Saturday, January 29, 2022

Stop Chasing Yield

I use a homemade excel screener to select Dividend Growth stocks for the DT portfolio. Taking the time to put the screener together has yielded some valuable insights!

As I've studied Dividend Growth Investing, one mistake I saw newer investors making was chasing yield. Finance Hippy's comment below struck a nerve. 

 

Let's investigate! Take a look at the chart below. Sure, AT&T raises their dividend each year, but adjusted for dividends the 5 year trend is negative.

StockRover - Dividend Adjusted Price

Let's just run a scenario below. Say I bought 100 shares in 2017 at ~$40 and the price goes down linearly each quarter down to the current $25.20. Dividends are reinvested and I'm counting the meager dividend increase each year. At the end of January, your $4,000 has turned into $3,514.  Finance Hippy is right, you'd be better off keeping 7% of cash in savings.


What if we apply this thought process to our selection process? Of my selection of 1,706 stocks, I'll filter any that have a current yield of between 6% - 15%.  That selection narrows the field to 153 stocks. The average return of this selection over 5 years is 46.4%. This is annualized rate of return of 7.9%.

Dividend Town Screener - Stocks with 6% - 15% yield

Let's see where some qualitative filtering gets us. Let's take that same selection of 1,706 and choose all everything yield 4% and below. Now I'll also select higher quality stocks by filtering anything with a DT quality score of  >18. These are going to be higher quality stocks that have higher growth, quality, economic moats, etc.  

With this selection, I have 293 stocks to choose from, with an average 5-year return of 143.5%. Right off the bat, chasing quality gives a better chance of netting higher stock appreciation than chasing yield. 

Dividend Town Screener - Stocks with <=4% yield, DT grade 18-25 and >4 years of consecutive dividend increases 

To do a quick comparison below, the left side is a stock at $40, at a constant 7% yield and price appreciation of 46.4%. Growing linearly and reinvesting dividends, $4K investment turns to $8.4K. On the right side we have 2% constant yield and price appreciation of 143.5%. Same situation, but the $4K investment turns into $10.8K.


Obviously your portfolio needs to be structured properly for number of years to retirement, risk profile, and other factors. After adjusting for those factors, with longer-term horizons you're better off searching for higher quality dividend stocks than higher yielding stocks.

Week in Review

It's been an exciting week in the Dividend Town portfolio and February will be no exception. Earnings announcements in January have been overall favorable. Information is below from Seeking Alpha. 

Earnings Update
  • $AAPLThe Cupertino, California-based Apple said it earned $2.10 a share on $123.95 billion in revenue, led by strength in the iPhone, which generated $71.6 billion in sales during the quarter. A consensus of Wall Street analysts expected the company to earn $1.89 a share on $118.4 billion in revenue during the quarter.
  • $V - Visa (NYSE:V) stock gains 5.2% in after-hours trading as card transactions increase year-over-year during the card network's fiscal Q1 and cross-border volume continues to rise.
  • $CVX - Chevron (NYSE:CVX) caps off a great 2021 with mixed Q4 results and conservative 2022 production outlook; shares are down 2-3% in light pre-market trading. Adjusted earnings per share came in at $2.56 in Q4, versus an expectation of $3.13, as the international upstream business missed by ~60c on the back of LNG trading, catch up depreciation and impairments. The company sees production in 2022 falling 0-3%, as contract expirations in Indonesia and Thailand pull volumes 5% lower.
The goal of the portfolio is to invest in high quality companies that have a history of continuously increasing their dividends. Almost all the companies in the DT portfolio meet this characteristic with very few exceptions. This has pushed up the annual income expected by $26! As a result of this, we've started off the year with some dividend increases! Information below comes from SimplySafeDividends.

Dividend Increases
  • Polaris announced its next dividend of $0.64 per share, a 1.6% increase over the company's previous payout of $0.63.

    The leader in off-road vehicles balanced historically strong demand for its high-priced products and supply chain issues to generate record sales in 2021. The snowmobile maker has excellent dividend coverage and looks poised to continue its growth streak.  Annual income increased $1.68 as a result.

  • Comcast announced its next dividend of $0.27 per share, a 8.0% increase over the company's previous payout of $0.25.

    The media and technology company's expanding broadband network is attracting new customers and helping grow cash flow to record levels. Strong demand and a conservative payout ratio should help Comcast keep growing its dividend.

