RTX - My Dividend Growth Portfolio: Blackstone's Dividend A New Position And Bonds

2023-11-01 07:15:00 ET

Summary

• Blackstone's total dividend for 2023 is set at $3.32 per share, down 33% from the previous year. I'm not looking for it to recover next year.
• I started a position in Kroger due to its dividend growth potential and low valuation.
• I began adding bonds to the portfolio and discusses the reasons why it's appropriate.
• Many bargains are available currently, but when compared to the return on cash are harder to justify. I discuss the Transactions and Payment Processing industry where I am seeing value.

This month's update is a little different than usual. I have three items up front to share with my readers, which took up a lot of space. So, I cut out many of the usual sections. For anyone wanting to see my overall goals, guidelines, and holdings, I recommend reading last month's update.

Blackstone's ( BX ) Final Dividend Announcement for 2023

Blackstone announced its 4th quarter dividend last month, setting the total dividend for 2023 at $3.32 a share, down 33% from 2022's dividend of $4.94. Before earnings, analysts projected the total dividend to be at $3.60 for the year, down considerably from the start of the year. In February, analysts forecasted a total dividend of around $4.10, which was already down from the start of 2023.

For 2024, analysts are projecting BX to see a nearly 40% increase in income and a $4.65 dividend payout. I think these numbers are optimistic, given the current environment. Blackstone is still a great company and will do well in the future, but we are at a point in the cycle where profits will be down and could take a few years to ramp up again.

The dividends have always been lumpy from BX, both quarterly and annually. The chart below shows the inconsistency of Blackstone's dividend.

As a dividend growth investor, I prefer consistent and growing dividends. However, Blackstone has increased the dividend over time, but it isn't always pretty. For instance, investors jumping into BX in 2015 had to wait until 2021 to see their initial dividend exceeded. It could be a few years until the 2022 dividend of $4.94 is exceeded; however, I am confident it will be in the future.

A New Position in the Portfolio

Last month, I took advantage of historically good yields in Kroger ( KR ) and opened a position in this portfolio. As I usually step into positions, particularly when I think there is room for a better price, I opened a ½% position at $43.45 and will look to expand it to 1-1.5% at an equal or better price. Ideally, I am looking to add below $42.

Kroger has an 18-year dividend growth streak, with 5 and 10-year growth rates of about 14%. As I have been trying to increase the overall dividend growth rate of the portfolio over the last few years, it is an ideal addition if it can sustain anything close to those rates. This year's increase was just over 11%.

While I have doubts about the company's ability to sustain such high dividend growth rates, I am optimistic about them meeting my 7% dividend growth goal. The long-term earnings growth forecasts range from 4% to 8%, which isn't great, particularly for a low-margin business. However, the company maintains a consistent payout ratio in the low 20% range. While I'm not a fan of growing the dividend through expanding the payout ratio, some payout expansion will likely occur.

Across my portfolios, I am light on consumer staples (not counting tobacco,) so Kroger is a welcome addition. This low weighting is because many traditional consumer staples companies have been relatively expensive over the past decade, and many have slow growth rates. So Kroger, being at a bargain price and having a faster-growing dividend, is an ideal addition. The Fastgraph below shows the company's current relative undervaluation to its historical PE.

Time for Bonds?

For years, I have eschewed bonds. I could not understand why anyone would accept a fixed 3% return, let alone a 1% (or less) return. Of course, the fixed return only applies to income investors buying individual bonds, as many in a target date fund or 60/40 portfolio have learned over the past couple of years. The saying "know what you are buying" has never been more true.

Although more work, individual bonds make the most sense for an income investor. This locks in the return if held to maturity while still allowing the opportunity to capture some additional gains if rates fall. In effect, this sets a floor on the investment (assuming the issue remains solvent), unlike a bond fund with unlimited capital losses as rates fluctuate.

The current consensus is that there is too much debt for rates to stay this high for several years. I am not so confident, as often when everyone agrees, the very certainty prevents an event from happening. (See the recession of 2022/2023 that everyone was sure was coming. Now that most everyone agrees we are in a soft landing, it is much more likely to occur.)

While I am uncertain if 10-year treasury rates will continue up to 7% or higher, I took advantage of the current environment to lock in 10-year treasury's at about 5%. This investment is only a tiny percentage of the portfolio, about 1%. However, I am considering growing my exposure, especially if rates continue to rise. However, I will continue to hold a significant amount of cash yielding 5% in money markets to be flexible should we see a significant market drop.

I believe that it is unlikely that I will end up holding the bonds till maturity. I think rates will likely drop over the next decade, and I will take advantage to sell at a gain and reinvest elsewhere. But, even if they don't, I will be content with a 5% return that I can place into faster-growing dividend growth stocks.

October's Dividend Increases

Lockheed Martin ( LMT )

When Lockheed Martin failed to raise its dividend on its regular schedule in September, I was a little concerned. The company has consistently given 20 cents per year raises since 2018. So this year's 15 cent (5%) increase was a surprise. I have not had time to look closely at what this might mean for future dividend growth, but I remain optimistic we will see a return to better raises.

Visa ( V )

As expected, Visa raised the dividend by 15.6% last month. This increase is lower than the 5-year average of 17% and less than last year's 20%. However, increasing by 15% will double the dividend every four and a half years! Visa is currently yielding near an all-time high and is a decent buy.

