ASMLF - Nicholas Ward's Dividend Growth Portfolio: Special Fixed Income Edition

2023-04-07 00:56:14 ET

Summary

• I'm reviewing my February and March results in this piece.
• My passive income stream grew by 22.63% in February and by 46.87% in March.
• Due to rising rates, during 2023 I've added exposure to fixed income in my portfolio for the first time.

Hello everyone… we’ll start this special edition portfolio review off with the normal introduction:

Another [two] month[s] another step[s] towards financial freedom.

Why was the February recap skipped, you may be wondering?

Primarily because I was on vacation last month and that cut into my time to work on Seeking Alpha articles.

My family had a wonderful vacation in Florida. My wife and I took the kids to Disney World for the week, spent the weekend at Grandma’s in Tampa, and then I had business meetings down in the Delray/West Palm areas for a few days.

All in all, it was a wonderful time. It was nice to have a short break from work. Despite all of the clamoring about the “magic being lost” from Disney, the entire family still loved it. Being in the “Disney bubble” really allows you to forget about the troubles of the outside world and focus on silly things like which princesses you’re going to meet with your toddler. There were a few days where I didn’t even check up on my watch lists. It was all very refreshing.

And with regard to south Florida, all I have to say is this: I’m jealous of the people who live here. I am grateful that hurricanes aren’t a threat where I live, but it was beautiful and 30 degrees warmer than Virginia, which was a nice change of pace. And I guess I’m always going to be a sucker for the silhouette of palm trees in front of a setting sun.

But, the delay wasn’t just about vacation. I could have crammed it in sometime last month, but I was also happy to wait on the portfolio updates because I made significant changes to my asset allocation during February and March and I wanted to allocate the proper time/energy to discussing them.

For the first time ever in my portfolio management career, I invested into fixed income assets.

The rapidly rising rates finally pushed the risk/reward into my favor and now that it's possible to generate 4%+ using relatively risk-free assets, I transitioned the vast majority of my cash savings into those income generating vehicles.

With that in mind, you’ll see a very significant bump to my passive income during the past two months and moving forward, I expect these decisions to result in 2023 being one of, if not my very best year ever, in terms of year-over-year passive income growth.

I couldn’t be happier to use these fixed income/money market funds as an accelerant to the compounding process that serves as the bedrock of my investment strategy.

I don’t know how long rates are going to stay high. But, in the meantime, I’m pleased to take advantage of the opportunities that the hawkish Fed is presenting.

As I’ve said many times before, my success in the markets revolves around my ability to be fearful when others are greedy, to be thankful for opportunities, and to take what the market gives me.

This is what I’ve done throughout 2023 thus far and I couldn’t be happier with the results.

February/March Passive Income

After a relatively tepid y/y dividend growth in January of 9.56% (9.5% isn’t terrible, but I’d much rather see dividend compound at a double digit clip), my February and March results were much stronger.

In February my y/y dividend growth rate was 22.63%. This pushed my year-to-date growth rate up to 16.34% on a y/y basis.

In March my dividend growth rate accelerated to 46.87%, which is the best results in years (narrowly beating out my December 2022 result of 46.50%).

After March’s big gains my year-to-date y/y growth rate grew to 28.55%.

And, like I said in the introduction, due to the additions of several fixed income/money market funds which are likely to carry significant weightings in my portfolio for the foreseeable future, I think 2023’s year end dividend growth results could end up being in the 25-30% range.

With regard to the compounding process, I had fun over the weekend comparing my Q1 2023 dividend results to years in the past.

During the first three months of 2023 my portfolio generated more passive income than I did in the entire year of 2016.

March of 2023 was my biggest month ever in terms of passive income. I began tracking my dividend growth results closely in 2014. March of 2023’s total was 72% of my entire 2014 dividend haul. At my expected rate of compounding, it’s possible that one of my biggest months next year (likely my December haul) will be larger than the dividends that I generated during my first year as a DGI investor.

I understand that these statistics are all meaningless to you, the reader, but the point is this: compounding works. It snowballs over time. And, anyone who is diligent about living below their means, regularly allocating savings towards the market, selecting blue chip dividend growth stocks, and consistently re-investing their dividends can create a situation where their passive income stream evolves from a trickle to a roaring river as well.

