APD - Compounders And Dividends: April 2023 Portfolio Update

2023-05-02 02:55:33 ET

Summary

• My dividend income detracted 5.8% from January 2023 due to no longer owning any REITs.
• Dividend income grew 23.7% year over year, reflecting consistent and robust purchases over the previous year.
• I added four new positions this month, all of which were on my watchlist, and doubled down on two of them after weakness.
• My portfolio remains on track for stellar dividend growth in 2023, anchored by high-quality stocks.

Welcome back to my monthly portfolio update! I will discuss my dividend growth, any rebalancing, monthly savings, dividend reinvestments, dividend increases and anticipated dividend increases. I initially planned to write a Q1 memo discussing the macro environment but decided against it. I don't think I was adding anything new to the noise and simply focused on my own portfolio. My attitude toward macro is that I'm very interested in everything going on in the world, but I try not to position my portfolio around it. I don't know where rates will be 1 month from now, so I don't attempt to make any long-term decisions on incomplete information.

Let's get into the updates.

Dividend Growth

Quarter over quarter (QoQ, with the explanation here ) top line dividend income decreased 5.8%. Year over year, my top line dividend income grew 23.7%.

The key driver of the QoQ dividend detraction was the loss of the REIT dividends I received in January 2023 (ESS, O, and MAA). Removing the impact of REITS, dividend growth was 24.7%.

• Key tailwinds included larger positions in nearly every company that paid me dividends in January, CMCSA's dividend increase, and the timing of KO's payment.

• Key headwinds included the removal of O (which will continue to present tough comps until March 2024 as March 2023 was the first month without an O distribution) and the removal of all REITs from the portfolio. The QoQ comparison for REITs drops off after April, but will present itself again next January. Although, I'm currently projecting January 2024 dividends in excess of January 2023.

I warned last month that my portfolio would see muted dividend growth in April, and it actually wasn't as soft as I expected. Adding more cash to the portfolio helped cushion the blow. I don't expect cash to be yielding that kind of percentage for a while, so I'm happy to keep my low-single-digit level of cash ready to pounce. My long-term portfolio cash target is mid-single-digit, but that will be a lumpy ride as I will spend down the cash when opportunities arise.

Rebalancing

I wasn't expecting "Rebalancing" to become a constant presence, but it's here for at least another month. I was able to roll over a retirement account to my control, which gave me a nice boost to dividend income. I put 40% of the balance into the S&P 500 and used the remainder to add four new names, increase my weightings in three other companies, and add to my cash pile.

On April 11, I purchased shares of CHTR at $355.90, OTIS at $79.60, CARR at $42.52, FDS at $407.04, MSCI at $531.91, TMO at $579.61, and PM at $99.24.

CHTR, OTIS and CARR are likely no surprise. I've been allocating to these names consistently over the past few months, and I was happy to add a ton of new cash to these positions and get their weights up to a range I find more appropriately in line with their quality. All three companies still have plenty of room to grow in my portfolio, and I intend to continue a disciplined dollar cost averaging approach.

For my new positions, all four companies have been on my watchlist. I discussed PM at length in my March watchlist article where it was highlighted as one of the companies I was watching closest. I went ahead and initiated a starter position in the name and am looking to slowly (or quickly if an opportunity arises) double it over the next year.

TMO is similar to PM in that it was also one of the watchlist companies I've been closely monitoring. Always expensive, I found it easier to allocate a portion of capital to it and then proceed to dollar cost average into the position. I could easily see a future where DHR+TMO constitute a top five position for me. The life science equipment companies have been big winners for shareholders, and I'm looking forward to DHR becoming even more focused post-EAS spin. A small starter position in TMO will let me average in while my cash balance will let me pounce during a sell off.

FDS and MSCI are companies I've long admired that have fantastic capital light high margin businesses. These are essentially tracking positions. I can see both companies having 4%+ weights in my portfolio, so they're only a fraction of their eventual size. I'll DCA slowly into the perennially overvalued names. I'm willing to pay up for quality businesses that have high ROICs, strong capital discipline with histories of outperformance. It's easier to buy a small piece and add when I'm able rather than completely missing the boat on these companies.

Monthly Savings

I put my April monthly savings to work by adding to a number of my favorite names that saw their weighting reduced to my rebalancing. On April 11, I purchased shared of CNI at $119.94, CP at $77.06 and MCO at $302.02; on April 12, I purchased shares of EL at $243.04; and on April 25 I purchased shares of DHR at $232.00 and MSCI at $472.92. On April 26, I used some cash to materially increase my position in TMO at $527.00.

None of these purchases should come as much of a surprise to anyone. CNI, CP, MCO and DHR are all positions I've aggressively added to over the last few months. I'll continue to average into these positions as I expect all of them will be much larger (dollar wise) 10 years from now.

EL is a company I really like and I've added to it a few times this year. Honestly, I'd love to lump this with L'Oreal and LVMH to create a stronger bucket of consumer brands/luxury goods that could launch into my top 10 list.