A.O. Smith ( AOS )

I recently sat down and determined the 20 companies I most want to own. There were only a few on the list that I already held, but AOS was one of them. Last month the company raised the dividend by about 7%, which aligns with my expectations. I expect the company to return to double-digit increases in the future. At present, I show AOS as a slight bargain, although I am not adding right now, given the return on cash.

AbbVie ( ABBV )

AbbVie is one company where the 5-year dividend growth rate of 17% is well off the mark of my forward expectations. I expect 5% average increases going forward, which aligns with this year's 4.7% increase. As AbbVie is one of the largest income producers in the portfolio, the raise has a significant impact on future dividends.

November's Expected Increases

Three increases are expected for November. These are smaller positions, with Aflac ( AFL ) being an average-size position, Automatic Data Processing ( ADP ) being a half position, and Snap-on ( SNA ) being a micro position. ADP and SNA are on my list of twenty companies I want to own, and I am actively looking to add to these positions.

Automatic Data Processing

ADP has a 47-year dividend growth streak yet still maintains 5 and 10-year growth rates above 10%! Last year's increase was a whopping 20%! While I don't expect to see that kind of increase this year, close to 10% is reasonable.

Aflac

Aflac does an excellent job of matching dividend growth to EPS growth. This allows the company to maintain a reasonably consistent payout ratio, but it does make for some lumpy dividend growth. The company has a 5-year dividend growth rate of 13%, which is relatively high for raising the dividend for over 41 straight years. I expect this year's increase to be 5%, or even slightly lower, as the payout ratio is at the high end of their normal.

Snap-on

Snap-on has a 13-year dividend growth streak with 5-year and 10-year growth rates of close to 15%. For this year, I'm not forecasting anything close to these averages. I expect a 5-7% increase for this year and the next few. However, over the long run, I think the company will maintain a high single-digit dividend growth rate.

What else am I watching?

There is no doubt that bargains are appearing in the market. In the last month, across my portfolios, I added some UPS ( UPS ), Tractor Supply Company ( TSCO ), Target ( TGT ), and RTX Corp ( RTX ), all of which were replacements from selling out of a Colgate Palmolive ( CL ) position. Additionally, I added to my positions in Nexstar Communications ( NXST ) and Fidelity National Information Services ( FIS ). Finally, I continue making small daily buys of Schwab US Dividend Equity ETF ( SCHD ), adding a little more on days it's below $70 and a little less when it's above.

In this portfolio, I added to my position in Texas Instruments ( TXN ), which, even though I am expecting slower dividend growth for the next few years, is at a fantastic entry point for long-term investors. Even with cash yielding 5%, the company looks like a bargain, with the yield topping 3.7% and dividend growth expected at 5% for a few years. Although, I think the long-term dividend growth rates will approach double digits again.

My purchases continue to be small and measured, even with many good buys showing up on my screens. This is because most of these bargains, compared to the 5% return on cash, look less appealing, and the economy's direction looks even worse. In general, the entire market is overvalued compared to the alternatives right now, with some sectors significantly so. However, there is one area that I find interesting.

Transaction and Payment Processing

There have been a lot of highflyers in the transaction and payment processing industry in recent years. PayPal ( PYPL ) is down 82%, and Square ( SQ ) is down 84% from their peaks. Meanwhile, Visa ( V ) is only about 6% from its all-time high. While there is no doubt that PayPal and Square were in a hype bubble, there are some interesting dividend-paying companies in this space right now.

While buying Visa at any time is usually a good bet, today might be even better, as it's currently at an all-time high dividend yield after its increase. However, there are two companies that I find more attractive right now, although they are not blue chips like Visa.

Fidelity National Information Services ( FIS )

While FIS has its negatives, the company appears priced for going out of business. Over the past decade, the company has commanded a premium valuation of nearly a 20 PE. This premium was partly a function of being in the right industry and partly because of growth. Currently, the company trades at a blended PE of less than 8. The Fastgraph below shows the relative undervaluation.

While future growth is expected to slow, the company still offers decent dividend growth possibilities. The company does not have a consistent dividend growth history as it has taken pauses, but it has increased the dividend regularly since 2011 and sports a 5-year growth rate of better than 10%. With payout ratios around 30%, the dividend has room to continue to grow.

Global Payments, Inc. ( GPN )

Far from a consistent dividend grower, GPN still has the potential to become one. The company pays out a paltry 10% of earnings, so there is plenty of room to expand the dividend. The company has grown earnings rapidly over the past decade and is forecasted to grow EPS at well over a 10% rate. The Fastgraph below shows the relative undervaluation and the consistent earnings growth that GPN has enjoyed.

Both of these companies will likely bounce back in valuation over the next few years. Neither is a solid dividend growth company. However, both have potential. As always, I encourage everyone to do additional research, as historical PE ratios are just a good indication of potential value, not necessarily the only reason to buy.

Final Thoughts

As I have accumulated about a year's worth of dividends as cash, and many good-looking bargains are appearing, I will take a new stance going forward. There is still potential for a significant downturn in the market so I want a cash pile available. However, as further dividends are collected, I plan to reinvest half and put the other half in bonds/cash.

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