WPC - Nicholas Ward's Dividend Growth Portfolio: January 2023 Review

Summary

• My dividend income rose by 9.56% on a y/y basis during January.
• My portfolio's value rose by approximately 6.9%.
• I made 19 trades during the month: 17 buys and 2 sales.

Another month, another step towards financial freedom…

Sorry that this update is a bit delayed; February has been a very busy month thus far with a lot of earnings reports to digest and knowing that I had President’s Day coming up on the calendar, I decided to put off the monthly update until my day off.

But, late or not, I’m happy to publish this report because January was a wonderful month for my portfolio. We saw a major macro rally in January, especially throughout the tech sector, where I remain overweight.

My largest holdings all saw significant rebounds and that, combined with ongoing cash additions, allowed my portfolio to hit all-time highs, in terms of value, in early February (despite the market still being down significantly from its prior all-time highs).

But, a bit more on capital gains later…as always, let’s start off by focusing on my #1 priority: passive income.

During January, my dividend income posted 9.56% y/y growth relative to January 2022’s total.

I usually shoot for double digit y/y growth figures, but I was pleased with this one because of the fact that I trimmed my Altria stake in Q4 and I knew that would negatively impact my January dividends. Losing out on those big MO dividends and still coming out nearly 10% ahead was nice to see. Also, since my January 2022 growth was 21.80%, I knew that was going to be a tough hurdle to clear.

As you can see, over time the exponential curve of the trend line at play with this compounding process is becoming more and more pronounced and that’s what allows me to sleep well at night with my overweight equity allocation.

The triple threat of annual dividend growth, monthly selective re-investment, and the addition of new capital being added to the portfolio allows me to generate reliably increasing passive income throughout what has proven to be a wide variety of market conditions since I began tracking my dividend growth journey back in 2014.

Capital Gains

As regular readers of mine know by now, total returns aren’t top in mind for me, especially in the short-term, because I understand that most short-term volatility in the market is irrational, driven by sentiment, rather than fundamentals, and that it takes time for the value plays that I’m making to play out.

That’s why I focus on passive income in the present - to me, it’s a tangible measure of success that allows me to ignore the short-term noise in the stock market that often inspires mistakes from investors (by tapping into fear and/or greed) and instead, maintain focus on my long-term goals.

Furthermore, since my entire plan - when it comes to financial freedom - revolves around generating enough dividend income to not only support my family throughout retirement, but to also protect my purchasing power from being eroded away by inflation over time via organic increases, really…at the end of the day, the dividends that I generate are all that matters.

My goal is to never touch my principle, but instead, pass it down to my children when I die.

That way, all of the work that I’m doing now will result in a passive income machine that can/should benefit Wards for generations to come (once my kids are older, I plan on spending a lot of time teaching them financial literacy and the wonders of dividend growth/compound interest).

But, I know that readers like to track capital gains and total returns when reading these articles, so as I’ve said many times before, I’m not opposed to giving the people what they want (these articles are about entertainment, after all).

So, in my 2022 Year-End Review, here’s what I had to say about my total returns:

"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)."

Well…January 2023 got me off to a great start when it comes to pushing that streak to 9 out of the last 12 years.

The S&P 500 was up approximately 6.0% during January alone, but my portfolio was up approximately 6.9% during the month.

Obviously there’s a long way to go between 2/1/2023 and 12/31/2023; however, I’ll never complain about that sort of start to the year.

January 2023 Trades

To start off, we’ll highlight the selective re-investments that I made on 1/03/2023 (on the first trading day of every month I put all of the dividends that I collected during the prior month to work).

Here’s the trade alert that I provided Dividend Kings subscribers along those lines - as you can see, I went fairly heavily into S&P Global ( SPGI ) on 1/03 with my December dividends…that remains a SWAN (sleep well at night stock) that I love to accumulate via monthly selective re-investment because it’s nearly always expensive and therefore I’d rather slowly accumulate over time than dive in head first with my cash savings.

“December 2022 was an all-time high for me in terms of monthly dividends, so I have been looking forward to putting this cash to work. I went pretty heavy into SPGI this month (roughly half of the cash was allocated towards SPGI shares because I want to increase that portfolio allocation). I bought SPGI at $337.29. I'd love to buy even more heavily with my monthly savings in the $300 area; however, in the meantime, I plan to keep buying SPGI with my re-investments every month. I also added to AMZN at $84.84, bolstering my growth. And, I added to CSL at $237.19 - still building that relatively small stake. Since these three stocks have relatively low yields (or no yield, in AMZN's case), I wanted to buy higher yielders with the rest of the dividend dollars. I went into REITdom to achieve that goal; REITs were one of the worst performing sectors during 2022 and I continue to see attractive value there. With that in mind, I bought shares of FRT at $101.83, CCI at $137.04, REXR at $54.05, and CPT at $111.56. To me, these are all blue chip REITs trading at fair value or below. Their yields are safe and growing. And they're all down big-time from 52-week/all-time highs. Therefore, it's easy for me to buy them here. Here's to a great January. Best wishes all!”

Because of the major rally that played out throughout the month of January, I was having a hard time finding attractive values.

Admittedly, most of the stocks on my watch list were running away from me, but instead of giving into FOMO (the fear of missing out), I did my best to spot blue chips with relatively attractive value (compared to the market’s macro trend).

With that in mind, we arrive at my first purchase of the month: Republic Services ( RSG ).

On 1/12/2023 I began putting my January savings to work, initiating a position in this blue chip garbage collection/disposal name.

Here’s the trade alert that DK members received shortly after I made that trade:

“I just put the first bit of my January savings to work...I allocated roughly 40% of the cash towards starting a new position in RSG at $123.46. I know if my recent watch list/price target article I highlighted RSG with a $111 PT; however, in recent weeks I've had a lot of the names on my watch list run away from me a bit and here today, I felt pretty comfortable starting to build RSG at this area (less than 24x forward expectations and less than 22x 2024 expectations). Are these multiples cheap? No, they aren't. But, when it comes to defensive industries, it doesn't get much better than trash pick up/disposal. Bill Gates owns something like 33% of RSG...so I always enjoy being in the same boat as him when it comes to investing in blue chips. And, for years, I've had my eye on the trash space. Turning trash into cash is a sweet business (we're never going to stop producing trash, regardless of the broader macroeconomic conditions). RSG yields nearly 1.6% and is on a 20-year dividend growth streak. I expect to see high single digit dividend growth from this one for the foreseeable future and fully expect to see RSG become a Dividend Aristocrat in 5 years. Basically...this is a Buffett...wonderful company at a fair price, IMO. I'll post 3 FAST Graphs below...looking at 20-year data, RSG doesn't appear to be attractive; however, relative to 5 and 10-year data the numbers line up nicely...and the most important data you'll see on the charts are the reliably forward looking growth expectations. To me, RSG is an ultimate SWAN stock and I'm very happy to finally have some exposure. I hope the recent weakness continues to I can build this one out fully...I have room for another 3-4 purchases here before the position is full (and RSG's quality is so high, I'd be happy to take this one overweight if the opportunity presented itself). Best wishes all!”

Here are the charts that I provided on 1/12:

Following these graphics, I went on to say:

“While I don't know if the stock deserves that 5-year premium or not...I do think that the new management team here is top notch and has taken really prudent steps to not only grow the business, but make it more efficient...so, with pretty reliable 10%+ growth rates expected over the next 5 years or so on the bottom-line, I also don't think the 20-year data makes sense to use because this is a much better business than it was a decade or so ago and it would take an absolute market crash to bring this one down to the sub 15x level again (IMHO).

But...if that were to happen, of course I'd be buying. Give me a 10x multiple on RSG like we saw in 2009 and there's a good chance I'm refinancing the house to go all in.”

RSG is one of those names that I’d had my eye on for years and since it was struggling while the market was soaring, I was pleased to take advantage of that opportunity and add shares of this wonderful company at fair value. And, I’m glad I did because RSG posted a strong Q4 report recently, causing the stock to pop a bit.

Up next, we have a fairly significant move: my decision to liquidate my long-held AT&T position and re-allocate those proceeds towards what I believe to be higher quality dividend growth stocks.

For years now, AT&T has been one of the biggest dogs in my portfolio. And ever since its dividend cut last year, the stock has been on the chopping block. But, I didn’t want to sell into weakness due to the stock’s relatively cheap valuation. Thankfully, AT&T experienced a nice little rally recently, giving me the chance to lessen the capital losses at play.

Here’s the trade alert that Dividend Kings members received regarding AT&T, and the 5 stocks that I bought with the sale’s proceeds:

On 1/25/2023 I wrote:

“I just made a trade...I was happy with AT&T's quarter (strong 2023 cash flow guidance); however, I don't expect to see the dividend growth that I'm looking for anytime soon here and therefore, I'm happy to take advantage of the recent rally (shares are up nearly 40% from their recent lows) and I decided to finally cut ties with this dog at $20.15 (I was considering selling AT&T as a tax loss sale in late 2022...but I didn't like the idea of selling into such significant weakness). The recent move has at least alleviated that concern. I still locked in losses here...my cost basis was $28.83, so we're talking about 30% losses. Thankfully, I held these shares for years (since 2016) so over this period of time all of the dividends that I collected did result in positive total returns. Granted, T has still underperformed the market over that period of time by a wide margin, so without a doubt, this has been a poor investment. It's one that I'm happy to part ways with...but, the problem was...how to replace this ~5.5% dividend yield (when I make trades, I'm always looking to use active management to increase my passive income stream). I came up with a basket comprised of ORCC at $12.88, MAIN (a new position for me) at $39.25, AVB at $173.18, CPT at 118.13, and BR (another new position for me) at $147.43...overall, the income from this new basket (driven by the high yielding BDCs) is 3.4% higher than AT&T's previous income. Furthermore, I believe that the overall basket will provide more reliable and faster dividend growth than AT&T on a relative basis, so we're talking about a win/win here (both +yield and +dividend growth). I hate locking in losses...but T has been on the chopping block for me ever since its dividend cut last year. Finally done with that saga and onto bigger and better things.

Edit: I also lucked out a bit...just realized I held more T shares in another account as well, so went to sell those and got out at $20.33...bringing my overall losses down ever so slightly.”

As you can see, I was able to use active management to increase my passive income here, manufacturing a 3.4% dividend increase by swapping out T shares for ORCC, MAIN, AVB, CPT, and BR.

Alongside this notice, I provided DK members with a couple of graphics from Broadridge’s recent investor presentation:

I imagine that MAIN sort of speaks for itself, in terms of its premiere status in the BDC space and its very reliable dividend growth, but Broadridge Financial is a criminally under-appreciated DGI stock in my opinion.

Since BR was a new position for me, I wanted to provide some data highlighting my bullish stance.

Looking at these charts, this company’s prowess becomes clear. BR is growing its bottom-line at a double digit clip. It’s increasing its margins. And, this has led towards a ~15% dividend growth CAGR.

Admittedly, I’m guilty of overlooking this one for far too long as well. Actually, a reader suggested that I take a look at the stock in the comment section of my 2022 Full Year Portfolio Review article and I’m certainly glad that they did because after performing my own due diligence on the company, I was enamored with the results that this compounder continues to put up.

On 1/26/2023 I decided to add more BR shares…here’s that trade alert:

“I just put a bit more of my monthly savings to work - filling out the remainder of my starter position in BR that I initiated yesterday. I just bought more shares of BR at $149.97. I think FV is $155 or so, so not a lot of margin of safety...but, the quality is high enough to warrant establishing a stake. Now, I'll likely use monthly selective re-investment to build up my share count and/or dive in more heavily if a deeper discount occurs. Ideally, I'd buy again at $140 or so, then $130. But, at least now, if shares take off, I have a significant enough stake to hold over the long-term. After this trade I have roughly 40% of my monthly savings left. I'm eyeing the beaten down railroad names (UNP, NSC, CNI)...but I want to see LHX's results tomorrow first.”

I made another trade on 1/26, adding to my long-term Diageo stake:

“I'll be quick here since there's only a minute or two left before the bell...I just added to my DEO position at $174.08. I couldn't pass up the opportunity to buy shares here around 21x forward. That's fair value to me...and this one rarely trades at those levels. In general, I rarely have the opportunity to add to blue chip food/beverage plays because they trade with high premiums (due to reliability).”

Lastly, on 1/27/2023, I put the rest of my monthly savings to work, sticking with the BR/DEO theme, using my remaining savings to bolster those positions.

Here’s my final trade alert of the month for January:

“I have meetings this afternoon so I may not be around chat much...but I did just put the rest of my monthly cash to work...buying DEO again at $172.16 and BR again at $149.32. LHX and AXP rallied...CL was interesting, but I like DEO better in that area of the market at these prices. UNP/NSC are pretty attractive, but I'm willing to wait on those due to macro concerns (the railroads will remain at the top of my watch list once new February savings comes into play). Most stocks on my watch list/portfolio have rallied thus far after earnings...which is good...but it also means that I'm not interested in chasing them. But, thankful to add shares of blue chip DGI stocks RSG, BR, and DEO with my monthly savings + the multifamily REITs and BDCs that I bolstered earlier in the week when I sold my AT&T stake. Now I'm looking forward to 2/1/ and selective re-investment! Best wishes and have a great weekend, everyone!”

Nicholas Ward’s Dividend Growth Portfolio

*I hold most of my cash in my bank account, as opposed to my brokerage account, so in reality, my dry powder level is roughly 4.5% or so.

Conclusion

January was a great month for the markets and a great month for my portfolio/network; however, I’d be lying if I said that I wasn’t excited about the weakness that we’re experiencing in February thus far.

As someone with a long investing time horizon (God willing), I’m happy with a “lower for longer” type of scenario in the markets.

The longer that the major averages languish down double digits from the prior highs, the more opportunities that I have to accumulate shares of blue chip names with historically cheap valuations and above average dividend yields.

In terms of the long-term compounding process that I rely upon as a dividend growth investor, this scenario is perfect for me.

I know that near-term weakness is scary, but it's definitely possible to continue to sleep well at night as markets fall when you prioritize passive income and realize that lower share prices in the near-term are bolstering yields and creating rare opportunities to buy the highest quality stocks in the world with fair (or better) prices attached to them.

Therefore, I’m looking to stay aggressive into macro weakness moving forward with my monthly savings and I still have bear market buckets set aside for a major crash should it occur (in 2022 I spent my -10%, -15%, -20%, and -25% buckets, but I still have my -30%, -35%, -40%, and -45% buckets sitting on the sidelines, ready to work should that sort of weakness occur).

For further details see: