Maintaining a Balanced Portfolio: February 2017

The Nobel Prize winner Harry Markowitz stated that ‘a good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.’

In building my portfolio I strive for balance – with respect to companies, sectors, high yielders and high dividend growth stocks. During my relatively short time as a dividend growth investor I have learned that this balance is much more like an art than an exact science.

For instance when looking at the table below, it is clear that my actual portfolio diverges quite a bit from what I initially set out as an ‘ideal’ portfolio sector allocation.

 

Looking at the differences in portfolio allocation between ‘Ideal’ and ‘Actual’ in a chart makes the contrast even more clear.

One reason I am ‘over invested’ in Real Estate is the fact that 2015 and 2016 offered many attractive valuations in this sector. For instance I added to my W.P. Carey position a number of times during dips – resulting in the fact that this REIT is now a cornerstone position of my portfolio. The same goes for several Healthcare and Lodging REITs (Omega Healthcare InvestorsLaSalle Hotel Properties, etc) that were attractively priced.

On the other hand I struggled (and continue to struggle) to find attractive valuations and dividend growth in Consumer Staples. Unilever is on my radar but is currently showing huge gyrations due to a possible takeover bid and subsequent retraction thereof by Kraft Heinz. I bought shares of Diageo in early 2016 for ~$102. I would like to add more to this position if the price would come down to around ~$104. CVS  remains an attractive candidate due to it’s high dividend growth rate. However, with 35 shares in my portfolio I am most likely done adding here.

Bottom line for me is that any ‘Ideal’ Sector allocation is always much more like a guideline than a law. I will likely hold off on buying new Real Estate companies in the near future and try a little harder to find good value in Consumer Staples, Financials and Information Technology. I might even change my mind and add some Utilities.

However, with 38 high quality dividend growth stocks in my portfolio my main concern remains a stable, predictable and growing dividend pay-out. The diversification in sectors and companies – no company position exceeds ~6% – continues to provide me with protections and opportunities.

How do you approach portfolio diversification? More or less rigid than I do? Leave a comment/reply to share your thoughts!

New Buy: Qualcomm Inc. (QCOM)

Although I like composing watchlists, I like executing on them even more. At the beginning of this month I put three companies in my crosshairs and yesterday I pulled the trigger on the first one.

As my first buy of the month I bought an additional 34 shares of Qualcomm Inc. (QCOM) for a total of $1,890.87. In this post I break down my reasons for adding to the existing QCOM position in my portfolio and what this means for my forward dividend income. 

Qualcomm develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI).

In October of last year the company announced the acquisition of NXP Semiconductors for a total of $47 billion. Through this acquisition Qualcomm will be able to grow faster in future industries such as drones and self driving cars.

My original purchase of Qualcomm dates back to November of 2015 when the stock was at $48.80. I initiated a modest position of 16 shares back then.

After that purchase Qualcomm enjoyed a rally to ~$70. More recently the stock showed a sharp decline due to several competition and patent issues.

I tend to like price drops because they are potential buying opportunities. However, as a DGI investor I don’t care too much about price at any given day but try to focus on other factors. One of these factors is the fact that Qualcomm is a dividend contender, boasting 14 years of dividend increases. The current yield is an appealing 3.86% with a payout of 65%.

Qualcomm’s Earnings per Share (EPS) show a 5 year annualized growth of +7.13%. At my time of purchase the Price/Earnings (PE) ratio was 16.75, below the 5 year average of 18.18.  

Both the current as well as the 5 year average PE are lower than the industry average, indicating that QCOM is currently undervalued as compared to other Semiconductors & Semiconductor Equipment stocks.

In their February 11 report S&P Capital IQ marks Qualcomm as a 4 star buy with 12 month target price of $70.

Given Qualcomm’s dividend of $0.53  per share and it’s quarterly payout this buy means an addition of $72.08 to my forward dividend income.

