | - | 649 | - | 1,817 | 493 | 1% | 0.0% | 0.0% | - | |
| Cisco | (CSCO) | 145.38 | 46.64 | 5,674 | - | 1,106 | - | 6,781 | 2,932 | 4% | 5.4% | 3.1% | 209 |
| Intel | (INTC) | 81.03 | 59.83 | 4,364 | - | 484 | - | 4,848 | 1,977 | 3% | 3.7% | 2.2% | 107 |
| SoftBank | (OTCPK:SFTBY) | 47.00 | 25.18 | 829 | - | 354 | - | 1,183 | 175 | 1% | 0.0% | 0.0% | - |
| Cloudera | (CLDR) | 0.00 | 7.87 | 464 | (720) | 255 | 387 | - | - | 0% | 0.0% | 0.0% | - |
| Accenture plc | (ACN) | 5.29 | 214.72 | 860 | - | 276 | - | 1,136 | 560 | 1% | 2.9% | 1.5% | 17 |
| General Motors | (GM) | 163.10 | 25.30 | 3,389 | - | 737 | - | 4,126 | (767) | 2% | 0.0% | 0.0% | - |
| Procter & Gamble | (PG) | 8.89 | 119.57 | 972 | - | 92 | - | 1,063 | 422 | 1% | 4.1% | 2.5% | 27 |
| Ollie's Bargain Outlet | (OLLI) | 8.00 | 97.65 | 371 | - | 410 | - | 781 | 306 | 0% | 0.0% | 0.0% | - |
| Alibaba | (BABA) | 1.00 | 215.70 | 194 | - | 21 | - | 216 | 92 | 0% | 0.0% | 0.0% | - |
| Wabash National Corp. | (WNC) | 92.50 | 10.62 | 665 | - | 318 | - | 982 | (264) | 1% | 2.4% | 3.0% | 30 |
| Under Armour | (UA) | 132.00 | 8.84 | 838 | 221 | 108 | - | 1,167 | (662) | 1% | 0.0% | 0.0% | - |
| Other* | -- | -- | -- | 9,322 | 1,120 | 5,566 | - | 16,008 | 3,685 | 9% | 0.3% | 0.3% | 52 |
| CASH | -- | -- | -- | 21 | (14) | -- | -- | 7 | -- | 0% | -- | -- | -- |
| $143,165 | $6,450 | $26,230 | $(445) | $175,845 | $30,355 | 100% | 3.1% | 2.6% | $4,487 |
| Industry/Portfolio Companies | Value | Portfolio Weighting | Goal Weighting | Over (Under) |
| Industrials/Conglomerates - GE, HON, BKR, WNC, BRK.B, SFTBY, RTX, WAB | $21,101.92 | 12% | 10% | 2% |
| Healthcare - JNJ, PFE, AMGN, CAH, MRK, CRL, TDOC | 27,416.89 | 16% | 10% | 6% |
| Financials - BAC, C, KEY, FITB | 14,568.98 | 8% | 10% | -2% |
| Insurance - AIG*, MET, BHF, PRU, PFG | 5,219.95 | 3% | 5% | -2% |
| Technology - AAPL, CSCO, INTC, CAN | 20,863.27 | 12% | 10% | 2% |
| Communication Services - T, VZ, DIS, TWTR, FB | 20,126.96 | 11% | 10% | 1% |
| Basic Materials - DD, DOW, CTVA | 4,925.14 | 3% | 5% | -2% |
| Funds - FKINX, DGRW, DGRO, FREL, VWO, SCHD, SCHX | 28,277.78 | 16% | 25% | -9% |
| Consumer - KR, GM, TGT, UA, BABA, PG, SBUX, SYF, OLLI | 17,357.24 | 10% | 10% | 0% |
| Other - (XIN), (RHE), (FSI), (MTZ), (AVD), (GPRE), (KTOS), (TSLA), GE call options, (APPN), (Z), (NIO), (GTX), (REZI), (LYFT), (UBER), (OTIS), (CARR) | 16,008.36 | 9% | 5% | 4% |
| Cash | 6.96 | 0% | 0% | 0% |
| 100% | ||||
| *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 a price-to-book a basis, but, on the other hand, the portfolio holdings also have significantly lower-than-average ROA and ROE ratios. More simply put, the portfolio is positioned higher on the risk spectrum.