Generating Higher Yields on my Cash Position

As regular readers know, I tend to maintain a cash position in the 5-7% range. I want to know that I can take advantage of irrational weakness in the market if it occurs and even though inflation is eating away at those funds, that’s a level that allows me to sleep well at night.

On top of that cash, I have my bear market buckets as well.

Throughout the sell-off that we’ve seen over the last 18 months or so, I used my -10%, -15%, -20%, and -25% buckets (when the S&P 500 hit those levels from its all-time intraday high).

That means that I still have my -30%, -35%, -40%, and -45% buckets ready to go.

Once again, I understand that there is an opportunity cost of holding that cash; however, during past sell-offs I’ve noticed that far too many investors blow through all of their dry powder in the early days of sell-offs and therefore, I put that plan in place to ensure that I would have the capability to capitalize on deep market sell-offs (because I know that crashes like that are when investors can make moves that truly change the long-term trajectory of their financial journeys).

Finally, on top of those cash positions I have my family emergency funds.

Depending on what financial experts you listen to, it’s deemed prudent to maintain 3-6 months of living expenses in cash as an emergency savings fund to help to weather an unpredictable financial storm (being laid off, an unexpected medical emergency, a leaky roof that has to be fixed, what have you) and due to my relatively conservative mindset, I’ve maintained a 6 month cushion for years.

That’s been a pretty significant pile of cash sitting on the sidelines in a relatively unproductive manner for a while now.

I’ve banked with Bank of America since college and in general, I’ve been happy with their services.

However, even with their reward programs and incentives, I was only generating 0.04% APY on my cash in their savings accounts.

For the longest time we were living in a zero interest rate policy (ZIRP) environment and therefore, that measly yield didn’t bother me.

The unproductive cash was just a cost of doing business when it came to the conservative management of my household’s balance sheet.

At the end of the day, sleeping well at night with my finances was worth it…even if savers were being hosed.

Thankfully all that has changed in recent months.

We’ve seen rates on short-term treasury notes rise at an unprecedented pace and this has created opportunities for savers.

So, a couple of months ago I decided to begin transitioning the vast majority of my cash holdings into higher yielding investment vehicles which, in my opinion, could be deemed “cash equivalents” due to their relatively low risks.

On February 21, 2023 I initiated stakes in the WisdomTree Floating Rate Treasury Fund ETF ( USFR ) at $50.40.

USFR currently sports a SEC 30-day yield of 4.78%. The fund’s expense ratio is just 0.15%. So to me, going with a short-term treasury ETF like this was a lot easier than building bond ladders myself and as always, it’s nice to have the liquidity of a low cost ETF in place.

Also on 2/21/2023 I initiated a stake in the SPDR Bloomberg 1-3 Months T-Bill ETF ( BIL ) at $91.63.

BIL currently offers a SEC 30-day yield of 4.50% and a gross expense ratio of just 0.1354%.

Once again, I was pleased to go the ETF route here instead of buying short-term bonds directly from the government or my brokerage.

These expense ratios are more than a fair price to pay for the ease of exposure to short-term treasuries, in my opinion.

These two purchases replaced my bear market cash buckets; now, in the event of a market sell-off which triggers through -30%, -35%, -40%, or -45% purchases, I will liquidate these funds to raise cash to make them.

I think the risk of capital losses here is minimal and in the meantime, I’m generating 4.5%+ yields on cash that was previously generating 0.04%.

More recently, on 3/9/2023, I transitioned my emergency cash holdings from my savings account into a Fidelity account with a “core holding” of FZFXX, which is the Fidelity Treasury Money Market Fund.

As of 3/31/2023, FZFXX had a 7-day yield of 4.46%.

I feel comfortable using this fund as a cash equivalent and once again, I’m extremely happy to be generating nearly 4.5% on cash that was previously yielding nearly 0.04%.

As you’ll see in a moment, these are now relatively significant positions within my portfolio; especially FZFXX, which is now my second largest holding.

