MKC:CC - Nicholas Ward's Dividend Growth Portfolio: April And May Review

2023-06-13 07:50:03 ET

Summary

• My passive income stream increased by 25.59% YoY in April 2023 and 40.02% YoY in May 2023, with a year-to-date growth of 29.99%.
• I have been taking advantage of high yields on money market funds and short-term treasury ETFs, transitioning about 6.5% of my total portfolio value from a 0% yield into a high-yielding position.
• I have been making selective reinvestments and trades to increase my passive income stream and accelerate my journey towards financial freedom.

This is 2-month update… so you know how the saying goes: another [two] month[s], another [two] step[s] towards financial freedom!

I’m sorry for the delay here. I’ve been busy lately with Dividend Kings, iREIT, and our various newsletter services at Wide Moat Research. In general, I don’t have a lot of time to dedicate towards non-pay walled content each month, but I always do my best to get these portfolio reviews out for everyone who isn’t a subscriber that likes to follow along.

This piece was also delayed because I wanted to publish an article highlighting the big Apple ( AAPL ) trade that I made a few weeks back first, before writing the overall portfolio review, because that trade changed the weightings across my portfolio significantly.

That article has over 300 comments already, so if you haven’t checked it out, here’s the link - feel free to join the discussion.

That article took up my usual portfolio review slot for May, so here we are in early June with an April & May review.

Lastly, I will admit that I’ve been busier on the weekends than normal because of the success that my Virginia Cavaliers have had in the NCAA baseball tournament. There’s nothing like college baseball in June. I’m hoping to head to Omaha for the College World series in the coming weeks, so if any readers are local and have suggestions for places to stay, things to do, food to eat, etc., in that area, feel free to leave those suggestions in the comment section below.

Moving into the report… April and May were very good to me, in terms of the reliable growth and compounding of my passive income stream.

During April of 2023, my passive income stream increased by 25.59% on a year-over-year basis.

During May of 2023, my passive income stream increased by 40.02% on a year-over-year basis.

With this growth in mind, looking at the first 5 months of 2023 compared to the first 5 months of 2022, my passive income’s year-to-date growth is now 29.99%.

I’m so pleased with this growth; however, I admit, there is a bit of a caveat involved.

As I said earlier in the year, because of the rapidly increasing interest rates that we’ve seen (especially on short-term treasury notes), I transferred quite a bit of cash out of my bank accounts and into my brokerage accounts.

This changed the interest earned on this cash from 0.04% to roughly 4% at the time that I made the transfer…and the rate that I’m receiving on Fidelity’s money market accounts today is roughly 4.75%.

Simply put, I consider these money market funds to be “cash equivalents” in terms of their relatively risk-free nature, now that the debt ceiling debate is over and the threat of default - however small it actually was - is gone.

With that in mind, I’m not only holding my emergency funds at Fidelity, but also the remainder of my bear market funds (cash that I have set aside for significant macro sell-offs), and all of the money that I owe in taxes (right now, because I am earning nearly 5% interest on cash, I’m making the minimum estimated tax payments required to avoid underpayment fees and holding the rest, which will come due next April, so that I can reap the benefits of high interest rates in between now and then).

Taking advantage of the high yields on money market funds and the short-term treasury ETFs that I bought earlier in the year, means that I’ve transitioned roughly 6.5% of my total portfolio value from a 0% yield into a high yielding position.

This, combined with the ongoing re-investments, organic dividend raises, and monthly capital additions that I’ve made to my portfolio have allowed me to compound my passive income at an extraordinarily high rate throughout 2023.

The caveat is this: I don’t expect to see rates go much higher from here, so by this time next year, I don’t expect my cash position to contribute to the year-over-year growth of my passive income stream.

And, in the event that interest rates are cut, well, then I’ll be looking at negative y/y growth pressure from my short-term bond and money market funds. With that in mind, I know that I’ll be looking at tough comparisons eventually, but that’s okay. I can soften the blow here with active management and simply put, I’ll cross that bridge when I get there. If the interest rate environment changes significantly, I’m sure that there will be other opportunities that open up and I’ll do my best to pivot towards them (for instance, equities could sell-off or, more likely, if rates fall significantly then alternative cash flow generating investments, such as real estate, will begin to look a lot more attractive).

Either way, I’m very happy to take advantage of the high, relatively risk-free rates that I can generate today.

The passive income that these funds are providing is still accelerating my journey towards financial freedom in a way that I didn’t expect just a year ago. Prior to 2023, I did not factor in the possibility of earning such high interest on my cash into my longer-term passive income estimates and since I’m re-investing all of this income into blue chip dividend growth stocks, I’m going to end up owning a lot more shares of wonderful companies at the end of year than I might have otherwise, due to the relatively high rate environment that we’re living in today.

April & May Selective Reinvestments

At the beginning of every month I put all of the dividends that I received during the prior month to worth via a selective reinvestment process (in other words, I don’t DRIP; instead, I pool my dividends and then use them to regularly rebalance my portfolio throughout the year).

When making these selective reinvestments, I allow myself to ignore valuation, instead, largely focusing on things like quality, growth, or simply asset allocation targets.

I do this because there are so many wonderful companies that I want to own more of, but over the years, my typical value oriented rules prohibited me from accumulating shares. Yet, more often than not, I noticed that these blue chips tend to trend higher…leading to regret. So, in an effort to reduce regret while still maintaining discipline, I developed a system that allows me to accumulate shares of such companies (using my dividends) without feeling guilty so that I don’t lose out on the long-term upside that best-in-breed stocks provide.

With that being said, here are the companies that I bought on 4/3/2023 with my March dividends:

• Broadridge Financial ( BR ) at $145.62

• Danaher ( DHR ) at $248.33

• Thermo Fisher ( TMO ) at $567.94

• Accenture ( ACN ) at 285.29

• PepsiCo ( PEP ) at $181.25

• Ares Capital Corporation ( ARCC ) at $18.37

• Palantir ( PLTR ) at $8.41

Look at these purchases, Broadridge Danaher were examples of blue chips trading at fair value, Thermo Fisher, Accenture, and PepsiCo were examples of overvalued wonderful companies that I wanted to own more of, Palantir is a speculative growth stock that I like to buy every month, and ARCC shares represented an opportunity to bolster the overall yield of this basket by adding shares of an undervalued BDC.

Here are the companies that I bought on 5/1/2023 with my April dividends:

• Northrop Grumman ( NOC ) at $464.99

• S&P Global ( SPGI ) at $362.97

• Accenture at $278.95

• Ares Capital Corp. at $18.46

• Palantir at $7.76

Northrop, S&P Global, and Accenture were examples of overvalued blue chips that I wanted to own more of and once again, Palantir represented my monthly speculative growth pick while ARCC shares bolstered the overall reinvestment bucket’s yield.

April & May Trades

Another way that I ensure that I’m consistently adding building blocks to my passive income stream and accelerating its compounding process over time is to allocate savings to the market each month.

One of the Dividend Kings subscribers recently asked me what percentage of my income I’m saving every month, which is something that I’ve never really discussed here, or even calculated before… but, this sparked an interesting discussion in our subscriber chatroom, so I figured that I’d share that information here as well.

Looking at my wife and I’s after-tax take home pay, I’m allocating roughly 37.5% of it to the market each month.

After a quick Google search I discovered that a good target savings rate is 20%... so apparently I’m ahead of the game, in that regard.

I suppose that makes sense, because my wife and I are willing to make sacrifices in the present so that we can retire early.

Avoiding lifestyle creep over the years as we’ve become more successful professionally has been a major priority of mine.

Our goal is to reach financial freedom (the moment when the passive income generated by our portfolio exceeds our monthly living expenses by 20% or so; to me, this is an acceptable margin of safety which would provide enough peace of mind to quit working and rely solely on passive income) as soon as possible so that we can dedicate our time/energy towards our family and other passion projects which, unfortunately, wouldn’t pay the bills on their own.

Thinking about all of this inspired me to think of ways to increase their percentage even higher; however, I think there’s something to be said about living a nice/fun life in the present as well.

It’s hard to know where that balance lies (between comfort and austerity); but, for the moment at least, I think this ~37.5% savings rate makes sense for us.

So, with all of that being said, here are the trades that I made with those savings during the last two months…

During April I made 10 trades, all purchases.

Outside of the 7 reinvestments trades that I made on 4/3/2023, I also bought shares of:

• Accenture at $275.78 on 4/21/2023 (I like that $275 level in terms of fair value, so I was pleased to bolster this position during the stock’s recent dip).

• Danaher at $236.05 on 4/25/2023 (I recently discussed my bullish outlook for DHR shares in this article and I’ve been very happy to take advantage of the stock’s recent weakness as I build up a long-term position in this reliable compounder).

