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The annual ritual of reviewing my portfolio is officially underway! January means it is time to review what worked, what failed, and set goals for what’s next.
My Portfolio and Investment Philosophy
First and foremost, I consider myself a dividend growth investor. While I have a balanced portfolio that includes growth, my goals are to sustainably grow my dividend income year over year without falling behind the S&P500. In retirement, which is still around two decades away, I hope to comfortably live off my dividends, be able to afford occasional big vacations, and to spoil my wife and family whenever I choose.
Growing up, I had an incredible role model in my grandfather, who taught me how to be a man, take care of my family, and how to invest. A man of modest means, he and my grandmother saved and lived a frugal life. In retirement, they lived off of their dividends from blue chips like Procter & Gamble (PG) and Duke Energy (DUK), with their Social Security income allowing them the flexibility to explore the world and generously give back to their community. This portfolio is based off of what he taught me.
My portfolio includes a Roth IRA, a joint stock account with my wife, and my 401k through work. Most of my portfolio tracking focuses on my Roth and joint stock account, as my 401k has only a handful of options that require almost no babysitting or tracking. My wife also has a Roth and Traditional IRA, but those are tracked separately.
Finally, I am a proud nerd and lover of spreadsheets. I’ve tracked every dividend I’ve received for almost a decade and appreciate the amount of historical data I can look back on to continue to build my portfolio. I am by no means infallible and am always on the lookout for what I can do better. I’m also a firm believer in learning through writing, which has motivated me to make my hobby of tracking my investments into something I do publicly to learn from this great community and organize my thoughts.
What worked in 2023?
1. 33.3% portfolio dividend growth! Total dividend income grew to $6413 for 2023 due to a combination of reinvesting dividends, companies raising their dividends, and new contributions.
2. This may seem like less of a big deal to some of you, but our household was able to contribute the maximum amount to both my wife and I’s Roth IRAs. This is significant to us because we are a one income household due to my wife staying home with our toddler until preschool starts. I’m sure we’ve all felt the sting of inflation the last couple of years, so I’m proud that we were able to continue saving with costs rising on a single income.
What didn’t work in 2023?
1. My portfolio is cluttered. When my broker switched to commission free trading a few years ago, I started buying shares 1 or 2 at a time in my Roth as a way to dollar cost average into positions. By the numbers, I received dividends from 63 different stocks and funds, and this doesn’t include some of the non-dividend growth stocks. Digging deeper, many of them are small positions, with 31 being worth less than $1400 and 6 being worth less than $500. Looking at dividends received for each position paints a similar picture, with 14 paying a yearly sum of less than $25. Overall, this is simply inefficient and makes it difficult to track and research.
2. My second failure comes from performance, where my Roth underperformed the S&P 500 by 0.8% in 2023. Now to some extent, this is acceptable as a great deal of the overall market’s gains come from a narrow group of companies, but I’m sure I’m not alone in saying that I prefer to beat the market. My joint stock account underperformed by even more, but the goal with that portfolio is lower volatility and steady dividend growth, with much larger positions in utilities and consumer staples.
Goals for 2024
Now for the fun part – getting ready for 2024! I use what worked and what didn’t work to better position my portfolio for growth and success. Here’s what I’m hoping to achieve in 2024:
I hope to once again maximize our contributions to our 2 Roth IRAs. This is less of an investment goal and more of a frugal living goal as we adapt to inflation, the cost of raising our son, and potential unknown expenses throughout the year.
I am incredibly happy with my dividend growth in 2023 and hope to continue the trend this year. For 2024 I hope to receive at least $7400 of dividends, a growth of 15%. This will come from a combination of reinvestment, new contributions, and focusing on finding the right companies.
Simplify and shift to higher quality
I’m going to take a chainsaw to my smaller holdings, hopefully cutting the tiny payers and positions by half, to focus on higher quality companies and scale my medium-sized positions. I’ll take the funds from some of the smaller holdings and add to other small holdings, add to some ETFs that help fill gaps in my portfolio, and continue to add and find high-quality companies.
What stays and what gets cut?