What do you think about Qualcomm right now? Leave a comment/reply to share your thoughts!

My Buy Watchlist for February

After my Amgen and Delta buys in January it is time to shift my attention to new buys for February. There are currently three candidates on my watchlist: Johnson & Johnson, Qualcomm and VF Corporation. In this post I go over these three candidates and set out my reasons for why they are on the watchlist – and make my trigger finger itchy!

Johnson & Johnson (JNJ) researches and develops, manufactures, and sells various products in the health care field worldwide. It operates through three segments: Consumer, Pharmaceutical, and Medical Devices.

The company is a favorite among dividend growth investors and with good reason: JNJ is a dividend champion with 54 years of raising dividends. It’s current yield is a decent 2.82% with a payout ratio of 54%.

I already hold 12 shares of JNJ in my portfolio but would like to add more. Apart from it’s attractive dividend features the current PE ratio is 19.12 versus a 5 year historic average of 19.40. Taking PE as a measure this means that I am interested in adding more JNJ when the price is below 115.

Second on my list is Qualcomm Inc. (QCOM). This company develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI).

Qualcomm is a dividend contender, boasting 14 years of dividend increases. The current yield is a very appealing 4.01%  with a payout of 65%.

My original purchase of Qualcomm dates back to November of 2015. Since then the shares enjoyed a rally to ~70 USD. More recently the stock showed a sharp decline due to several competition and patent issues. The current PE is 16.12, below it’s historic 5 year average of 18.18. The relatively low PE plus the great 4+% dividend raises my interest in adding more Qualcomm in the near future.

The final candidate on my February watchlist is VF Corporation (VFC). The company  engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products in the United States and Europe. Famous brands include The North Face, Vans, Timberland, Kipling, Napapijri, Jansport, Reef, Smartwool, Eastpak, lucy, and Eagle Creek brands. It also provides denim, casual apparel, footwear, and accessories under the Wrangler, Lee, Lee Casuals, Riders by Lee, Rustler, Timber Creek by Wrangler, and Rock & Republic brands.

Retail – recently labeled as ‘uninvestable’ by a Wells Fargo analyst – is not the most popular investment category right now. Keeping with the trend, VFC’s price has pretty much collapsed in the past year. However, just by looking at the dry facts of VF Corporation there remains a lot to be liked.

The company is a dividend champion with 44 year of raising dividends. The Greensboro, NC clothing behemoth has been around since 1899 and has thus weathered some storms before. Due to it’s price decrease the current yield is at a very decent 3.42% with a payout ratio of 59%. VF Corporation’s PE is 17.10, way below it’s 5 year historic average of 21.83.

What do you think about these three companies? What is your watchlist for the month? Leave a comment/reply to share your thoughts!

New Buy: Amgen Inc. (AMGN)

At the same day President Trump met with Health Care CEOs in the White House I decided to finally pull the trigger on a Health Care giant I have been eyeing for a long time. I was actually hoping that the ‘Tweeter-in-Chief’ would get the price down a bit – instead it enjoyed a little rally in the days after the meeting. Short term noise aside, let’s get to it!

On January 31 I bought 18 shares of Amgen Inc. (AMGN) for a total of $2,786.02. In this post I break down my reasons for adding Amgen to my portfolio and what this means for my dividend income. 

Amgen Inc. discovers, develops, manufactures, and delivers human therapeutics worldwide. It offers products for the treatment of illness in the areas of oncology/hematology, cardiovascular, inflammation, bone health, nephrology, and neuroscience. The company’s products include – among many others – Neulasta, a pegylated protein for the treatment of cancer patients; NEUPOGEN, a recombinant-methionyl human granulocyte colony-stimulating factor for reducing the incidence of infection for patients with non-myeloid malignancies; and Enbrel to treat rheumatoid arthritis, plaque psoriasis, and psoriatic arthritis.