• Thermo Fisher at $533.21 on 4/26/2023 (for many of the same reasons that I’m bullish on DHR, plus the fact that TMO shares dipped below my fair value estimate, allowing me to use my cash savings - alongside monthly reinvestments - to quickly bolster the size of this position).

May was a much more active month for me, in terms of trading.

During May I made 33 trades (29 purchases and 4 sales).

5 of these trades were the May re-investments. 14 of the trades (12 buys and 2 sales) were the aforementioned Apple trade that I made on 5/5/2023…

In short, I trimmed roughly 30% of my AAPL position, reducing position size from 13.7% to 9.4% because of another poor dividend increase announcement.

In doing so, I locked in significant gains, while reducing my single stock risk…

Here is a list of the AAPL shares that I sold:

• AAPL bought on 10/21/2014 for $25.56 and sold on 5/5/2023 for $173.07 for 577% gains

• AAPL bought on 4/28/2015 for $33.06 and sold on 5/5/2023 for $173.07 for 423% gains

• AAPL bought on 4/18/2016 for $26.79 and sold on 5/5/2023 for $172.72 for 545% gains

• AAPL bought on 7/03/2017 for $36.00 and sold on 5/5/2023 for $173.07 for 381% gains

• AAPL bought on 10/04/2017 for $38.37 and sold on 5/5/2023 for $173.07 for 351% gains

• And another batch of shares that was built up via selective monthly re-investments from June of 2014 to September of 2016 with an overall cost basis of 26.35 that was sold on 5/5/2023 for $173.10 locking in 557% gains.

In an effort to reduce the tax drag of this trade, I also sold my Stanley Black & Decker, Inc. ( SWK ) position, locking in losses of roughly 38.6%, in an attempt to off-set some of these AAPL gains.

I put those proceeds (minus the cash owed to Uncle Sam) to work, buying shares of:

• Accenture plc at $268.75 (I recently highlighted my bullish outlook on ACN here )

• Air Products and Chemicals, Inc. ( APD ) at $292.90 (blue chip player in the industrial gas space)

• ASML Holding N.V. ( ASML ) at $643.29 (high growth potential in the tech sector)

• BlackRock, Inc. ( BLK ) at $641.86 (I’m always happy to buy BLK shares yielding ~3%)

• Broadridge Financial Solutions, Inc. at $153.72 (an extremely reliable compounder)

• Danaher Corporation at $242.21 (I recently highlighted my bullish outlook on DHR shares here )

• Linde plc ( LIN ) at $365.47 (another blue chip stock in the mission critical industrial gas space)

• MSCI Inc. ( MSCI ) at $469.22 (a high growth/dividend growth stock that I’ve wanted to own for years)

• Thermo Fisher Scientific Inc. at $543.99 (best-in-breed pure-play on the life science tools space)

• UnitedHealth Group Incorporated ( UNH ) at $498.31 (a blue chip dividend grower that I recently highlighted here )

• Visa Inc. ( V ) at $229.87 (Visa continues to be one of the fastest growing dividend growth stocks out there)

• Zoetis Inc. ( ZTS ) at $179.34 (a high growth stock and the best-in-breed player in the animal health industry)

Overall, even with the capital gains tax set aside, I was able to increase my passive income by approximately 55%, while also increasing my long-term dividend growth prospects, by making this trade.

This is a perfect example of using active management to increase my passive income stream.

I try not to make trades like this very often (in general, I’m a fan of doing nothing and letting my winners run). But, when I do make trades, I always ensure that my passive income stream is larger after the trade than it was before I made it.

As you’ll see in a moment, AAPL is still (by far) my largest position. And therefore, I’m obviously still very bullish on the stock long-term. However, I was happy to reduce my exposure a bit because of the poor dividend growth performance and rotate that capital into stocks that better align with my primary goal in the market (generating reliably increasing passive income).

Still sitting on massive capital gains from the Apple trade and wanting to take further steps to harvest tax losses, I also sold my Adobe ( ADBE ) position on 5/19/2023 at $370.47.

After its recent rally, ADBE was approaching my fair value estimate and it was one of the few options that I had left in a taxable account to lock in losses (I sold those ABDE shares down roughly 18% from my cost basis).

I think Adobe is likely going to be a fine company to own long-term; however, in recent years I have been reducing my exposure to non-dividend payers in an attempt to increase the overall yield of my portfolio… so I continued along that path here with ADBE.

I used the proceeds from this sale to add to existing positions in:

• Broadridge Financial at $153.79

• Danaher at $227.88

• Thermo Fisher at $528.25

• UnitedHealth Group at $479.08

• Carlisle Companies ( CSL ) at $213.50

I also established a new starter position in AGCO Corporation (AGCO) at $114.38.