In short, I turned roughly 7% of my portfolio from an essentially zero-yielding asset into various high yielding assets while taking on minimal risk.

This is the benefit of rising rates and moving forward, these moves are going to result in significant y/y dividend growth figures over the next year or so.

February/March Stock Purchases

Since I just spilled so much ink discussing my fixed income/money market moves, rather than highlighting my prior trade reports for each equity trade that I made during the last couple of months, I’m going to quickly list them.

Please don’t hesitate to ask about any specific trades that you see in the comment section below; I’m happy to discuss them and/or copy & paste my original trade reports that Dividend Kings subscribers received in real-time when I made these moves. I just didn’t want to copy/paste all of those words here because it would have turned this article into a novella of sorts.

So, with that being said, here’s the list in chronological order…

February:

2/01/2023: bought Broadridge Financial Solutions ( BR ) at $151.04

2/01/2023: bought Essex Property Trust ( ESS ) at $226.23

2/01/2023: bought Diageo ( DEO ) at $177.96

2/01/2023: bought Palantir ( PLTR ) at $7.96

2/01/2023: bought Republic Services ( RSG ) at $123.29

2/01/2023: bought EcoLab ( ECL ) at $153.93

2/06/2023: sold Scotts Miracle-Gro ( SMG ) at $81.40

2/13/2023: bought UnitedHealth Group ( UNH ) at $492.74

2/14/2023: sold Roper ( ROP ) at $431.89

2/14/2023: bought Brookfield Infrastructure Corp. ( BIPC ) at $43.41

2/16/2023: trimmed Cisco ( CSCO ) at $51.18

2/16/2023: bought Toronto-Dominion Bank ( TD ) at $68.99

2/16/2023: bought Royal Bank of Canada ( RY ) at $103.27

2/23/2023: trimmed British American Tobacco ( BTI ) at 38.27

2/23/2023: bought Owl Rock Capital Corp. ( ORCC ) at $13.72

2/23/2023: bought Linde ( LIN ) at $331.09

2/23/2023: bought CME Group ( CME ) at $187.37

2/28/2023: trimmed Altria ( MO ) at $46.60

2/28/2023: bought Owl Rock Capital Corp. at $13.72

2/28/2023: bought Broadridge Financial Solutions at $141.03

March:

3/01/2023: bought Broadridge Financial Solutions at $140.57

3/01/2023: bought Republic Services at $128.43

3/01/2023: bought UnitedHealth Group at $477.27

3/01/2023: bought CME Group at $184.84

3/01/2023: bought S&P Global ( SPGI ) at $341.92

3/01/2023: bought Palantir at $7.85

3/02/2023: trimmed Salesforce ( CRM ) at $189.05

3/02/2023: bought Danaher ( DHR ) at $244.71

3/07/2023: trimmed Meta Platforms ( META ) at $186.44

3/07/2023: sold Meta Platforms at $186.61

3/08/2023: bought UnitedHealth Group at $469.86

3/10/2023: bought CME Group at $174.85

3/10/2023: bought Broadridge Financial Solutions at $136.88

3/13/2023: bought Toronto-Dominion Bank at $59.32

3/13/2023: bought Royal Bank of Canada at $95.08

3/27/2023: bought Toronto -Dominion Bank at $57.81

3/27/2023: bought Royal Bank of Canada at $93.55

3/31/2023: bought Thermo Fisher (TMO) at $569.17

3/31/2023: bought UnitedHealth Group at $472.32

3/31/2023: bought Camden Property Trust ( CPT ) at $103.88

Nicholas Ward’s Dividend Growth Portfolio

Conclusion

Despite recent negative volatility, I continue to look forward to what 2023 has in store. Due to my long-term time horizon I am always happy when I see blue chip dividend growth stocks go on sale because buying low accelerates the compounding process. In recent days there has been major weakness in the Industrials sector, in general, and there are many companies in that area of the market that I’d love to accumulate. There’s always a bargain to be found somewhere… and now that interest rates are so high, even if my stock watch list runs dry I can happily park cash in short-term bonds or money market funds and generate 4-5% while I wait for wonderful opportunities to arise. That’s a win-win for an income oriented investor like me.

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