The company serves pharmaceutical wholesale distributors; and physicians or their clinics, dialysis centers, hospitals, and pharmacies, as well as consumers. It has collaborative agreements with Xencor, Inc; UCB; Novartis AG; Bayer HealthCare Pharmaceuticals Inc; Advaxis, Inc.; Dr. Reddy’s Laboratories Ltd.; Biocartis Group NV; and Nuevolution AB. The company also has a strategic collaboration with Immatics Biotechnologies GmbH. Amgen Inc. was founded in 1980 and is headquartered in Thousand Oaks, California.

Amgen has been paying dividends since 2011 -making it a ‘Dividend Challenger’ on David Fish’s list of Dividend Champions, Contenders and Challengers. The annualized dividend growth rate has been a very impressive 32.65%. From a dividend growth perspective this makes Amgen attractive, also given the fact that the pay-out ratio is quite modest at 44.92%.

The current dividend yield is  2.75% – lower than my average target of 3.5% – but similar to my recent Delta buy I am willing to accept this as long as the dividend growth rate makes up for it.

Amgen’s Earnings per Share (EPS) show a 5 year annualized growth of 20.4%. At my time purchase the Price/Earnings (PE) ratio was 15.2, below the 5 year average of 17.7.  

Both the current as well as the 5 year average PE are lower than the industry average, indicating that Amgen is currently undervalued as compared to other Health Care stocks.

In their February 4 report S&P Capital IQ marks Amgen as a 4 star buy with 12 month target price of USD 214.

Given Amgen’s yearly dividend of $1.15  per share this buy means an addition of $20.7 to my forward dividend income.

What do you think about Amgen? Leave a comment/reply to share your thoughts!

 

Books that got me started with investing

Two years ago I knew next to nothing about dividend growth investing. I always thought that the way to make money with stocks was to be a trader. I also knew that as an ‘average Joe’ you would always be behind professional traders, hedge funds and the like.

Behind in terms of material information that influence stock prices, and behind in terms of speed of trade executions. Articles and books like Michael Lewis ‘Flash Boys‘ confirmed this idea.

I changed my point of view when I learned about dividend growth investing (DGI). I learned that while for a regular, non-professional trader time and speed can be a disadvantage, for a dividend growth investor time can be the biggest asset. Some of the world’s most iconic investors stress how time in the market beats timing the market.

In this post I share some of the books that helped me get started with dividend growth investing. They will also be featured in my Resources section and I intend to add more along the way.

The first book I bought – back in early 2015 – was The Ultimate Dividend Playbook. Income, Insight and Independence for Today’s Investor by Josh Peters. The book is a great introduction on the concept of DGI and how to value stocks. The Ultimate Dividend Playbook is a very practical book, filled with many charts and examples to illustrate the concepts and terminology you want to be familiar with as a beginning investor.

The Snowball is the title of Warren Buffett’s biography and is also the perfect summary of his investment philosophy. Slowly but surely Buffett used the power of time and dividend compounding to create the Berkshire Hathaway holding company- which is now the fourth largest public corporation in the world.

The person that had the most influence on my decision to start with DGI is probably Jason Fieber. On his blog Dividend Mantra he provided analysis, insight and encouragement to aspiring investors like myself. Jason bundled some of his best blogs in a Kindle e-Book called The Dividend Mantra Way. I highly recommend his book and also his new blog – Mr Free at 33.

After attending a lecture by author Alec Ross I bought his book The Industries of the Future. While not a dividend investment book as such, Ross does a great job in describing what the dominant economic trends will be in the next several decades. He describes how robotics, genetics, cyber-security and more are shaping new industries and destroying old ones.

MIT researchers Erik Brynjolfsson and Andrew McAfee show in The Second Machine Age the relentless pace of digital transformation which is disrupting and upending entire industries. Similar to Alec Ross’ book this is not a book that directly helps making investment decisions on specific stocks, but it does help with formulating investment strategies for those with a long term horizon.

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