Nicholas Ward\'s Dividend Growth Portfolio: December Trades

Sorry for the delay here; I've been under the weather since the turn of the new year and haven't been nearly as productive as I had hoped. I have a lot of work that I need to get out for followers in the near future. I'm working on my personal portfolio's 2018 recap pieces, as well as the annual Nick's Picks 2018 review and 2019 selections. With that in mind, here's the first piece of 2018 review: my December trading report.

I typically talk about my monthly trades as a part of my monthly portfolio review, but for December, I decided to skip the monthly review and make it into an annual review. However, for those who don't follow my stock talks closely and are interested in the trades that I made, this piece should be of interest.

December was a pretty active month for me. When volatility spikes (especially to the downside), I tend to get more active because I'm trying to capitalize on the deals that the market is presenting. There is no better time to add to one's high-quality holdings than when they're selling at discounts. These moments are relatively rare in the markets and investors must be ready to take advantage of them when they arrive. Most people know this. Buy low and sell high. However, it's not an easy practice to adhere to. Fear is usually associated with sell-offs and that is one of the most difficult hurdles to overcome as a portfolio manager.

There were a few really big down days towards the end of the year. That can be scary. However, it turns out that I was more disappointed in the year-end rally than the big down December because there were still stocks on my buy list that I wasn't quite able to add to.

Sure, when I checked Personal Capital after the Santa Clause rally that we experienced and saw just how much the total value of my net worth increased across all of my accounts, I was impressed. Don't get me wrong, I'm never going to complain about the market jumping up 5% in a single trading session. I think we closed up something like 6-7% off of the December lows at the end of the year. That's a pretty significant bounce.

But I'd be lying if I said I wasn't sincerely hoping that it would continue to drift lower, for a little while at least, so that I could put more of the cash that I've saved up for a gloomy time period like this in the markets to use.

I guess all of the value oriented, dividend focused talk has rubbed off on me. I truly understand the power of compounding, and I know well and good that buying high-quality dividend payers at a discount is the most effective way to really fuel the compounding process.

When stocks sell off, I'm able to buy more shares for the same amount of money. Those shares have higher yields than they did prior to the weakness. And, as long as they stay depressed, I'm able to re-invest the dividends that I receive back into attractively valued shares, starting the process all over again.

Throughout October, November, and December, I took solace in my passive income stream. As the market sold off, I received numerous dividend increases and the DGI thing really started to click.

"So, this really does work," I thought to myself.

I've always known that it works. All of the success stories that I've heard from fellow DGI portfolio managers is what lead me to dividend growth in the first place. I've written numerous times about my focus on my passive income stream. Every month when I do my monthly portfolio update, I also close it with my passive income graph, which is consistently moving in the right direction, regardless of how healthy the broader market appears.

Admittedly, I've never invested through a really rough patch in the market. During the boom/bust, I was still in elementary school, and during the Great Recession, I was a senior in high school/first year at the University of Virginia, and the stock market wasn't even on my radar. I was managing money during the sell-off in late 2015/early 2016, though that can hardly be considered a bear market.

Well, flash forward to today and we see the major averages down just about 20% from their lows. I suppose technically, this is my first foray into bear market territory. This is an exciting (and admittedly, nerve-wracking moment in my investing career). I've spent much of the last few months upgrading the quality of my portfolio and the yield it provides. That meant selling out of a few positions that I considered to be "trades" and redeploying those funds into companies with higher, more reliable yields.

I began this process back in October when things started to fall apart (broader market wise), and I've adhered to it since. I don't necessarily think that we're due for a recession in 2019, though I definitely think we're operating in a late-cycle economic environment, and I decided it was better to be proactive about upgrading quality. All of the trades that I made in October were discussed here. All of my November trades were discussed here. In this piece, I will discuss all of the moves that I've made in December thus far.

December Trades

I started the month off by trimming a small portion of my Starbucks (SBUX) position at $66.49. In doing so, I locked in 40% profits on shares that I bought earlier in the year at $47.63. This trade was made in a retirement account, so there were no negative tax consequences. I like SBUX a lot and it continues to be one of my largest holdings, yet I thought taking gains after its massive run-up made sense, especially since SBUX has tied so much of its future growth to the Chinese market and our President seems hell-bent on a trade war between the U.S. and China. I was (and still am) concerned that the Chinese government might enact boycotts of U.S. companies, or even outright ban them from doing business in its county. If this were to happen, SBUX would sell-off drastically because it would no longer deserve the multiple it receives.

I also sold off my entire position in Bank of America (BAC) on the 6th, locking in gains of 6.5%, at $26.08. I bought the banks back when Trump was elected, hoping that the GOP's deregulatory mindset would be bullish. That was the case at first, but lately the banks have started to slide and I knew that this was a trade and not an investment. After seeing what happened to the big U.S. banks during the Great Recession (especially from a dividend growth standpoint), I knew I wouldn't want to be holding them into the next recession. I decided to get out before my gains turned to losses. The trade would have been more successful had I sold a few months before, but then again, the goal here is to be making money and I did that successfully.

I put part of the proceeds from this trade into Altria (MO) at $54.23. In doing so, I replaced all of the income that I lost by getting rid of the SBUX and BAC shares, while still augmenting my cash position.

On December 7th, I dipped into my newly increased cash position to add to Broadcom (AVGO) after the company announced its 51.4% dividend increase. AVGO has been known for large dividend increases in recent years. In 2016, AVGO's management gave investors a 100% dividend increase. It followed this up with a 71.6% increase in 2017. Headed into 2018, I didn't expect those types of increases to continue. That's simply not sustainable, and AVGO has spent billions recently on the Brocade and CA Technologies acquisitions. I expected an increase in the 10-20% range in 2018 and was totally surprised by the 51% raise that I received. This increase bumped AVGO's forward yield up above the 4.5% threshold and I was happy to add to my holdings.

I bought shares at $236.08 in the morning and then when I saw them selling off in the afternoon, I added again at $229.38. To make room for this second purchase, I sold my J.P. Morgan (JPM) shares, with the same mindset that I used the day before regarding Bank of America. I locked in ~11% profits on JPM, selling at $103.34. Now, the only big bank that I didn't sold is Citigroup (C). I haven't sold C because I'm currently sitting on a loss and I hate to lock in losses. C is very cheap at the moment and pays a solid yield. If I make it back into positive territory, I will likely sell these shares, too. However, in the meantime, I'm happy to wait and collect the ~3.5% yield that it offers. I suspect that C (and the other banks as well) will announce strong shareholder returns again in 2019 when the CCAR results are released. I think the banks stand on solid ground regarding their balance sheets. I don't think they're in the same boat that they were in during 2008/09. However, I also think I'm better off being safe than sorry. I feel comfortable having drastically reduced my exposure to the banks. Now my financial exposure is largely made up of asset managers and fin-tech plays.

On the 7th, I also added to Altria again at $54.27. These moves were made on the heels of the Cronos (CRON) purchase. I am really bullish on marijuana long-term and liked the fact that MO finally entered into the space. I'd been waiting for years for the company to diversify its revenue stream further away from cigarettes, and when it did, I was more than happy to significantly add to my position (and lock in yields of nearly 6%).

Also on the 7th, I added to my FedEx (FDX) position at $200.15. The $200 area had been my next buy target for some time, and I thought the stock was incredibly cheap at the time. Unfortunately, I was early on that call. However, I did add more FDX shares later in the month on the stock's further weakness. A week later, on the 13th of December, I bought more FDX shares at $187.06. I added to United Parcel Service (UPS) on the 13th as well, at $100.77. These moves proved too early still, yet I am happy to hold these names long-term. Both FDX and UPS are strong dividend growth plays. They're also leaders in the global logistics industry, which I think has secular growth tailwinds. FDX reduced 2019 guidance on trade/global growth concerns. Even so, both of these companies are trading at multi-year low valuation levels. When you're bottom fishing, you don't always time it perfectly, but I have a hard time imaging a future, 5-10 years down the road, where these shares aren't much higher than they are today due to the combination of increasing volumes and the price inflation that we've witnessed in this shipping space over the long-term.

To fund those FDX and UPS purchases on the 13th, I sold out of my position in Calavo Growers (CVGW) at $87.83. I like CVGW because I like the avocado business. However, CVGW has a small yield, recently gave me a disappointing dividend increase, and its growth hasn't been up to snuff during recent quarters. I sold my shares, locking in small profits (4.5%), deciding to relocate those funds toward better dividend growth opportunities in the logistics space. Thankfully, hindsight is proving the timing of this sale (in the short-term, at least) to be pretty well done. Shortly after my sale, Calavo announced another disappointing earnings reports where it missed on both the top and bottom lines, sending the shares down to the low $70s. I'd be lying if I said I saw this huge move to the downside coming. I thought it was a risk, but I wouldn't have predicted it. Sometimes, I guess it's better to be lucky than good.

On December 17th, I took another step to bolster my passive income stream, buying shares of Enbridge (ENB) at $31.07. At this price, ENB shares yielded more than 7%. This is wonderful, especially considering the fact that I wouldn't be surprised to see double-digit dividend growth coming from ENB in the short-term. This is my first purchase in the energy sector in years. I think shares in this space have gotten very cheap recently. I still think oil is facing secular headwinds (which is why I sold out of the space years ago, which has proven to be a solid decision thus far), but it's hard to pass up ENB's strong, reliable yield and the fact that it has a leading position in the natural gas/LNG market, which should post growth in the decades to come. This was just a starter position for me, and I'd be happy to add again should ENB shares continue to fall. ENB shares are down~25% from their 52-week highs. I have to assume the bottom is close at hand when looking at the company's fundamentals, but either way, I'm getting paid richly to wait for a turnaround.

On the 19th of December, I dipped into my cash pile again, adding to my Texas Instruments (TXN) position at $90.33. I bought my first TXN shares a few months back, entering into the name at $100.05 on October 10th. At the time, I wrote this article explaining why I was bullish on TXN. Honestly, since then, not much has changed other than the fact that the stock has continued to sell off and get cheaper. If I was happy to buy TXN back in October when it was trading for 18x earnings with a 3.1% yield, then you better believe that I was happy to add again in December for ~16.5x earnings and a 3.3% yield. I typically like to average into stocks in 3-4 essentially equally weighted purchases. I like to average down in -10% intervals. That situation played itself out here with TXN trading down $10 from my original $100 entry point. If the stock falls down to the low $80 area, I'd be happy to add again.

Speaking of averaging down, also on the 19th, I bought shares of Constellation Brands (STZ). This is a great DGI stock that I've had my eye on for some time now. Really, it's the only company in the beer space that is posting growth. I initially bought into STZ back in August at $208.24. Since Constellation trades with a more speculative valuation that many of the companies that I own, I wanted to get a bit more margin of safety before adding again (relative to my typical -10% rule). Down ~17% from my original purchase price, I was happy to add to my STZ position at $171.61. Early on in 2018, STZ traded for more than 25x earnings. Well, after trading down from $236 to $171, STZ's multiple had fallen to a more justifiable 17.5x. The stock has continued to sell off and currently sits at the $160 area. I'm looking to add again around $150. I love the market share that STZ has gathered in the beer space and the growth potential of its position in the pot market after its large investments in Canopy Growth Corporation (CGC). This is a strong double-digit dividend grower that I'm happy to hold for the long-term. I don't know where the current weakness will end, but I'm happy to accumulate more shares on the way down.

And most recently, I added to my Altria position again (for the third time in December), buying shares at $48.89. At that price, MO's yield was above 6.5%. Who would have ever thought it would get that high? I don't know what else to say about MO being so cheap, other than that fact that I think this yield is a gift to dividend growth investors. I expect MO to continue to give investors dividend increases in the 5-7% range (even after adding ~$15b in debt with its Cronos and JUUL deals). I think these shares have gotten too cheap and I'm quite happy to hold and collect this juicy dividend while I wait for them to recover. After adding so many MO shares in such a short period of time, I'd be happy to trim the position should I be in a situation where I'm able to lock in significant profits. That will be based off of valuation, more than anything else. I think fair value for MO is somewhere in the 15x range. Using my $4.20 estimate for 2019 EPS, that comes out to $63 or so. I'd probably unload some shares around that price point, locking in nearly 30% gains in the shares that I purchased most recently.

Future Buy List

This piece had grown rather long (I was more active than I remembered during the December downturn, but then again, I've always heard that you should buy when there is blood in the streets and a 10% down-month represents oversold market conditions, if you ask me). I won't talk long about my watch list because we're already 2,700 words into this piece, but I will say that I'm talking a close look at Apple (AAPL), Boeing (BA), Cisco (CSCO), Union Pacific (UNP), and the three main industrials that I follow, United Technologies (UTX), Illinois Tool Works (ITW), and 3M Co. (MMM) at their depressed levels. I wouldn't be surprised to see volatility continue into the new year, and if this sell-off continues, I will continue to be a buyer. Right now, I'm sitting on ~7% cash. I'd be more than happy to take that down to 3-4% should the market fall back into bear market territory.

Only time will tell, but in the meantime, I will continue to sit back and happily collect my dividends. I'll be discussing my passive income stream (and broader portfolio as a whole) in upcoming 2018 review pieces that I'm working on, but I'll give a bit of a sneak peak here: my dividend income stream was up 2.7% y/y in the month of December and 10.45% on the year compared to 2017's overall total. One of my stated goals is to generate double-digit annual dividend growth and I've done that again this year. Stay tuned for total return reports and my annual "Nick's Picks" piece which should be published over the next week or so.

Happy New Year, everybody!

Disclosure: I am/we are long AAPL, AVGO, STZ, MO, ENB, SBUX, C, TXN, BA, MMM, ITW, UTX, CSCO, UPS, FDX. 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.

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