Time For A Portfolio Check-Up!

Includes: EPD, KMI, KO, MCD, PM, WBA, XOM
by: Larry Smith

As I have stated in previous articles, it is my investing goal to outperform the S&P 500. Most years, I have been able to do that. Last year, my investment account returned 11.27%, while the S&P returned approximately 1%. In 2010, I had a gain of 21.8%, which was much better than the S&P's 12.8%. In 2009, the S&P's 19.7% return soundly trounced my meager 1% gain.

As I write this, the S&P is up approximately 11% for the year, while I have managed a gain of 3.46%. To be a successful investor, you must have an investing plan. Different styles of investing work for different people, but without a plan, your chance for success is greatly reduced. It is also wise to review your plan and see if there is an adjustment that can be made to improve returns. This past weekend, I spent some time reviewing my investing plan to make sure I had not veered from its path, and to see if there was some aspectI could tweak to improve my returns. In this article, I will share with you what I reviewed and what I found.

Let me start by briefly going over my investment rules:

  • Any stocks I buy must pay a dividend of at least 2%
  • The dividend must have a history of annual raises
  • The stock must be selling at a reasonable valuation
  • The business must have a sustainable product that will have a market far into the future
  • The business should have a moat, minimizing competition

I will add one thing that is not a not a rule, but more of a personality trait that does affect what stocks I own. I like to sleep at night, and I hate to lose money. Therefore, I tend to invest in rather boring, mature companies. I realize this keeps me from investing in any rocket ship that might double in a short time frame, but it also keeps me from investments that crash and burn.

I have mentioned previously that I have investments in several stocks that I consider my pillars. These are stocks that I intend to hold forever, or until their fundamental business story changes. I also occasionally invest in a company when I believe the stock market has mispriced a stock. These investments must still have the traits I have mentioned previously -- the only difference is I know I won't own them forever.

The chart below shows the stocks I owned at the end of 2011, and their return for the year. I consider Coca-Cola (NYSE:KO), Exxon (NYSE:XOM) and McDonald's (NYSE:MCD) to be pillars.


2011 Closing Price

2011 Return

Coca-Cola (KO)



McDonald's (MCD)



Philip Morris (NYSE:PM)



Exxon Mobil (XOM)



During 2011, I also invested in and sold out of positions in TransCanada (NYSE:TRP) for a gain of 12%, Enterprise Products Partners (NYSE:EPD) for a loss of 5.26%, and SandRidge Mississippian Trust (NYSE:SDT) for a loss of 4.3% When the year started I had a position in Canadian National Railway (NYSE:CNI), which I sold for a 2012 gain of 1.8%. Just to be clear, I had positions in XOM, KO, CNI and MCD at the beginning of 2011. Philip Morris (PM) was added in June when the price fell into the mid-60s.

A nice investment in PM and solid showings from MCD and XOM helped my 2011 immensely. My shorter term investments were up slightly, but nothing to brag about.

The chart below shows the companies I own now and their returns to date:


Price as of 07/30

Return to Date







Exxon Mobil



Kinder Morgan (NYSE:KMI)



Walgreen (WAG)



To show you how I got from I owned at the end of 2011 to the holdings I have right now, I will list every trade I've made so far this year and share what my thinking was at the time of the trade:

  • On January 13, I sold my entire PM position at $76.31. I have nothing against people who smoke, and I have nothing against people who own tobacco stocks. I just never feel right when I own them. I had a real nice gain in a relatively short period of time, and decided to sell. For the year, this will show as a loss of 2.7%, as PM was down a couple bucks from its 2011 closing price.
  • On the same day, I took the money from the PM sale and bought Enterprise Products (EPD) at $46.29/share. I really like the pipeline business, and consider EPD one of the better-run limited partnerships. As my investments are in a tax deferred account, I was aware of and concerned about the tax implications, but proceeded anyway.
  • On January 23, I sold my entire EPD position at $49.05. The more I researched the issue of holding a limited partnership in an IRA, the more I decided it was a headache I did not need. I read countless articles on the issue, and almost no two stated the same thing. I like to keep things simple, so I sold.
  • On January 24, I bought Kinder Morgan (KMI) at $32.63. I said I liked the pipeline business, and Kinder Morgan's general partner status avoids the tax issue associated with limited partnerships. With the El Paso acquisition, KMI is now the biggest pipeline operator in the country. KMI has forecast double digit annual dividend increases for the next several years. This company was added as a pillar -- I have no intention of selling unless the fundamental story changes.
  • On May 9, I added shares to my McDonald's position at $92.12. I have a lot of long term confidence in MCD and felt $92.12 was a good price. I may have been a little early, but long term, I will be fine. As of right now, this trade is a 2.5% loser.
  • On June 22, I bought a full position in Walgreen (WAG) at $29.80. My reasoning for buying WAG can be found in this article, which I wrote when I purchased the stock. WAG has had a nice bounce up to the $36.00 dollar range, but long-term, I think even better things are in store. I consider WAG another pillar.

So What Did I Learn?

Initially, after running the numbers, I was disappointed in my return for the year. However, after reviewing the stocks I own and what I think the future holds for them, I am very comfortable with my holdings and where I think the portfolio is headed.

My overall returns trail the S&P for the year due to the loss in MCD. McDonald's is my oldest and largest holding -- an 11% loss in MCD eats up much of the other gains. As a dividend growth investor, I have to accept the fact that if one of my large dividend growth stocks has a blockbuster year, as MCD did in 2011, the next year will probably not be as good.

I am very happy with the two long-term holdings I have added and the prices I added them at. KMI is my smallest dollar weighted position, and I will add to it at suitable prices. I am very bullish on WAG going forward, and if the stock price were to sink back below $30, I would happily add to my position.

The fundamental business story on my other three holdings -- KO, MCD and XOM -- remains intact, and l am happy I own them.

My weakness as an investor is to over trade, but this will be the third year in a row I have avoided making that mistake. If I had done a little more research on the tax issues surrounding limited partnerships in IRAs, I could have avoided buying EPD. Fortunately, I got out with a 5% gain, so that turned out all right.

Four of the five companies I own raised dividends substantially this year, which is of major importance to me as a dividend growth investor. XOM(21%), KO (7%), WAG (27%), and KMI (9% in the most recent quarter) have all announced dividend increases. McDonald's normally announces its dividend increase in September.

The stock price on all the holdings are reasonable, with only KO looking a little stretched.

Action Going Forward

As of right now, I do not see any reason to change anything I am doing. I have thought about rebalancing the portfolio, which would require selling some MCD, XOM, and maybe a little KO to add to my KMI and WAG positions. However, I believe MCD and XOM are relatively cheap, and do not think selling shares in those companies to add to KMI and WAG is a smart move at this time.

I do have cash on the sidelines, which I can put to work when I see a bargain, or I could add to KMI. I hesitate to do that, though. I believe the market is fairly priced right here, and I would prefer to wait until there is a pullback. I am not a market timer, but I do know the market has gone up rather quickly.

I also continue to look at all stocks, but especially those in sectors in which I do not currently have a position. I do not see any bargains at the moment, but will continue to look.

The exercise of reviewing your holdings and reminding yourself why you own what you own is a healthy process to go through. If you examine your portfolio with a critical eye, you may able to improve your investment results by seeing errors in your thinking, or by recognizing that a stock you own no longer fits your investment goals.

I invite readers to comment on any flaws they see in my portfolio or my thinking. If it makes me a better investor, I'm all for it.

Disclosure: I am long KO, MCD, KMI, XOM, WAG.