  • Chevron announced its next dividend of $1.42 per share, a 6.0% increase over the company's previous payout of $1.34.

    The AA- rated energy giant's ample cash flow from oil trading well above the company's breakeven price, in the $40-50 range, should continue to support a stable and growing dividend.  Annual income increased $22.40 as a result.

  • Anthem announced its next dividend of $1.28 per share, a 13% increase over the company's previous payout of $1.13.

    The A rated health benefits company has a strong track record of growing earnings plus a healthy payout ratio and flexible balance sheet. Anthem looks positioned to keep growing the dividend. Annual income increased $2.40 as a result.

February looks to be an exciting month of earnings releases with the calendar below.
StockRover Earnings Calendar

Trades
  • Purchased 45 shares of $ETO to the portfolio. This increased the Projected Annual Dividend Income by $97.
Dividends Received - There were no dividends received this week.

Options Activity
  • Rolled a 01/28 $50 Kroger covered call into a 02/11 $45 this week, netting $144 premium on the $45. Kroger has been on a hot streak lately and I believe they are overvalued. Additionally, I'm slowly looking to trim the number of portfolio holdings to 40 so I do not mind if this gets assigned.
  • Closed a Verizon Iron Butterfly 50-52-54 for a very minimal profit. 
  • Closed an ABBV put due to expire on 01/28. This was a miss.
  • Was assigned a Comcast (CMCSA) put RIGHT in the money!  I've wanted to add Comcast to the portfolio to beef up the communications sector and sold a $50 strike / 01/28 expiration cash-secured put on 01/18 for $114 premium. Comcast closed yesterday at $49.72 so I don't think I could have done any better! These shares added $108 to Projected Annual Dividend Income.
Other Activity
  • Added $1,000 to the portfolio in savings in January meeting my goal for the year.
What's Next
  • Honestly, not much. I've been pleased with the performance during the recent market choppiness, where the portfolio diversification has helped ensure the fluctuations are not as wild as the Nasdaq index.
  • Evaluate covered call opportunities. 
  • Slowly shrink number of positions to ~40 while maintaining a similar sector breakdown. 
Hope everyone has a great weekend!

Saturday, January 22, 2022

Week in Review

While overall a disastrous week in the market, the Dividend Town portfolio is functioning as designed. When I built the portfolio one of the things that I'm KEENLY aware of is exposure to risk. As the back half of 2021 was wrapping up I saw nothing but risk in the marketplace. 

  • Real inflation
    • In my 9-5, I have seen the inflation risk first hand. From product shortages, higher input costs, and sky-high freight costs, higher interest rates were always an outcome.
  • Sky high evaluations
    • Everything feels reminiscent of the early 2000's where any idea is met with wild evaluations. No income?  No problem!  I love great ideas as much as the next person, but profit (or future profit) drives stock prices, not hope.
  • Relentless pumping of crypto and NFTs
    • Love the concept of decentralized finance, but not ready for prime time yet. 
    • I'll agree there's utility in NFTs, but 99.9% of what I see is based off greater fool theory. 

I've been on this merry-go-round twice, in the early dot.com era and real estate bubble era and I know where this goes. This time I'm in control of the finances instead of fund managers or blind indexing.

While I'm still heavy in tech, it's nowhere near the weighting of the S&P and Nasdaq. Invesco QQQ sector weighting for the Nasdaq weightings. After the run up of the last two years, I really don't want the risk associated with that heavy of a tech weighting.
As a result, the portfolio only lost 4.4% this week compared to the NASDAQ at 7.6% and the S&P 500 at 5.7%. While there may be more of a drop to go, I believe there will be a return to value and other unloved sectors this year that should benefit the weighting over time. 

Dividends this week ($134):
  • CTRE - $26.50
  • SRE - $34.10
  • STOR - $38.50
  • POR - $35.26
Dividend hikes:
  • I neglected to mention on Jan 14th BlackRock hiking their dividend 18% from $4.13 to $4.88 a share. This increased annual income by $15. 
Purchases, deployed some of the cash from cleanup a few weeks ago:
  • Added 18 shares to ($POR) Portland General Electric Company, yielding 3.28%. 
  • Added 39 shares to ($BKH) Black Hills Corp, yielding 3.56%.
  • Added 35 shares to ($AFL) Aflac, yielding 2.63%. 
  • All purchases pushed up holdings to at least 100 shares unlocking the ability for additional income via covered calls.
Options:
  • Holding an AMC $17 put expiring in July. 
  • Verizon iron butterfly expiring next week looks like it might be in the money. Need to finish between $50.33 and $53.67.  
  • Sold one put for Comcast at $50 expiring 01/28. Happy to hold this one to balance out my communications sector which is underweight.
  • Flipped some Nike puts for $93.
  • Flipped some Peloton puts for $106.
Website:
  • Added a dashboard page showing how I track progress.
Have a great weekend!

Saturday, January 15, 2022

Week in Review

"Have a plan. Follow the plan, and you'll be surprised how successful you can be. Most people don't have a plan. That's why it's easy to beat most folks." - Bear Bryant

Do you ever look out in the distance and see storm clouds rolling in? Do you panic as they approach? Did you pay attention to the weather report from last week? Did you make preparations? 

Over the last few weeks as I review the Dividend Town portfolio I feel prepared for what comes next. The plan is to invest in high-quality dividend growth stocks, maintain a more reasonable sector weighting than the market, and generate income via cash-secured puts and covered calls.

If I take the existing portfolio and measure the historical dividend growth, there's a 7.6% increase each year over the last 10 years. Without any stock appreciation or reinvestment, my annual income would have gone from $2.8K to $7.8K. 

SimplySafeDividends.com Dividend Growth

Continuing this trend, assume a 5% appreciation in share price annually, reinvestment of dividends at 2.7%, a dividend growth rate of 7.6% and $15K a year contribution, the current ~$300K will reach ~$2.2M and generate $82K of dividend income a year. 

Dividend Town Graphs

So what if things don't go as planned? I plan for a few contingencies.
  • Dividend cuts: I use SimplySafeDividends and monitor their Dividend Safety score. Of the dividend producing stocks I invest in, only Medifast is rated Borderline Safe, the rest of the companies are Likely Safe (>60%). 
  • Consistent trend of dividend growth: 50 of the 52 dividend generating companies in the portfolio issue consistent dividend increases each year. Of those 50, the average number of consecutive year increases is 22. That's through good times and bad times. 
  • Consistently great companies: I use a custom screener that I refresh each week with input from a variety of sources. I then apply a series of weightings against ~1,700 companies and force rank them based on growth, quality, dividend safety and some other factors. The companies that rise to the top is where I will invest.
  • From that list, I need to make some choices. Is it overvalued/undervalued? For value, I calculate a blended average of fair values from a variety of sources, throw out the high/low, then apply a discount for highly ranked companies or a premium for poorly ranked companies.
  • Watching my sector risk: This is my biggest fear about index investing. 
    • For example, take $XYLD. It's an S&P 500 Covered Call ETF. It's in my portfolio. Generates a great yield (~9.0%). Mirrors an index. What's the sector breakdown look like? If I committed more of this index, do I want the risk of ~30% of my portfolio tied to Tech?
From https://www.globalxetfs.com/
    • Tech dominates the financial news, but it doesn't always dominate returns. On the Novel Investor, there's a great diagram showing top performance by year. 
https://novelinvestor.com/sector-performance/

All the above are elements of the strategy and keys to executing the plan. As the quote above mentioned, I'll follow the plan to be successful.

Dividend activity this week was good, netting $142 total. 

Option activity was good this week as I closed a few puts against $EMBK thanks to The Bear Cave.
  • Closed the call end of my $ABBV strangle for a $94 loss, but keeping the put option open. Expires on 01/28 at $135 strike. I do believe this is overvalued slightly so I'll keep this open.
  • Closed a covered call against $WLK, netting $100 gain. I'm glad to have this stock in my portfolio, but some of the swings lately have been churning for option activity. 
  • Closed my puts against $EMBK for a $420 gain. 
  • Remaining open: Verizon Iron Butterfly, $AMC put for June expiration, $HIMX call for June expiration (currently underwater)
Overall performance was good, gaining 0.62% this week vs. S&P, NASDAQ and DJIA all negative. 

I'm currently working on a few books from Kuppy's Book List. Really enjoying Tomorrow's Gold on the perspective of looking for future trends. 
  • You can be a Stock Market Genius
  • Tomorrow's Gold 
Over the next two months I'm considering narrowing the portfolio from ~60 stocks to ~40. I'd like to have more targeted bets but need to think critically before taking any type of action. I asked the question on this Twitter thread earlier this week and there's a large range of answer. It's good food for thought.

Have a great weekend!