I already own Deere ( DE ), which I consider to be the best-in-breed play in the agriculture industry; however, I thought that AGCO was a pretty interesting deep value play here in the $115 area and after its recent 20.8% dividend increase, the stock had moved up my watch list (I should note that this one is also known to pay special dividends).

Obviously, with the benefit of hindsight, I know that I was early on this move. But, this trade resulted in a nice bump to my passive income stream and moving forward, don’t be surprised if you see my continue to trim non-dividend payers and replace them with blue chips that provide yield because this is one of the final steps that I need to take to reach my passive income goals.

On 5/25/2023, I made a trade, selling Medtronic and using the proceeds to re-establish a position in Pfizer in my portfolio.

Here’s the trade alert that I provided to Dividend Kings members regarding the rationale behind this move:

“I just made a trade...I trimmed my MDT position (I would have sold the entire thing, but some of my shares were purchased in in November of last year at $76.01 so I don't want to add to my gains by selling those shares, especially at the short-term rates), locking in profits of approximately 13% on shares in an IRA account at $83.27. I immediately used the proceeds from this trade to buy PFE...I sold PFE back in December of 2022 at $51.91...so I was pleased to re-buy a large part of that position here at $38.17. This trade increases my passive income significantly (MDT yields 3.31% here while PFE yields 4.29%). Both companies are growing their dividends at a low single digit clip, but I've wanted to re-enter that PFE position on the news of their potential mega-blockbuster obesity drug. This trade bought back 59% of the PFE shares that I sold in December (26% lower). I am hoping to buy back the remaining 41% with my May cash in the near future...however, I'm waiting to do so until there is clarity on the debt ceiling.

I should mention, the decision to sell MDT was due to relatively poor guidance and a disappointing dividend raise (1.5%). Since I was able to lock in profits in a tax-advantaged account and increase my portfolio's yield, this was an easy decision for me...and the rest of those MDT shares are on the chopping block as well...as soon as they go from short-term gains to long-term gains.”

It always feels good to sell something and then buy it back at a 20%+ discount.

And lastly, I sold off my entire crypto basket in late May/early June.

Long-term followers here will know has always been a relatively small - roughly 0.5% - speculative part of my portfolio.

I liked having a bit of exposure here…just in case crypto “went to the moon” as the bulls like to say, so that I wouldn’t be left behind.

But, when looking for losses to lock in to offset those Apple gains I was running out of options and there were meaningful losses to be harvested across that crypto portfolio.

Being that my crypto holdings didn’t contribute to my passive income stream, those were also easy assets to sell in an attempt to reduce my tax burden. I used the proceeds of this sale to help make my estimated tax payments in early June.

Nicholas Ward’s Dividend Growth Portfolio

Conclusion

The cost basis/weightings above are accurate as of 5/31/2023.

Moving forward, I hope to continue to allocate cash to the market, building positions in blue chip DGI stocks.

I want to continue to increase the overall yield on my portfolio, but I’m not willing to totally sacrifice growth prospects when doing so.

If I were to allocate all of my savings to higher yielding stocks, I could accelerate my journey towards retirement; however, the entire point of this strategy is to create a passive income stream that supports my sustainable, over the long-term, so that I never have to touch my invested capital (which will be passed down to my kids…or charities, if they don’t behave).

Lately, I find myself focusing on a barbell approach when it comes to yield (focusing on lower yield/higher growth names and then higher yield (4%+) options to increase the yield overall) so I would expect to see more of that going on moving forward (for example, my recent additions of stocks like DHR/TMO being combined with share of PFE fit that mold).

But, I should note, that if the macro rally that we’ve seen throughout 2023 continues and the market rises up to within 5% of all-time highs, I will significantly slow the pace of my equity investments and begin to allocate savings towards my depleted bear market buckets so that I will have all of the dry powder necessary to take advantage of the next market crash.

We’re not quite there yet, but we are headed in that direction.

It’s always hard for me to build cash as opposed to investing in stocks because I love their compounding potential so much. But, the high interest rates that I can receive from short-term bonds make that an easier process to stomach and I want to stay disciplined to my plan.

Once that -5% threshold is crossed, I will begin allocating at least 50% of my monthly savings towards my cash equivalent positions in an attempt to raise that weighting from the mid-single digits where it sits today to the 10-15% area (or potentially even high, so long as rates stay in this 4%+ area).

For further details see: