PLDGP - Nicholas Ward's Dividend Growth Portfolio: December/Full Year 2022 Review

Summary

• My passive income was up by 46.50% on a year-over-year basis during December.
• For the full-year in 2022, my passive income rose by 23.73%.
• My portfolio's total returns during 2022 came in at -17.09%, beating the S&P 500's performance for the 8th time in the last 11 years.

Another month, another step towards financial freedom!

Please bear with me here, being that this is an annual report, there will be a lot of words… and more importantly, a lot of numbers.

I know that a numbers heavy read can be a bit arduous, but I’ll do my best to break it up with clear sub-headers so that readers can quickly find the information that they’re interested in.

December and Full-Year Dividend Data

Overall, for 2022, looking at year-end data, my dividend yield was 2.17%.

My dividends were up by 46.50% during the month of December (on a year-over-year basis), marking my best monthly y/y growth rate of 2022.

My second best month was September 2022, which posted 41.14% growth. Therefore, it’s clear that much of December’s 46.5% growth can be attributed towards non-organic growth.

When I make purchases, I don’t pay attention to which quarterly cycle each stock that I buy is scheduled to pay their dividends in. To me, it’s much better to focus on quality and value, as opposed to trying to balance out my monthly dividend income. That’s what budgeting is for (in retirement), in my opinion. And with all of that being said, it appears that I’ve accumulated a lot of shares during 2022 that pay dividends during the March/June/September/December cycle.

Overall, for 2022, December’s 46.5% growth pushed my overall annual dividend growth rate up to 23.73%.

This was my best annual dividend growth result since 2019, when my dividends increased by 24.25%.

As you can see below, 2022’s great performance continued my streak of 8 consecutive years of double digit dividend growth.

For references’ sake, my December dividends from 2022 were approximately 4.5x the size of the dividends that I received during December of 2014 (the first year that I began tracking this data).

There have been a lot of ups and downs in the market during these 8 years; however, it’s great to see the very reliable growth and compounding process that the dividend growth investing strategy is all about play out here.

Anytime I’m nervous about the markets, I just look at my monthly dividend income charts.

They show tangible success and allow me to sleep well at night throughout volatility.

It’s amazing to see my dividends up nearly 24% during a year when the market was down by 19.4%.

This is why I’m constantly saying things like, “I don’t track near-term share price performance, but instead, focus on my reliably increasing dividend income stream.”

Near-term share price movement is nearly always irrational, based upon emotional sentiment rather than fundamental data. However, sustainably increasing dividends are derived from each stock’s underlying fundamentals and therefore, I’d much rather spend my time and energy focusing on things like dividend growth prospects and dividend safety metrics (things I can control) as opposed to short-term gains/losses (things that are outside of my control).

I think these are lessons that all investors can take to heart.

Hopefully charts like these help to drive home the message that dividend growth investing works… so long as you’re disciplined and patient.

2022 Total Returns

Although I don’t pay attention to capital gains/losses closely myself, I know that readers like to track these things.

I don’t take the time to tally up this data on a monthly basis when putting together these portfolio review articles; however, for the December/2022 full-year review piece, I did calculate my time-weighted returns for the full-year.

For the full-year, my TWR was -17.09%.

I was very happy with this result because it meant that I beat the broader market (the S&P 500) once again.

During 2022, the S&P 500’s price returns were -19.44%.

But, that doesn’t paint a fair picture, because that doesn’t include dividends.

The SPDR S&P 500 Trust ETF’s ( SPY ) total returns - with dividends included - during 2022 was -18.20%.

Therefore, I still beat the major index by approximately 1.1% which pushes my historical record against the S&P 500 up to 8 wins during the last 11 years (I fired my financial adviser and began managing my own money 11 years back).

During 2021 I underperformed the S&P 500, largely due to the fact that I carry very little exposure to the energy sector.

Energy continued to be the top performing sector during 2022 as well… and I’m still underweight.

During 2022, I made 229 trades, which helps to achieve this result.

206 of these trades were buys, 23 of them were sales.

95 of these purchases were a part of my selective re-investment process (on the first trading day of each month, I allocate all of the dividends that my portfolio generated during the prior month into the markets).

Therefore, I used a combination of monthly savings and my bear market cash reserves to make 111 equity purchases during 2022.

All of these trades have been discussed in the monthly updates that I post to Seeking Alpha which are available in the archives section of my Seeking Alpha profile page.

It was especially great to see my holdings produce relative outperformance without the boon that a higher allocation towards energy would have provided.

It feels good to be back on a win streak and here’s to 2023 pushing my historical performance relative to the S&P 500 up to 9 out of the last 12 years!

December Trades

Overall, during the month of December I made 14 trades (13 buys and 1 sale).

I’ll start off by discussing the 6 stocks that I bought on 12/1/2022 when I put my November dividends to work via selective dividend reinvestment…

Here’s a snippet from the real-time trade alert that I provided Dividend Kings subscribers regarding the selective re-investments:

“I put that dividend cash [referring to my November dividends] to work this morning, adding to my ESS position at $220.07, V at 216.23, ORCC a $12.87, REXR at $55.18, CCI at $142.57, and PLTR at $7.81. In general, I focused on higher yielders here. I was happy to continue to build out my REXR/CCI stacks (I plan to use selective re-investment to fill them out over the next year or so if their values don't drop back down to levels where I'd like to buy shares with savings). V is slightly undervalued here (IMHO) so I was happy to buy shares of that high growth blue chip. And, as I've done several times, I used my leftover $$ to add a few more shares to my highly speculative PLTR position (honestly, I don't even know how to evaluate that company and therefore, I don't have a FV estimate, but I think the business is interesting and there is high risk/high reward there). Basically, those PLTR shares are like my crypto...I just plan to stash them away for 20 years+ and see what they look like then.”

Moving onto the only sale that I made during the month, let’s discuss my decision to liquidate Pfizer ( PFE ) and use those proceeds to add to my existing positions in Crown Castle ( CCI ), Essex Property Management ( ESS ), and Visa ( V ).

Here’s the trade alert that I provided Dividend Kings members regarding that move on 12/9/2022:

“All, I just made a trade...due to PFE's disappointing dividend increase (a 2.5% raise doesn't meet my expectations on a low-3%yield) I have liquidated that position at $51.91, locking in profits of approximately 70.5% (thankfully, these shares were held in a retirement account, so no payments are headed to the tax man). I used the proceeds from this sale to add to existing positions in CCI at $141.18, ESS at $215.63, and V at $209.97. I think the real estate plays are undervalued here so I am pleased to continue to add to those beaten down positions. And, being that V is trading at a discount to my fair value estimate, I was pleased to buy more shares there, adding a bit of growth to this trade bucket. Overall, the combined dividends of my new CCI/ESS/V bucket is approximately 12.3% higher than the dividends produced by the PFE shares that I sold. That's great - I love using active management to increase my passive income stream. Furthermore, moving forward I believe that each company that I bought has better dividend growth prospects than PFE as well (I expect to see 4-7% raises from ESS/CCI next year and a 10-15% increase from V). In short, a win, win here for me. I'll look to use cash to replace the healthcare stake if/when bio-pharma names experience a bit of weakness. But, other than MDT, which I added to last month, I'm not seeing a lot of appealing value in the healthcare sector, so I wasn't going to force it. I'm happy to take what the market gives me in terms of quality + value and right now, I'm seeing that with CCI/ESS/V.”

With the benefit of hindsight, it looks like I timed that one fairly well.

PFE shares are currently trading for $46.12.

Therefore, they’ve fallen by approximately 11.1% in the month or so since I made the sale.

On the flip side, CCI, ESS, and V are all up nicely.

Now, as I always say, short-term share price movement is typically irrational and therefore, I’m not going to pat myself on the back too much here. But, I think there’s something to be said about management foreshadowing poor performance with their low dividend raise (if they were more confident in their operational growth, they would have provided a raise that was more in-line with historical averages) and therefore, I’m happy to continue to let dividend growth be my primary guide when it comes to selling/trimming portfolio positions.

Up next, on 12/14/2022, I continued to allocate fresh funds to the market, building out my allocation towards residential real estate.

I’ve discussed this at length with subscribers, but in short, here’s the deal: I love the idea of adding income properties to my investment portfolio; however, I’m too lazy to be a landlord. Therefore, in recent years I’ve been very happy to take advantage of the sell-off that we’ve seen in the multi-family subsector of REITdom and I hope to continue to build these positions (at this point I’m long AVB, CPT, ESS, and MAA) so long as their valuations remain depressed.

Here’s the trade alert that I provided DK subscribers:

“All, I just put the first bit of my December savings to work, initiating a position in CPT at $117.85. CPT adds nice geographic diversification to my multi-family REIT holdings (its focused on the sun belt, as opposed to the large coastal urban markets. Shares are down by roughly 33.5% on a year-to-date basis and trading right around fair value (IMHO). I think FV lies in the $115-$120 area, so we're right in the middle of that range here. Shares yield nearly 3.2% and I expect to see a nice dividend raise early next year (AFFO is expected to rise by 25% this year). CPT is trading for roughly 20x this year's AFFO expectations and roughly 18.5x next year's AFFO expectations. Over the last decade, CPT's average P/AFFO multiple is approximately 22x. I don't think the margin of safety is very wide here, but I do feel comfortable with an entry stake into this high quality company here around fair value. I'll add more shares if the stock heads lower. But, in the meantime, I'm looking forward to sitting back and collecting these dividends. CPT goes ex-dividend on 12/15 so I had to buy today if I wanted to collect the January payment. I was happy to do so. (F.A.S.T. Graph below).”

Source: F.A.S.T. Graphs

I continued, “The real estate sector is down something like 25% on the year and it's one of the few areas of the market where I'm still seeing blue chips with attractive valuations attached. Healthcare has run up, my favorite industrials have rallied, consumer staples and utilities never really got cheap in the first place, and lately, there's been a solid rally in the chip space. Blue chip growth stocks in the information technology sector still look good...but I'm trying my best to raise the dividend yield of my portfolio overall...so it's difficult to justify purchases there.”

And regarding my sector allocation, I said, “I increased my real estate exposure from like 6.5% to 10.5% thus far during 2022...I think I'll cap it around 15%.”

Therefore, I have plenty of room to go when it comes to buying REITs.

My next purchase was on theme here… but, rather than buying another REIT, I added to my Carrier Global position, another blue chip name that has been beaten down due to higher rates and poor sentiment surrounding the real estate/construction space.

On 12/15/2022 I provided this trade alert to DK members:

“All, I just put a bit more of my monthly savings to work, adding to my CARR position at $42.42. I've owned CARR since its spin-off from UTX a few years back, but I haven't added to it because I wanted to see a dividend growth trend form. After management's recent 23% increase, I wanted to start building up that position weighting. At 42.42, CARR is trading for roughly 16.5x next year's earnings, which seems reasonable enough to me. The stock has secular tailwinds in place due to rising ESG trends. And, due to the underpenetration of air conditioning in places like Europe, where temperatures are rising, I expect to see regular growth from this one over the next 5-10 years. From here, I'd like to add again in the $38 area, and then again in the $35 area. Due to the relatively low yield, this isn't a name that I'm looking to go overweight right now. But, I'd love to bring CARR up to a 0.5-1.0% weighting or so...and therefore, I have room for another couple of purchases from here.”

Then, on 12/19/2022, I made my next purchase, taking advantage of the headlines surrounding L3Harris Technology’s acquisition of Aerojet Rocketdyne ( AJRD ) and the sell-off that accompanied this news.

I think LHX’s attempted takeover here is more likely to go through than Lockheed’s recent attempt and I like AJRD’s assets.

I was already long LHX prior to the news and I’ve been bullish on the defense space overall as a defensive area to allocate cash in the equity markets due to expected spending increases by the U.S. and its allies in response to heightened geopolitical tensions across the globe.

Therefore, when LHX sunk 7%+ on the AJRD news, I provided this alert to subscribers:

“All, I just put more monthly savings to work, adding to my LHX position on today's sell-off. I added shares at $206.52. LHX's 52-week low is $200 or so, meaning that unlike other defense names, this one is trading poorly. Supply chain issues have plagued LHX throughout 2022 which is hurting bottom-line growth; however, I don't believe this is a long-term issue. LHX is trading for roughly 16x next year's estimates...well below the 18-20x multiples currently being applied to peers (LMT, NOC, GD, RTX, etc). And, I like today's M&A news...I think the horizontal deal here is more likely to get done than LMT's recent vertical attempt with AJRD. I like the AJRD assets. I like aerospace, and more specifically, space investments. Overall, I like paying 16x for a blue chip defense name here. This is a sleep well at night type of trade...and early next year, I expect to see LHX provide another dividend raise (likely lower than historical double digit averages, but I still think that a 5-8% raise is likely...which is fine with me in the short-term. I have 20% of my monthly savings remaining to put to work before the month is over. Here's to finding one more good deal!

