Sand In My Shoes – Carnage And Recovery

Sand In My Shoes – Carnage And Recovery

I have not given an update to the Sand In My Shoes portfolio since the January update. It usually takes me 3-5 days to write one of these updates. I had the February update almost completely written, but things were changing so fast at the beginning of March that statements I had typed just a day or two earlier didn’t even make sense anymore. So, I took a pause, and now that volatility is no longer off the charts, I think I can resume my updates.

Since I have not updated everyone on my progress in a while, I’m going to briefly reset. Three years ago, I rolled over a substantial amount of money from an old 401(k) plan. At that time, I set for myself certain targets for fixed-income investments, international investments, and domestic equities. The targets can be seen in a later section (“Asset Allocation of the Portfolio”).

When I rolled the 401(k) over, I went about purchasing ETFs to get me to my target asset allocation. So I purchased a mid-cap ETF, an international equity ETF, a few fixed-income ETFs, etc.

I already had a small portfolio of large-cap stocks (like Amgen Inc. (AMGN), International Business Machines Corp. (IBM), and Southern Company (SO)), but to make up the balance, I also purchased a huge chunk of an S&P 500 index ETF. The idea was to sell off a few shares of the S&P 500 ETF each month and purchase a new position or add to my existing ones, growing my dividend income as I went.

I seek to invest primarily in dividend growth stocks and similar instruments (REITs, BDCs, LPs, etc.). Why? Well, two primary reasons. First, I like to get paid. I like to get paid and I like getting raises. When you invest in dividend growth stocks, you get paid for owning a piece of the company – a microscopically tiny piece for most of us, but still a piece. And when the company boosts its dividend, you get a raise.

It is, of course, a lot more complicated than that, but it is that simple at the same time.

My stated goal is $10,000 of dividend income in a single twelve-month period. Based on when I set my goal (July of 2017), that period is the twelve months ending July 2027. What this means for my updates is, while I am not oblivious to the total value of my portfolio, most of my tables and charts will focus on past and projected dividends.

So, without further ado, let’s get into the meat of this update, and I’ll start where I always do – with the dividends collected for the month.

Image Credit

June Dividends

All graphs and charts created by author unless otherwise specified.

This also serves as the dividend report for February-May. June was a record month for dividends collected, totaling $467.25. Another few months and I should eclipse $500 in a single month. When I first started this journey, that sure seemed like it was a long ways off. Now I might get there before the end of the year.

June Performance

I almost took out the “month” column because it is not as meaningful as the YTD. I am “only” down 7% YTD, which is slightly worse than the S&P 500, which was down 4% YTD through June 30th.

This makes sense since I am overweight in the two worst-performing sectors, namely Energy (-38%) and Real Estate (-22%), and I am underweight in the best performing sector, which is Information Technology (+16%). This is according to as of July 16, 2020.

Individual Stocks

The yields on some of these stocks are getting quite lofty. Of course, the outlier is Apple Inc. (AAPL) with a yield of 0.85%. The yield was 1.54% when I first bought it, and the company has raised its dividend thrice since then. That’s how on fire this stock has been in the last two and a half years. Man, I wish I had bought more of that stock… Anyway.

The yields on my two energy stocks are 7.8% and 9.5%, which shows you just how beaten-down that sector is. I have added to it during this downturn, so if and when energy rebounds, I will probably be very overweight there.

Projected Dividends

Total projected dividends for 2020 at current payouts stands at $4,489.53. This is assuming no dividend raises or cuts or suspensions. Unfortunately, the likelihood of a cut or suspension is a lot higher now than it was pre-COVID-19. Still, I’ve seen a few dividend hikes in the past few months, and I fully expect most of my positions will continue to raise their dividends on schedule. Will there be some companies that may take a pause? Sure, and I expect that too. Hopefully we have chosen our companies well and our dividends won’t suffer too much, if at all.

Sector Diversification

Current Weight Target Weight
Consumer Discretionary 10.1% 10.0%
Consumer Staples 8.6% 8.0%
Energy 6.9% 7.5%
Financials 9.1% 10.0%
Health Care 11.7% 12.0%
Industrials 7.5% 8.5%
Materials 12.0% 5.0%
REIT 8.0% 7.5%
Technology 14.3% 15.0%
Communication Services 5.8% 9.0%
Utilities 6.1% 7.5%
100% 100%

I was frankly perplexed to see that my Materials sector was back up to 12.0%, especially when I haven’t added any money to it in well over a year, and just a few months ago, it was close to 10%. I was pleasantly surprised to find that one of my sleepier stocks (they literally sell “air”), Air Products and Chemicals, Inc. (APD), is up 22% YTD and through sheer price appreciation has become my largest holding, just edging out AAPL (as of July 16).

Asset Allocation of the Portfolio

Since the beginning of this pandemic, the only thing I’ve done is plow my dividends and distributions back into individual stocks, and the weighting shows that. I have not purchased any more shares of a fixed-income fund since February, and the weighting of domestic fixed income has dropped to what I believe is a new low. I’m going to have to ease up on the stock purchases and add to my fixed-income and, possibly, my small-cap holdings.

Sales and Purchases

In late February, I made one more sale of the S&P 500 ETF and added to my domestic fixed-income funds. Since February 25th, I have not sold any of the S&P 500 fund and I have not purchased anything but the following stocks. All of these purchases but the two made on February 25th were made using dividends and fund distributions:

Date Symbol Quantity Price ($) Amount ($)
2/25/2020 IPG 31 23.75 (736.25)
2/25/2020 XOM 23 56.05 (1,289.15)
3/2/2020 GPC 3 86.05 (258.15)
3/5/2020 IPG 6 20.55 (123.30)
3/9/2020 MAIN 5 33.05 (165.25)
3/11/2020 IPG 5 17.85 (89.25)
3/16/2020 MAIN 4 24.93 (99.72)
4/1/2020 O 14 45.5 (637.00)
5/1/2020 O 13 51.8 (673.40)
5/12/2020 PRU 5 55.15 (275.75)
5/22/2020 T 10 29.65 (296.50)
6/25/2020 LEG 20 32.9 (658.00)
6/26/2020 PRU 10 59.25 (592.50)

Some of these I clearly bought too early (Exxon Mobil (XOM), Interpublic Group of Companies Inc. (IPG)), and some I clearly picked up at the right time (the second purchase of Main Street Capital Corp. (MAIN) and Realty Income Corp. (O)).

Forward-Looking Dividends

As you may have noticed, I made several purchases in the past five months, but none of them were particularly large. As such, my forward-looking dividend total is only up $300 since January. The trajectory is still up, but ironically, the curve has flattened slightly.

You have already seen what I purchased since February 1st, and that, of course, adds to my future dividends, but there have been several dividend hikes as well. Here are the dividends added, annually, due to those purchases and dividend raises.

Position Raise/(Decrease)
XOM 80.04
O 76.56
IPG 42.84
MAIN 22.20
PRU 22.00
T 20.80
APD 20.16
GPC 14.20
HD 11.20
PEP 6.48
SO 6.40
CSCO 5.48
MMM 4.92
AAPL 4.00
JNJ 2.40
WMT 1.00
PPL 0.76
WRK (28.64)

Sadly, I have experienced one dividend cut, namely Westrock Co. (WRK). That company is now on my chopping block. I don’t blindly sell stocks when they cut their dividends like some people do, but one of the reasons I liked the stock in the first place was it generated a lot of cash and the dividend appeared well-covered and, therefore, “safe”. Well, lots of crazy things have happened lately, so a “safe” dividend being cut is sadly not surprising. I plan on reading the company announcement of the cut thoroughly and probably more than once before I determine what to do with my shares.

There are at least two additional stocks of mine that appear to now have frozen dividends. The Fed has determined that the big banks are not allowed to raise their dividends, so both of my bank stocks are stuck in 2019 for now. In the past several years, they had been hiking their dividends at a tremendous rate, so this is bad news.

Luckily, WRK and my two bank stocks make up less than 3% of my portfolio combined. So, while this is bad news, it almost won’t be noticeable.

Final Thoughts

In an effort to hunker down, all I’ve done for the past several months is scoop up what I perceived to be bargains when I had some available cash. I’m very thankful that most brokers started the zero commission policy less than a year ago. It made buying 4 shares of MAIN for less than $100 possible, or at least affordable, for example.

I have experienced my first dividend cut in this portfolio. I will definitely be taking a deep look at WRK and deciding if I should cut my rather small loss (less than $200 as I type this) or hang on until after the uncertainty with this pandemic has abated.

And I now have a few too many (three) stocks with frozen dividends. There is no telling when the Fed will allow banks to return their profits to shareholders via share repurchases or dividend increases. It might be time to find more profitable stocks in the financial sector. Also, I am going to be taking a deeper look at CVS Health Corp.’s (CVS) latest earnings report. The company should be getting down to the leverage target it set for itself after that huge acquisition. I expect a dividend increase from the company within a year, but I’ll do a double check on that.

And finally, while there are undoubtedly going to be bargains in the market for several more months to come, I really need to start aggressively re-balancing my portfolio. That will hurt my hunt for dividend accumulation, but my fixed-income investments are paying me about 4.7%, so when I think about that, it is not quite as painful. Currently, I’m earning a bit more than $400 per month from them, which is a little more than what I’m earning monthly in dividends (on average). Dividends are sexier, but grabbing $400-500 every month from fixed-income investments is easy to get used to.

Great to be back. I’ve really enjoyed writing this and look forward to doing so monthly again now that, while not completely recovered, at least the DJIA isn’t dropping or jumping by thousands of points per day. It feels like fundamentals, where I start my research, might actually mean something again. I have some portfolio maintenance to attend to, and I’ve been putting it off for the past year or more. I better get to it now before it gets too out of hand.

Hope that you and yours are staying safe and healthy during these crazy times. If you see anything I missed, please chime in. It seems that things are changing so rapidly that it is quite possible I missed a piece of news regarding this portfolio. Happy investing, and best of luck!

Disclosure: I am/we are long AAPL, ABBV, AMGN, APD, AVGO, BAC, BLK, C, CSCO, CVS, ED, EMN, GPC, HD, HRL, IFF, IPG, ITW, JNJ, LEG, MMM, MMP, O, OHI, PEP, PPL, PRU, SO, PRU, T, TXN, VZ, WMT, WRK, XOM. 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.

Originally published on Seeking Alpha

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