Depending on the industry, I have a number of metrics I look at to determine if a position is worth keeping or if I need to reevaluate holding it. I take a bird’s-eye view of the company to get an idea of if I agree with how the company is being run, then take a look at how it might fit into my dividend portfolio, and then finally dig into the financials to make sure the company is competitive and growing both revenue and earnings sustainably.
Today I’ll apply the first 2 steps of my process to a number of my smaller holdings:
Step 1 – Ick Factor
This is the easiest but most subjective step in determining if a company or fund is staying in my portfolio. If management makes a move that I strongly disagree with, if I don’t believe management can navigate the seas ahead, the company doesn’t fit into my portfolio anymore, or the company loses its competitive edge, I will reevaluate and usually sell. Examples of this could include entering a sector that management does not have expertise in, taking on excessive debt for the sake of growth, large dividend cuts due to mismanagement, or steps that don’t fit my risk reward expectations. If I can’t trust management to properly manage the company, I move my capital elsewhere.
In other words, I will not marry my stocks. I’ve done that before, ignoring red flags out of greed, trust in management, or community sentiment. Now this is not a “shoot first, ask questions later” step for me, but rather a warning that leads me to do a deep dive into a company or fund.
Step 2 – Dividend Growth
Going back to first line of my investment philosophy, I’m a dividend growth investor. I expect the stocks and funds I own to provide steadily growing dividends, specifically looking at the following pieces of information:
- 1 year dividend growth
- 5-year average dividend growth. This should smooth out some of the bumpiness from earnings, macroeconomics, etc., and show overall trends.
- Did 1 year dividend growth beat last year’s inflation? 2023 saw an inflation rate of 3.4%. If dividend growth falls below that, inflation is eating my lunch.
- Did average dividend growth beat black swan inflation? I’m sure we’re all still feeling 2022 punch-to-the-gut inflation where the consumer price index rose by 9.1%, but I’m looking to see whether the 5-year average dividend growth was able to beat this sky-high number.
- Did the company beat iShares Dividend Growth ETF (DGRO) 1 year dividend growth? Holding a dividend growth index fund like DGRO would diversify my holdings (DGRO has 424 holdings) and allow me to clean up some of my smaller holdings, but I still expect consistent dividend growth. For this step I’ll compare 2023 dividend growth with DGRO’s respectable 12.67% growth.
- Did the company’s 5-year average dividend growth beat DGRO’s 5 year average dividend growth? Similar to number 5, but did the company beat DGRO’s 5 year average dividend growth of 10.24%? This gives us additional long-term data.
Every position doesn’t have to hit all of the above every year, but over time I’m looking for my stocks and funds to continue to provide steady dividend growth. The questions associated with metrics three through six are especially helpful in making sure my portfolio doesn’t fall behind.
Which companies am I looking at today?
As I mentioned earlier, the goal is to simplify my portfolio by combining or eliminating some of my smaller positions. I will apply the steps above to look at a number of companies in sectors ranging from retail and industrial to technology and financials. (I also have some small REIT holdings that I plan on cleaning up, but I use additional metrics to evaluate their place in my portfolio)
The 6 companies I’m taking a look at today are Home Depot (HD), Bank of America (BAC), Qualcomm (QCOM), Ally Bank (ALLY), Prudential Financial (PRU), and Corning (GLW).
|1 year dividend growth
|5 year average dividend growth
|Beat 1 year inflation (3.4%)?
|Beat 2022 inflation (9.1%)?
|Beat DGRO 1 year div growth (12.67%)?
|Beat DGRO 5 year average div growth (10.24%)?
Before diving into the results, I want to say that all 6 companies passed the “Ick Factor” test.
GLW – GLW passes only 2 of the 4 dividend growth tests and is a prime candidate to dig deeper into the financials of, meaning GLW may be leaving my portfolio in favor of adding to other small positions.
HD – Not only does Home Depot pass 3 out of 4 of my dividend growth tests it also fills the consumer-facing gap in my portfolio. Overall, HD has had exceptional dividend growth, and I like its competitive landscape. This is likely a company I will add more funds to.
QCOM – Qualcomm showed much lower dividend growth compared to the other companies being evaluated, passing only 1 of 4 metrics. I say that recognizing that it is in a very different industry than the others, but the dividend results mean I will dig deeper into the company’s financials.
BAC – Like HD, Bank of America passes 3 out of 4 dividend growth metrics I am using. This makes it very likely it will stay in my portfolio. Since the financial crisis, BAC has seen almost a decade of excellent dividend growth.
ALLY – Ally only passed 2 out of 4 growth metrics, but this is largely due to no dividend raise in 2023. Even with 0% growth for 1 year, it achieved the highest 5 year average dividend growth rate.
PRU – Prudential was another company that only met 1 of the 4 dividend growth milestones, with very low (but steady) dividend growth. While it has had much lower average dividend growth, it is the only insurance company I hold and may stay.
There’s no such thing as too much data. After evaluating a company based on the ick factor and for dividend growth, there is still more work to be done. As a predictor of future dividend growth, I look at a number of metrics, including revenue growth, earnings growth, free cash flow, debt ratios, and many others. For these, I am looking for steady, sustainable growth with healthy debt levels.
Overall Changes to My Portfolio
Looking at our portfolios as a whole, I think it is important to frequently reevaluate holdings and not to marry any of your stocks. Don’t go down with the ship and if a company doesn’t have a strategic fit in your portfolio anymore, consider selling and moving on, and hold management accountable.
Zooming out, here is what I plan on doing in the next week:
1. The focus of this article is how I begin to analyze the companies I’m investing in, but as I mentioned earlier, I simply have too many stocks and will be consolidating and eliminating many of them. First, I’ll take a look at any position that is valued at under $1400, see if the dividend and company’s growth has been keeping up with inflation, and then if not, I’ll sell and add to a better company. Cleaning up my portfolio will allow me to save time and do higher-quality analysis of what I do have vs. watching pennies come in from dozens of tiny holdings.
2. One specific step I will take is to increase my exposure to utilities and consumer staples in my wife and I’s joint brokerage account. There are two main reasons for this.
First, we like the flexibility of receiving more defensive dividends in our main brokerage account to give our family financial flexibility. We have a comfortable emergency savings and I am very safe in my employment, but in a worst-case scenario of multiple home improvement issues or another round of high inflation, we can always stop reinvesting dividends for a short period of time. I have no plans of this, but we both sleep better at night knowing this is an option.
Second, filing taxes can be a major pain when there are lots of small buys and sells. To combat this, I like companies that I can confidently hold for years and years with no taxable events (with the exception of the dividend income). For example I’ve comfortably held Procter & Gamble for decades without selling a single share. I am not an accountant, but I think everyone should have overall portfolio design in mind when deciding what to buy and where you’ll hold it and I personally want filing taxes to be a simple process.
3. Within my Roth I plan on increasing my exposure to REITs. If predicted lower interest rates come to fruition, this could allow REITs to refinance existing loans to free up cash flow for more sustainable growth.
4. I’ve talked a lot about individual stocks up to this point, but I am also a believer in simple index investing. This can give exposure to the entire market or sectors without company-specific risk. With that being said, I will also clean up my ETF and CEF holdings to eliminate overlap and fill in gaps in my overall portfolio. Increasing index holdings as a percent of portfolio has the potential downside of making it difficult to beat the overall market, but also gives my exposure to the high growth, low (or no) yield companies that dividend growth investors sometimes lack and prevents me from falling too far behind the market.
5. Finally, in addition to my collection of tiny holdings I have another type of baggage I acquired when my broker switched to commission free trading – high yield funds and companies. Part of the struggle of investing is to simultaneously fight your inner fear and greed, specifically yield chasing. I want to see overall year over year growth in my dividend income, but I don’t want to do this via junk funds or companies that overpay dividends when free cash flow can’t support it. Looking at my portfolio there are a few funds/companies that fit this narrative that will be sold and added to other positions.
Overall, I am very happy with my progress in 2023. Everything from a 33% dividend growth rate to maximizing and increasing my retirement savings are huge wins. And best of all, it gives me a place to build. My next steps are to continue to reexamine each stock and fund individually to see if it still fits into my overall portfolio or if it needs to be replaced with something better.
2023 was great and 2024 will be even better.
Finally, thank you for reading! I have been a long time reader of exceptional writers here on Seeking Alpha and am grateful for you taking the time and stopping by. What goals do you have for 2024? How are you positioning your portfolio?