ESS - Compounders And Dividends: January 2023 Portfolio Update

Summary

• My January 2023 income is multiples higher than my January 2022 dividend income.
• I made two sales in my portfolio and added one new position.
• Six of my portfolio companies increased their dividends and I'm anticipating several February dividend raises.

I’m excited to dig into another eventful month with everyone. January 2023 was very exciting as we made a number of moves in our portfolio. The capital unlocked allowed us to add to some under allocated names in our portfolio. I discussed in my 2023 portfolio goals article that I was considering a few different sales, and I’m happy to announce that I executed on one of them.

We will first dig into dividend growth, the two sales, and how I reinvested the money. Then we will turn to the monthly savings, dividend reinvestments, dividend increases and anticipated February 2023 dividend increases.

Dividend Growth

Unfortunately, the year-over-year comparisons for dividend growth won’t make sense until later this year when my portfolio reflects the change in allocations. My January dividends last year were significantly less than the dividends I received in January of this year mainly due to having a higher allocation to ETFs last year, which typically pay out in the last month of the quarter. For at least the first half of this year, I’ll likely compare my dividend income to the corresponding month in the previous quarter (so this month will be compared to the first month of Q4 2022). In the last half of 2023, we will begin the year over year comparisons.

My dividend income in January 2023 compared to October 2023 was -7.0%. Key headwinds for this comparison were 1) AMT paying its dividend in Feb 2023 rather than Jan 2023 (if AMT was paid in Jan, my dividend income would have grown 5.3%), 2) a smaller special dividend from COP and 3) KO’s non-uniform payment schedule. Excluding special dividends, my dividend income grew -3.4%. Excluding specials and including the AMT Feb dividend, dividend income would have grown 9.3% quarter over quarter.

Given the Feb payment from AMT, I don’t have any material concerns around this “negative” quarter over quarter growth. I’m still on pace for 20%+ dividend growth in 2023 compared to 2022.

Sales

I made two sales this month, which is more voluntary sales than I made all of last year (unfortunately, I sold the big banks last year due to compliance reasons at my previous employer). Olaplex ( OLPX ) and Netflix ( NFLX ) have left the portfolio, in their place I bolstered several positions and added one new position.

In my inaugural article detailing my portfolio, I said the following regarding OLPX:

• One company I will note below that's not a "real" portion of the portfolio is Olaplex ( OLPX ). It's a micro position held in my wife's Roth IRA. She has no desire to sell it, so it stays.

Well, at year end 2022, I asked my wife about OLPX and if she was still happy with the company. She decided she wanted to sell OLPX and reallocate the proceeds (and some future savings) into a company that makes some products we love at home, Constellation Brands ( STZ ). I happily obliged for a number of reasons. One, I’m happy to upgrade in quality. While STZ isn’t the bluest of blue chip names, it should be without discussion that it is a higher quality name than OLPX. Two, I’m thrilled that my wife is continuing to look at products she likes/uses as companies instead of products. I hope it’s a quality our child picks up as it’s not something that I realized until much later in life.

While I control all of our investments, I think it’s important to bring my wife into things so she knows what’s happening and gets excited about investments. If at the end of this year she decides she no longer wants to own STZ and instead decides on something else, I will again happily oblige. Turnover in a micro position is hardly turnover, and it keeps us both happy. I sold shares of OLPX on January 3 at $5.38 and picked up shares of STZ on January 27 at $229.30.

The second position I sold was not a micro position. At the time of sale, it was the second largest non-dividend payer and eleventh largest position in my portfolio. I noted this was a possible sale in my 2023 Portfolio Goals article. I ended up being in the green on this sale given my multi-year ownership, but not as much as I would have been if I had not bought more in the $350 range after the initial drop last year. I’ve been thinking of this move for quite some time and considered selling down half the position. At the end of the day, my reasoning for selling was not being comfortable with the future. I don’t know how the ad-supported tier will work out and I’m not confident we will see the same robust subscriber growth we saw before and during the beginning of the pandemic. What also weighed on me was that it was a large position that could be allocated to dividend payers, thereby boosting the yield and growth prospects. Since it was a non-dividend payer, I could allocate to lower yield/fast growth names and still see a big improvement in the portfolio. In the end, I decided if I was going to sell a position for losing faith, I had to sell all of it and move on.

Which is exactly what I did on January 5. I exited my NFLX position at $305.32. What to do with the proceeds was extremely difficult. I considered initiating positions in UNH or INTU, but I still think those names are a bit expensive. I also considered non-dividend payers like AMZN , CPRT , or BRK.B , but I decided to allocate to names in my current portfolio. I allocated roughly 40% of the proceeds to UNP, 20% to COST, 10% to MSFT , 10% to DHR and the remainder to QCOM and SPGI . While some of these names are overvalued, I’m much more willing to average into a position (up or down) that I already own rather than initiating a new position.

The push pull between adding to a name vs starting a new position is something I really struggle with and is the biggest area I need to work on as an investor. I’m going to always lean slightly towards adding to current positions even though adding a new position is enticing with shiny toy syndrome. As my portfolio grows, it’s much easier to sit on cash and wait for fat pitches rather than feel like I need to put everything in the market.

In the end, I’m extremely happy with these purchases. This helps build some top 10 positions, including UNP , MSFT, and SPGI; add to companies I’d potentially like to see in my top 10, including DHR and COST; and add to an undervalued name in QCOM. I picked up shares on January 5 of UNP at $207.45, DHR at $260.28, COST at $451.90, MSFT at $223.78, QCOM at $109.47 and SPGI at $337.70.

I’m not sure what the price of NFLX and OLPX will be once this article is published, but I’m not going to care too much (although my eyes popped checking NFLX on January 25). Those companies’ share prices could be significantly higher or lower than where they were when I made my sales. Specifically regarding NFLX, once I decide to sell a company, that’s it. I’m not going to dwell on whether it was a good or bad sale. Process over results. Process over results. I made a good decision for me and my family, and I will let things fall as they do. Moving forward, I will try to keep the non-dividend paying portion of my portfolio tight, with only room for the absolute best companies.

Monthly Savings

On January 4, I purchased shares of QCOM at $111.26 and AAPL at $126.71; on January 25, I purchased shares of UNP at $198.31; on January 27, I purchased shares of NEE at $76.01 and CP at $77.18; and on January 31, I purchased shares of CVS at $88.17.

There is a bit of everything in this monthly savings update. QCOM and AAPL looked like good values at the beginning of the month, so I was happy to add shares. Throughout the remainder of the month, I added to my cash pile and ended up putting it to work later in the month. As seen in an earlier section, I added heavily to UNP at the beginning of the month and added again near the end of the month after a weaker earnings release. After NEE fell off after earnings, I added there to keep that position at roughly 0.5%, which is a full position for NEE. CP is a company I love to add to as it’s a core position. CVS looks like one of the better bargains in my portfolio, so I was happy to add after the pullback.

Dividend Reinvestments

On February 1, I put our pooled January dividends to work. I purchased shares of MSFT at $246.51, UNP at $204.56 and ABBV at $146.43.

The first two purchases are in line with my 2023 goals. I’m building my largest individual position and adding to another large position consisting of one of my three railroads.

The last choice was between ESS and ABBV. I try not to heavily weigh valuation in my dividend reinvestments and instead focus on portfolio weighting. ABBV is a smaller position I’d like to keep building given the bullish comments from ABBV management on future revenue. ABBV management has been first class in navigating the Humira patent expiration. The blockbuster drugs in the pipeline coupled with the growing aesthetics business should set this company up for years. It’s a bit more expensive than I’d like, so I was happy to reinvest my pooled dividends.

ESS was strongly considered due to its valuation, as I still think it looks attractively priced. I decided to go with ABBV to pick up a few more shares rather than grow ESS. If anything, I’d like to reduce my ESS weighting and grow my apartment REIT exposure by adding shares of MAA to diversify my risk.

Dividend Raises

My portfolio saw the following dividend raises in January

• On January 5, EPD raised its distribution by 3.2% to $0.49 per share

• On January 24, CNI raised its dividend by 8% to C$0.79 per share

• On January 25, SPGI raised its dividend by 5.9% to $0.90 per share

• On January 25, BLK raised its dividend by 2.5% to $5.00 per share

• On January 26, CMCSA raised its dividend by 7.4% to $0.29 per share

• On January 26, APD raised its dividend by 8.0% to $1.62 per share

I discuss them in order:

I almost included EPD as a candidate for a raise in my December update, but decided against it since it just raised its distribution in August 2022. I’m conservative in my anticipated raises since I always enjoy a surprise. Anything more than 1 raise a year is fantastic for growth and compounding. I’m “fully” weighted in EPD at ~0.5% of my portfolio, but I’ll gladly add more if the rest of the portfolio begins appreciating and I can bring EPD back to size.

CNI’s 8% dividend growth came in right at my expectations. As a core position, I have conviction that this company will deliver that consistent dividend growth over many years. I’ll add on weakness.

While SPGI’s raise comes at a bit of a disappointment, I can understand the logic. SPGI issued a lot of shares to acquire INFO last year and spent $12B on share repurchases. I expect to see another large buyback announcement early this year. With the mid-single digit raise (well below my low-double digit expectation) I’ll need to consider changing my expectations of SPGI’s future dividend prospects.

The most disappointing raise of the bunch has to be from BLK with a paltry 2.5% raise. I “forecasted” the dividend growth rate would slow from its double digit pace, but I was thinking a 5% raise would be the downside scenario. I’m hopeful as earnings grow the payout ratio will come down and BLK will be able to hike its dividend at a faster clip. The raise also came with a 7MM+ share increase in the repurchase program.

CMCSA’s bump to $0.29 per share is roughly in line with what I thought would happen. I was hoping for $0.30, but I’m not going to be upset over a penny. CMCSA is doing what is supposed to do in my portfolio, give me communication exposure with mid-to-high single digit dividend growth.

The APD bump was quite the surprise. I had already pre-written my comments on a potential ADP dividend raise for February:

• Air Products and Chemicals ( APD ) – Fingers-crossed that one of my (are maybe your) best 2022 performers delivers with a strong dividend raise. The 2022 raise occurred in early February, but the previous five raises took place in late January. The raises have slowed a bit over the last three years, with 8%, 11% and 15% quarterly bumps. I’d be thrilled with another high-single digit raise.

And APD delivered! I’m happy with this 8% raise. Given APD’s relative position sizing and yield, it’s a meaningful contributor to my yearly dividend income. As an example, APD is roughly half the size of my AAPL position, but generates almost 2x the income.

In total, I’m mildly disappointed with this crop of dividend raises. It’s never enjoyable to see smaller raises from two large positions (BLK and SPGI), but both have performed very well from a capital appreciation perspective. February has the potential to be a huge month for me given a large number of my holdings will announce increases that will impact this year’s dividend growth.

Projected February Dividend Increases

February is always a great month for dividend increases for my portfolio. My back of the envelope math says companies contributing roughly ~13% of my dividend income are up for a dividend increase this month, which will be accretive to this year’s dividend growth rate. Remember, I’m always going to be a bit conservative in my predictions, which are nothing more than my own (sometimes hopeful) predictions. I discuss them below:

• Essex Property Trust ( ESS ) – ESS, with its 28 years of dividend increases, seems to always deliver in its late February announcement. The last time ESS raised its dividend outside of February was in 2014 when it announced its raise on January 30. ESS has blessed investors with mid-single digit raises, averaging 4.7% over the past five years (which is being weighed down by its 0.6% dividend raise during Covid). Another mid-single digit raise is my estimation, with a bump in the range of $2.25-2.35 per share per quarter from the current $2.20 level.

• Vulcan Materials Company ( VMC ) – VMC’s last nine dividend raises occurred in Mid-February (unfortunately, VMC didn’t fare as well during the GFC housing downturn and had to cut, then freeze, its dividend). VMC’s last three raises have been 8.1%, 8.8%, and 9.6%, which is at the high end for my expectations for my core dividend growth bucket. I’m expecting another high-single digit raise this month.

• The Coca-Cola Company ( KO ) – Mid-February declarations are the norm for this king. After three straight $0.01 per quarter raises, KO treated shareholders to a $0.02 per quarter raise last year (good for a 4.7% raise). If we get another $0.01 per quarter bump, that would equate to a 2.2% raise. Honestly, I’m not sure my wife and I could ever sell KO even if the growth rate is $0.01 per quarter in perpetuity as we are big fans of their products. (Except ginger ale, where Seagrams is outclassed by Canada Dry and Schweppes.) I’ll happily accept any raise from KO as we don’t plan to ever sell unless there is some massive deterioration in the fundamentals. While there are plenty of better growth opportunities out there, we’re happy holding boring old KO for the rest of our lives.

• NextEra Energy ( NEE ) – NEE has declared its dividend increase in mid-February the past 10 years (and likely longer but that’s where SA’s data ends). NEE has grown its dividend by 12.0%, 10.0% and 10.5% the last three years. As you may see, NEE is in my “core dividend growth bucket” which anticipates mid-to-high long term single digit dividend growth even while NEE has been growing its dividend well north of that hurdle. That’s likely because part of me refuses to believe utility companies can keep hiking the dividend, but NEE is a growth machine. A double digit hike is likely expected from many, but I keep thinking NEE’s capex and acquisition ambitions may start to degrade that growth rate over the longer term. But, it looks like those expectations shall be met again, as NEE’s Q3 print expects 10% dividend hikes through 2024.

• Moody’s Corporation ( MCO ) – One of my largest positions, MCO began declaring its dividend increase in early to mid-February from 2019. Prior to that, MCO declared its dividend increase in January or December. MCO has grown its dividend by 12%, 10.7%, and 12.9% the last three years. I’m expecting another low double digit dividend increase. This is the beauty of these capital light compounders; the dividend is grown quickly since the company doesn’t need significant capital to grow. The remainder will likely be thrown to share repurchases, which can quickly become accretive with a lower valuation.

• The Home Depot ( HD ) – HD has declared its dividend increase in February for the last 10 years (it was a bit more unpredictable with its increase coming out of a frozen dividend during the GFC and settled into its current increase schedule in 2013). I’m hoping for another low double digit increase this year, but the spread on this increase may be much wider than I’d like to admit. Given the difficulties in the housing market, I’m thinking a raise between 5% and 15% is possible, which would give us a quarterly dividend between $2.00 and $2.19. That feels like the right range, but let’s all hope for the higher end.

• Danaher Corporation (DHR) – DHR announced its dividend increase in late February for eight of the last nine years, with the lone exception being a March bump in 2019. Previous to that run, DHR went 10 quarters without a dividend increase. This will be DHR’s tenth consecutive dividend increase! DHR has been a stellar dividend grower for me the last two years (with smaller growth for a few years previously given debt reduction and large acquisitions). I’m hoping for another low double digit growth year, with a bump to somewhere between $0.28 and $0.30 per share per quarter. I guess there is a chance of slower growth given the spin-off of EAS later this year, but that honestly would be a disappointment.

• Old Dominion Freight ( ODFL ) – ODFL has announced its dividend increase in early February since its dividend was established in 2017. ODFL has been a dividend growth machine, giving us 36%, 33%, and 50% growth over the past three years. Trees don’t grow to the sky, so 30%+ dividend growth is not a reasonable expectation. The payout ratio is a conservative sub 10% (according to SA ) with a short history since the dividend was installed in 2017. I’m expecting a “relatively” slower double digit increase, somewhere between 15% and 20%.

Portfolio

Below is a current look at my portfolio.

Conclusion

I think I'm set up to have a very successful year of dividend growth. I expect to see robust dividend growth for the remainder of the year. There is a very good chance I'll be able to add significant amounts of capital over the coming months. I'll be in the tug of war match between adding to existing positions and adding new positions, and I'm excited to see how my portfolio will look by the end of the year.

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