Lastly, the R.I.P. portfolio is highly levered to the Financial Services sector and Large Cap value still makes up approximately 49% of the total assets (down from 60% at the end of fiscal 2018). See more below about how this value-tilt has impacted the portfolio.
Portfolio Performance for the current period and since the portfolio was first introduced to SA community (December 4, 2015)
| Return (Q2'20) | Return (YTD) | Return (Intro) | |
| 17.9% | -9.7% | 26.6% | |
| This period | YTD | Since Intro | |
| Beg. Balance | $143,165 | $180,559 | $52,610 |
| Contributions | 6,450 | 13,552 | 96,410 |
| Unrealized G/L | 26,258 | (18,237) | 26,853 |
| Ending Balance | $175,873 | $175,873 | $175,873 |
| Dividend Inc. | $1,111 | $2,246 | $14,358 |
| Realized G/L | $(445) | $(2,245) | $3,039 |
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 $1,111 in Q2 2020, which is slightly higher than the year-ago quarter ($1,108 in Q2 2019). The portfolio's dividend income for 2020 is projected to be approximately 10% higher than the total income received in 2019 and this is after the disastrous dividend cuts announced during the current quarter (see more on this below). 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. And the portfolio [again] underperformed 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 had a value-tilt and has been overweight financials - 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 over the next 3-to-5 years.
From a sector perspective, Industrials and Basic Materials have been the most significant drags to the portfolio's performance (i.e., the overweight GE position did not work out as planned, obviously).
During the most recent quarter, the top performers and underperformers for the portfolio were: Performers - [1] Tesla, [2] Apple, and [3] WisdomTree US Dividend ETF. Underperformers - [1] GE, [2] Berkshire Hathaway, and [3] Pfizer.
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
Buybacks and/or Dividend:
- Johnson & Johnson increased its quarterly dividend by 6.3% (from $0.95 to $1.01), which brings the forward dividend yield to 2.8% based on today's price.
- General Motors suspended its quarterly dividend due to liquidity concerns.
- MetLife increased its quarterly dividend by 4.5% (from $0.44 to $0.46), which brings the forward dividend yield to 5.2% based on today's price.
- Apple increased its quarterly dividend by 6.5% (from $0.77 to $0.82), which brings the forward dividend yield to 0.86% based on today's price.
- Disney suspended its quarterly dividend (July payment date) due to liquidity concerns. However, I believe that the suspension could very well extend into 2021 given the backdrop.
- Cardinal Health increased its quarterly dividend by 1% (from $0.4811 to $0.4859), which brings the forward dividend yield to 4.0% based on today's price.
- Kroger increased its quarterly dividend by 12.5% (from $0.16 to $0.18), which brings the forward dividend yield to 2.2% based on today's price.
Other Noteworthy News:
- Merck announced a spinoff of its women's health, legacy brands and biosimilars businesses. The deal is estimated to be ~$6.5B.
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;
- an improving regulatory environment and a rising interest rate environment (although an improving rate environment trend will likely not actually happen over 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.
Final Thoughts
Q2 2020 was a strong quarter from a return perspective but the R.I.P. portfolio is still significantly underperforming its benchmark. I expect that the portfolio will be playing catching up over the next few quarters but I like how the portfolio is currently positioned. I have been in risk-off mode since mid-2018 (i.e., early) and I believe that it will pay huge dividends over the next 18-24 months as the COVID-19-related headwinds will likely be apart of the story for at least the next few quarters. 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 another 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 2021. I believe that 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. Plus, both of these companies are top-5 positions.
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
This article was written by
Disclosure: I am/we are long AAPL, GE, BRK.B, PFE, JNJ, BAC, C, FITB, INTC, CSCO, TSLA, NIO, XIN, DGRW, DGRO, FREL, VWO, T, 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.