Over the weekend, after reviewing the recent moves on the portfolio (specifically the taxable account), I realized after some number crunching that the significant rotation into bonds lately (to reduce volatility) caused the overall estimated future dividend growth to dip down to 5%. What does this mean? It means I have to increase my allocation to the "High DGI" holdings for future growth, and double-check that the current holdings there have high DGI potential. That brings me to my holding in iShares S&P 500 Value ETF (NYSEARCA:IVE)...
This ETF has exhibited high dividend growth in the last 3-5 years. However I am concerned that during a recession, the dividend will go down significantly (as it did in the last one). It has a good percent allocated to financials, energy, and industrials, among others. Time to find replacements where I have more control of my "dividend destiny." Ex-div was was last week, so good time to sell it.
I am looking for companies similar to my other high DGI holdings such as NKE and TROW. None of them cut their dividends during the last recession. After much research, I settled on Microsoft (NASDAQ:MSFT) and Nasdaq Inc. (NASDAQ:NDAQ). Intercontinental Exchange (NYSE:ICE) was a close second choice to NDAQ.
Why MSFT? Despite the fear of the "Death of the PC" and being non-competitive with industry giants like Google and Apple, MSFT still rules the Operating System market, and has a wide moat in business software and tools. PCs are here to stay, and no, tablets are never going to replace them. It didn't cut its dividend in the last recession, and in fact raised it at the end of 2008. It is also one of three or four companies with the AAA credit rating. Its trailing P/E is deceptively high (i.e., due to writedowns on the Nokia investment).
It's funny that as a former software engineer, I had never considered investing in MSFT! I guess back then, I ruled out any company with a market cap greater than $10B.
Why NDAQ? Like my recent purchase of CBOE, it is a wide moat oligopolic business (same reason I love Visa and Mastercard.) Although it has a short dividend history, its low payout ratio (under 30 percent), profitability, wide moat, low capital expenditure to defend its moat, and abundant cashflow gives me confidence it'll continue to raise its dividend.
It's been a busy couple of weeks. The portfolio is getting closer to where I want it to be. Once I reach that point, there should be a lot less trading...
- Sold all 400 shares of IVE (3% gain excluding dividends)
- Bought 300 shares of MSFT, with plans to add more in the future as cash becomes available
- Bought 400 shares of NDAQ
Disclosure: I am/we are long NDAQ, MSFT.