TMO and MSCI both fell after earnings later in the month after establishing positions in early April. I took the opportunity to aggressively average into both names, which was exactly my plan when establishing those tracking positions.

Dividend Reinvestments

On May 1, I put my April dividends to work. I purchased shares of ADP at $220.15. I added to my ADP position earlier this year and wanted to add again since it's a high quality company that is a bit underweight in my portfolio. I decided to reinvest all of my dividends into one company this month to help boost the weighting a tad more. I typically target 2-3 companies for reinvestment but, given ADP's weighting in my portfolio and general weakness, reinvesting into one company tends to get me a bit more bang for my buck.

April Dividend Raises

Here are the dividend raises my portfolio saw this month:

• On April 6, STZ announced that it was increasing its dividend by 11.2% to $0.89 per share beginning in May 2023

• On April 19, COST announced that it was increasing its dividend by 13.3% to $1.02 per share beginning in May 2023

• On April 25, OTIS announced that it was increased its dividend by 17.2% to $0.34 per share beginning in June 2023

Three double digit raises, with each one being more than the last! I will discuss them in order.

STZ knocked it out of the park with an inflation beating 11.2% dividend raise. Given STZ's checkered dividend growth history, I was crossing my fingers for a mid-single digit raise. I added STZ to my core dividend growth bucket when I added it to my portfolio and I'll need to see a few more years of double digit dividend (and earnings) growth before adding STZ to my high dividend growth bucket.

COST delivers again! Another double digit raise from the highest quality retailer helps the yearly dividend growth. COST is one of my larger positions for a good reason. The company is rarely on sale, so expect me to slowly average in throughout the year with pooled dividends. Happy to see this company meet my low double digit dividend projection.

OTIS delivered another strong raise and beat my expectations by $0.01 per share per quarter. The dividend growth slowed a hair from the 20% rate the past two years, but I do expect to see OTIS slow its dividend growth to the high single digits at some point over the next few years. OTIS is a core position moving forward.

Projected May Dividend Raises

May should bring a number of dividend raises, the most important being the raise we did not get last month:

• Apple ( AAPL ) (copied over from last month) - My second largest position has typically been shrewd with its dividend increases, averaging mid-single digit increases for quite some time. The last time AAPL didn't announce an April bump was in 2018 when it raised its dividend on May 1. Share buybacks have been king at the phone/tablet maker and there does not appear to be any change in strategy. I'm assuming we will get another one to two pennies a quarter which results in quarterly dividends around $0.24-$0.25 per share.

• Lowe's ( LOW ) - LOW has given investors its annual raise in late May three of the last four years. The one exception was in 2020 when LOW delayed its annual bump by one quarter due to the pandemic. LOW got right back on track in 2021 with the late May bump. Preceding this four year stretch was a June 1 dividend bump with a number of May bumps prior. LOW's last two raises blew investors out of the water in the low 30% range. HD's recent 10% raise bodes well for LOW SHs. I'm thinking a ~10% raise is likely, and I'd only be disappointed with a mid-single digit raise.

• Medtronic ( MDT ) - MDT is coming off three straight late May raises, with June raises in the years prior. MDT has been increasing its dividend longer than I've been alive, so another raise is anticipated. With 3 and 5 year growth rates around 8%, I'm expecting another mid to high single digit raise.

• Northrop Grumman ( NOC ) - The only defense contractor in my portfolio is up for a raise this month. I'm hopeful for another double digit raise, but I expect it to come down a bit more in line with last year's 12% raise. NOC has been bumping in mid-May for quite some time. I'm expecting to see a dividend at or north of $1.90 per share, good for a 9%+ bump.

• Union Pacific ( UNP ) - UNP's strong history of dividend raises should slow down a bit with UNP right at its payout ratio target. I'm penciling in mid-single digit raise, although I wouldn't be surprised to see a high single digit raise if UNP is expecting stronger 2023 EPS growth than the street. UNP has a surprisingly checkered dividend growth track record. Several years of bumping after 6 months, it then held its dividend unchanged for 7 quarters during COVID, then back to bi-annual raises. The $1.30 per share dividend has been in place for 4 quarters, so a return to a normal yearly dividend growth cadence is likely.

• FactSet ( FDS ) - A new core dividend growth position will hopefully reward my family with another mid to high single digit raise. Outside of last year, FDS has been increasing its dividend in early to mid May the past few years. A 6-8% raise is what we're hoping for.

Portfolio

Below is a current look at my portfolio.

Conclusion

April was a strong month for my portfolio. I was able to establish positions in four companies that have been on my watchlist for a long time, and add to two of those after they experienced weakness. While I saw a modest QoQ decline in my dividend income, I continued to show robust year over year dividend growth. All of the seeds I'm planting now will bear fruit over the coming 18 months, and I'm still on target for a huge year of dividend growth.

Thank you again to everyone for following along. Your readership, comments, and feedback are appreciated, welcomed and encouraged.

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