Regarding that final bargain, we’ll go back to the beaten down real estate/contraction space with my last buy of the month… on 12/28/2022 I initiated a new position in Dividend Aristocrat, Carlisle Companies ( CSL ).

I strongly considered buying CSL on its post-earnings drop back in late-October, but I missed it when the company rallied from $225 back up to $260 or so.

Watching CSL rally, I regretted not going long after the stock’s quick 20% sell-off, so when I had a chance to buy the most recent dip, I wasn’t going to make the same mistake twice.

My CSL position remains relatively small since I had already invested most of my monthly savings, but this one remains near the top of my watch list and I’d be happy to continue to buy shares… or better yet, average down into weakness, if I have the opportunity.

Here’s the trade alert that DK members received on 12/28:

“All, I just put the rest of my monthly savings to work...done with December...looking forward to January now. I initiated a new stake in CSL at $237.18. CSL is a near-dividend King with a 46-year dividend growth streak. The company is a leader in the commercial building space - largely focused on commercial roofing/envelope solutions + it offers exposure to aerospace via its advanced wiring segment (roughly 15% of sales). CSL's EPS is expected to grow by 111% during 2022...yet the stock is down by 3% on the year. During the last 12 months, CSL's P/E ratio has fallen from nearly 25x to the 12x area where it sits today. This 12x mark is well below its historical averages and looking at the chart below, you'll see that a reversion to the 15x area (still below historical averages) provides upside potential north of 30%. CSL's yield isn't high at just 1.26%; however, the company raised its dividend by 38.9% earlier this year. And using 2022 EPS estimates and CSL's forward $3.00/share dividend the payout ratio remains very low at just 15% or so. Therefore, moving forward even as EPS growth slows (analysts are projecting 5% growth in 2023 and 2024) I think strong dividend growth is still possible (alongside buybacks and continued bolt on M&A activity). Basically, this is a boring one...but a great value here in the $240 area. During my recent watch list update I noted that my FV estimate for CSL is $315 (15x forward consensus). Therefore, with CSL I'm locking in a wide margin of safety on a high quality dividend aristocrat. Now I'm off of chat for the rest of the day because I have a lot of work to do for upcoming newsletters. Have a great afternoon/evening, everyone!”

Source: F.A.S.T. Graphs

I continued:

“As you can see above, CSL hasn't been this cheap since 2011.

Furthermore, the long-term average P/E here is 18.4x...that seems reasonable for a blue chip, but we're way below that at just 12x.

Assuming multiple expansion to 15x, we're looking at 33% total returns by the end of 2023 and a 19% total return CAGR looking out to the end of 2024 (assuming analyst consensus comes true).”

Source: F.A.S.T. Graphs

Nicholas Ward’s Dividend Growth Portfolio

*Most of my cash position in held in my checking account, so in reality, my cash position sits at roughly 6%.

Conclusion

Overall, both the month of December and 2022 as a whole treated me well.

It’s great to look back on what was otherwise a tumultuous year (especially if you’re someone who focused primarily on capital gains/losses) and to be able to say that (because of my focus on dividend growth).

Watching my double digit dividend growth trend continue throughout so much market volatility definitely bolsters my conviction, when it comes to my belief that the dividend growth investing strategy is the best, simplest, and easiest path to success in the markets.

Data clearly shows that time in the market (as opposed to successful market timing) is a long-term investors’ most precious resource.

Looking at the cost basis data shown above, you can see that simply buying and holding blue chips over the years tends to work out well.

Sure, I've got a few dogs in my portfolio that have underperformed, but that's bound to happen. Thankfully, the vast majority of my long-term positions have done quite well and I suspect that my newer purchases will trend increasingly higher over the long-term as well.

Seeing my passive income stream reliably increase during tough times provides the peace of mind which allows me to ignore fearful headwinds and comfortably sit tight, holding shares of the blue chip companies that I’ve amassed over the years, allowing the long-term compounding process to play out.

I continue to believe that if you create a portfolio that has a dividend yield above the S&P 500’s and sustainable dividend growth prospects above the S&P 500’s then it’s likely that you’ll generate total returns that are also greater than the S&P 500’s.

That belief held true in 2022 and I’m looking forward to a similar story playing out in 2023 as well!

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