Subscribe to Portfolio Insight and Save!

Use my affiliate link to sign up for a free 14-day, no-obligation trial of Portfolio Insight. No credit card required. If you decide to subscribe during the trial period, you'll receive a 20% discount on the first year's annual subscription price of $330. Please note the 20% affiliate discount does not apply to the monthly rate.

Saturday, September 17, 2022

Monthly Review Of DivGro: August 2022

Welcome to the August review of DivGro, my portfolio of dividend growth stocks. 

These reviews aim to provide a summary of dividends received and to detail buy and sell transactions. Additionally, I look at how the month's activities have impacted DivGro's projected annual dividend income (PADI).

This month, I opened two new positions and added shares to four existing positions. Additionally, I closed one position and reduced my holdings in two positions. Three DivGro stocks announced dividend increases in August. The net result of these changes is that PADI increased by about 0.7% in August. Year over year, PADI increased by 31.5%.

As for dividend income, in August, I received dividends totaling $3,239 from 27 stocks in my portfolio, a year-over-year increase of 53%. So far in 2022, I've collected $30,253 in dividends, or about 70% of my 2022 goal of $43,200.

Assuming the status quo and given DivGro's PADI of $45,203, I can expect to receive $3,767 in dividend income per month, on average, in perpetuity. Of course, most of the stocks I own are dividend growers, so I expect my dividend income to increase over time! Furthermore, I plan to reinvest dividends until I retire, so DivGro's PADI should continue to grow through dividend growth and through compounding.


The above chart presents a rolling 12-month average of DivGro's projected monthly dividend income. 

I'm happy to announce that I've achieved my 2022 goal of increasing PADI to $45,000!

Dividend Income


In August, I received a total of $3,239 in dividend income from 27 different stocks:

Here is a list of the dividends I collected in August:

  • Apple Inc (AAPL)income of $46.00
  • AbbVie Inc (ABBV)income of $141.00
  • Accenture plc (ACN)income of $9.70
  • Virtus Artificial Intelligence & Technology Opportunities Fund (AIO)income of $120.00
  • Air Products and Chemicals, Inc (APD)income of $25.92
  • Bristol-Myers Squibb Company (BMY)income of $162.00
  • BlackRock Science and Technology Trust (BST)income of $100.00
  • Costco Wholesale Corporation (COST)income of $9.00
  • CVS Health Corporation (CVS)income of $55.00
  • D.R. Horton (DHI)income of $22.50
  • Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO)income of $224.00
  • Eaton Vance Tax-Advantaged Dividend Income Fund (EVT)income of $203.25
  • General Dynamics Corporation (GD)income of $126.00
  • Hormel Foods Corporation (HRL)income of $78.00
  • JPMorgan Chase & Co (JPM)income of $210.00
  • Lowe's Companies, Inc (LOW)income of $105.00
  • Mastercard Incorporated (MA)income of $24.50
  • Main Street Capital (MAIN)income of $55.90
  • National Retail Properties, Inc (NNN)income of $110.00
  • Realty Income Corporation (O)income of $37.13
  • The Procter & Gamble Company (PG)income of $91.33
  • Public Storage (PSA)income of $591.75
  • Royal Bank of Canada (RY)income of $147.86
  • Starbucks Corporation (SBUX)income of $98.00
  • The Toronto-Dominion Bank (TD)income of $138.56
  • Texas Instruments Incorporated (TXN)income of $115.00
  • Verizon Communications Inc (VZ)income of $192.00

The chart below shows DivGro's monthly dividends plotted against PMDI. Clearly, quarter-ending months are huge outliers:

To smooth things out a bit, I create a rolling 12-month average of dividends received (the orange bars) plotted against a rolling 12-month average of PMDI (the blue, staggered line):

While it would be great if dividends were distributed more evenly, I don't want to change my investment decisions based on the timing or frequency of dividend payments.

Someone asked why the orange bars are trending above the blue line. The reason is special dividends, which count under Dividends Received but not under Projected Monthly Dividend Income.

Dividend Changes


In August, the following stocks announced dividend increases or paid higher dividends (perhaps due to exchange rate fluctuations):

  • Altria Group, Inc (MO)an increase of 4.44%
  • Royal Bank of Canada (RY)an increase of 5.61%
  • The Toronto-Dominion Bank (TD)an increase of 0.37%

As a result of these changes, DivGro's PADI will increase by $70.

I like seeing dividend increases above 7%. Unfortunately, none of these increases measures up. The arithmetic average of this month's dividend increases is 3.48%, which easily beats inflation.


Transactions


Here is a summary of my transactions in August:

New Positions

  • BlackRock MuniHoldings California Quality Fund (MUC)new position of 1,000 shares
  • WEC Energy Group (WEC)new position of 70 shares
I've been increasing my exposure to higher-yielding closed-end funds (CEFs). I opened a position in MUC, a muni CEF yielding 5.85%. Muni income is exempt from federal taxes, and I'll receive additional state tax benefits because I reside in California. The taxable equivalent yield (Yte) depends on one's federal tax rate:
  • 10% bracket: Yte = 5.85% ÷ (1 − 10%) = 6.50%
  • 12% bracket: Yte = 5.85% ÷ (1 − 12%) = 6.65%
  • 22% bracket: Yte = 5.85% ÷ (1 − 22%) = 7.50%
  • 24% bracket: Yte = 5.85% ÷ (1 − 24%) = 7.80%
  • 32% bracket: Yte = 5.85% ÷ (1 − 32%) = 8.60%
  • 35% bracket: Yte = 5.85% ÷ (1 − 35%) = 9.00%
  • 37% bracket: Yte = 5.85% ÷ (1 − 37%) = 9.29%
I'm planning on increasing my MUC position to somewhat match those of the other CEFs I own: AIO, BST, ETO, EVT, and NIE. 

While it is risky to have six CEFs contribute more than 27% of DivGro's PADI, I'm intentional with this strategy. With only a few years left before retirement, I need to increase my annual dividend income and boost reinvestment opportunities to expand my portfolio positions. 

Some CEFs use leverage to boost distributions. When interest rates rise, the cost of leverage also rises, and it becomes harder for CEFs to pay generous distributions. A prolonged period of high short-term interest rates (and especially when the yield curve inverts) may cause the earnings of a CEF to decrease so much that a distribution cut becomes inevitable.

As for WEC, I covered the stock recently and really liked what I saw. 

A Dividend Contender, WEC Energy provides regulated natural gas and electricity in the United States. WEC yields 2.88% at $101.29 per share and has a DVK quality score of 22 and a Dividend Safety Score of 87, according to Simply Safe Dividends

Over the past 20 years, WEC outperformed the SPDR S&P 500 ETF (SPY), with total returns of 1,457% versus SPY's 565%. That's a margin of 2.58-to-1!

I really like WEC's consistent record of paying and increasing their dividends:
Note also the steady growth of WEC's Non-GAAP EPS!

WEC is a high-quality dividend growth stock trading around my fair value estimate of $100!

Closed Positions
  • Franklin Resources, Inc (BEN)
    sold 300 shares and closed the position
  • D.R. Horton (DHI)
    sold 100 shares and closed position
  • Gilead Sciences, Inc (GILD)
    sold 200 shares and closed the position
  • Valero Energy Corporation (VLO)
    sold 150 shares and closed the position
In August, I reviewed my portfolio positions and decided to say goodbye to BEN, DHI, GILD, and VLO. 

BEN's DVK quality score has deteriorated over the past year to its current level of 17, and the stock has failed to live up to my expectations. I sold out $27.59 per share, for an annualized loss of 2.7%. On Friday, 16 September 20222, BEN closed at $24.14 per share, so despite the loss, I'm happy to be out of BEN!

DHI is a major disappointment, and my short-term foray into this homebuilder has been costly. I racked up annualized losses of about 22%! The economic environment is getting tricky for home builders, with 30-year fixed mortgage rates now topping 6% and mortgage applications down to levels not seen since December 1999! I sold my shares for $73.84 per share, a couple of dollars above Friday's closing price of $71.12 per share. 

I first bought shares of GILD in August 2015 and sold my last lot of 200 shares in August 2022 at $62.77 per share. I've lost around 5% on an annualized basis by investing in GILD, certainly not what I had hoped for when first I invested in GILD. With a DVK quality score of 20, several higher-quality Health Care stocks are out there, though few match GILD's high 4.45% dividend yield! 

Finally, I decided to close my VLO position (DVK quality score of 15) to invest more in Chevron Corporation (CVX), my current top dividend growth pick in the Energy sector. My timing was good, as VLO now trades around $104.46 per share, whereas I sold out at $107.68 per share. I'm happy to note that my position returned 22% annually since my first investment in 2016!

Increased Positions
  • Virtus Artificial Intelligence & Technology Opportunities Fund (AIO)
    added 400 shares and increased my position to 1,200 shares
  • BlackRock Science and Technology Trust (BST)
    added 200 shares and increased my position to 600 shares
  • Cisco Systems, Inc (CSCO)
    added 100 shares and increased my position to 300 shares
  • Intel Corporation (INTC)
    added 80 shares and increased my position to 280 shares
Adding to AIO (initial yield on cost of 8.23%) and BST (initial yield on cost of 8.07%) more than compensates for the loss in dividend income from closing out BEN, DHI, GILD, and VLO. Those are juicy (but somewhat risky) yields, but I'm going to ride this CEF wave as long as I can! 

CSCO and INTC are stocks I hold in one of our IRA accounts, which now are eligible for covered call options trading. I added 100 shares to my CSCO position and sold 3 covered calls to generate extra income from my CSCO holding. As soon as I have enough capital to buy 20 more shares of INTC, I'll do the same with that position! 

Selling covered calls in retirement accounts are less "risky" than doing so in taxable accounts, as assignments don't carry the risk of having to pay capital gains taxes. One drawback of covered calls is if the assignment happens just before the stock's ex-dividend date. In that case, unless I have time to buy back shares, I would forfeit the next dividend payout. 

Decreased Positions
  • JPMorgan Chase & Co (JPM)
    sold 110 shares and reduced my position to 100 shares
  • Pinnacle West Capital Corporation (PNW)
    sold 50 shares and reduced my position to 200 shares
I wanted to bring these positions closer to their respective target weights. This is something I don't usually do, but both positions are currently trading below my entry points, and so there wouldn't be capital gains taxes involved. 

All these transactions increased DivGro's PADI by about $233.


Portfolio Diversification


I'm slowly rebalancing DivGro between Defensive, Sensitive, and Cyclical supersectors. Below is a chart showing the current distribution with an insert of last month's distribution.
My exposure to the Cyclical sectors decreased by 1%, whereas my exposure to the Defensive and Sensitive sectors increased by 0.7% and 0.3%, respectively. 

I'd like to see an equal distribution between the Cyclical, Defensive, and Sensitive sectors. 

In November 2021, I reworked my system for determining target weights for DivGro. The system is dynamic and flexible and allows me to calibrate factors when my goals change. Following is a chart showing the current and target weights of dividend-paying stocks in DivGro:
Stocks like AAPL, AMGN, CVX, and HD are significantly overweight, whereas NKE, ACN, SYK, and AMT are significantly underweight. 

I'm not interested in trimming positions to bring them back into "compliance," especially for positions in my taxable account. Rather, I'm favoring buying more shares of underweight positions to fill any gaps from below.

Markets


It is worth looking at the markets to understand the environment we're investing in:

  DOW
30
S&P
500
NASDAQ
Composite
10-YR
BOND
CBOE
VIX
Jul 31, 2022 32,845.13 4,130.29 12,390.69 2.642 21.33
Aug 31, 2022 31,510.43 3,955.00 11,816.20 3.133 25.87

In August, the DOW 30 dropped 4.1%, the S&P 500 dropped 4.2%, and the NASDAQ dropped 4.6%. The yield on the benchmark 10-year Treasury note rose to 3.133, while CBOE's measure of market volatility, the VIX, increased by 21.3% to 25.87.

Following is a chart showing how the stocks and funds in DivGro performed over the past month:

In difficult market conditions, I'm happy to note that DivGro again outperformed the S&P 500. Note that this comparison is a price-performance comparison only and does not account for dividends. DivGro's position-weighted average yield is 3.41%, whereas, in 2022, the S&P 500's yield was only 1.54% in August 2022

DivGro outperformed the S&P 500 on a trailing twelve-month basis, with negative returns of 4.35% versus negative returns of 12.67% for the S&P 500! 

My efforts to increase DivGro's Defensive sector exposure certainly is paying off!

Portfolio Statistics


Given DivGro's current market value and the total capital invested, the portfolio has returned about 112% since inception. But calculating the IRR (internal rate of return) gives a better measure of portfolio performance, as IRR considers the timing and size of deposits since inception. DivGro's IRR is 14.0%.)

I track the yield on cost (YoC) for individual stocks, as well as an average YoC for my portfolio. DivGro's average YoC increased from 4.17% last month to 4.29% this month.

Another interesting statistic is percentage payback, which relates dividend income to the amount of capital invested. DivGro's average percentage payback is 29.7%, up from last month's 29.2%.

Finally, DivGro's projected annual yield is at 7.10%, up from last month's value of 7.05%. I calculate the projected annual yield by dividing PADI ($45,203) by the total amount invested.

Here's a chart showing DivGro's market value breakdown. Dividends are plotted at the base of the chart so we can see them grow over time:

In the chart, there is a dip in the light blue bars representing Current Capital. We co-invested in property in 2021 and needed a down payment, so I sold some stock and recorded my first withdrawal from DivGro since founding it in January 2013. 

Looking Ahead


The markets are quite volatile, with high inflation and fears of a possible worldwide recession playing on the psyche of investors. As a dividend growth investor, I'm not overly concerned about increased volatility. If the market drops, I can buy more shares for the same money!

I'm looking forward to September's dividend income, as my quarter-ending totals often set new record highs for monthly dividend income. It is unlikely that September's dividend total will top January's record, which included several special dividends. 

Please see my Performance page for various visuals summarizing DivGro's performance.


Thanks for reading, and happy investing!
You can now follow me on Twitter and Facebook.

2 comments :

  1. Some minor remarks. According to the linked article, your best pick in the energy sector was EOG, not CVX. I'm also not sure if 3.48% easily beats inflation nowadays. Good luck and hope you do well close to retirement. If I had your portfolio, I could already retire right now in my thirties!

    ReplyDelete
    Replies
    1. Fair enough. $CVX now is my top Energy sector pick.

      You're right, 3.48% does not easily beat inflation. Of course, with Dividend Growth stocks you need to look beyond the current yield and include the (long-term) impact of dividend growth (and, possibly, dividend reinvestment).

      We live in one of the highest cost-of-living regions in America. We could retire if me moved elsewhere. Further, I enjoy my work and so does one of my colleagues, who's still working at age 70.

      Delete

Please don't include links in comments. I will mark such comments as spam and the comment won't be published. To make me aware of your blog or website, comment on my Blogrole page instead.