It’s been a while since I wrote my last post or created a new video on YouTube.
But don’t worry, I’m not going anywhere! It’s just that May was extremely busy for me with a lot of family events. It’s a sign that many things are getting back to normal.
And you know what’s also normal for me to do in May?
Spring cleaning my desired portfolio based on my dividend portfolio allocation strategy.
Every year I make quite a lot of transactions in my dividend growth portfolio. Most of these are buy orders to increase my existing positions or to initiate new positions in stocks I didn’t own yet.
The issue with such an approach is that you can easily create a polluted dividend growth portfolio.
Many investors are OK with this because they are pure in their DGI philosophy: only sell after a dividend cut.
Hence, as a result, they mostly see an ever-increasing projected annual dividend income (PADI) and that’s of course exactly what we want.
But this is also where I’m a little bit different in my approach.
Over time I’ve learned that weak fundamentals are the most important indicator of a possible dividend cut (learning from my mistakes). Good examples of these were General Electric and Tupperware. I’ve really burnt my fingers on those!
That’s also why I decided to implement an annual portfolio allocation review. During such review I ask myself the following questions:
- Which stocks have increased the risk of a dividend cut in my portfolio? Should I downgrade them to a lower Tier rating or maybe even sell them?
- Which stocks lost my conviction? Do I really want these in my portfolio or are there better opportunities out there?
- Which stocks are not meeting my original thesis for buying them? Should I consider selling them?
- Which stocks are performing well? Should I upgrade them to a higher Tier in my allocation strategy?
So far these annual reviews have done me well. It ensures that I know what I own and that I can easily buy more shares of a certain stock when it hits my price targets.
I feel this is also the reason why I sleep so well with a relatively large portfolio. Sometimes an individual day down in the stock market is impacting me more than I can save with working a full-time job. It’s crazy when you think about it!
Having said that, maybe this is the right moment to get into the results of this year’s spring cleaning exercise. I will not give a full rationale for every change but feel free to ask further clarification questions in the comment section below.
Positions I’m Selling
I’m going to sell the following positions:
|General Electric Company
|Kimberly Clark Corp
|Fresenius SE & Co KGaA
|Koninklijke Philips NV
Some of these will definitely come as a surprise to you, so let me clarify some of my thoughts.
I bought Novartis after writing a stock analysis about them two years ago. I have been following the stock quite closely ever since and unfortunately, it’s not really convincing me.
Operational wise the company seems struggling and just floating around without having a clear goal in mind. It is a clear sign to me that their management is failing. This is even more evidenced by an announced 1 billion cut by restructuring and laying of employees.
On top of that they recently also sold back their ~30% stake in Roche which should give them more “balance sheet” flexibility going forward.
Don’t get me wrong, becoming a lean organization with a healthy balance sheet is a good thing. The issue I just have is that their CEO is entirely lacking vision.
This is where my thesis has proven wrong the most and why I decided to sell my position. It was still a small entry position so it’s also easier to sell for me. There are better health care opportunities out there.
Talking of which 😂. Fresenius is another stock that I decided to sell and this is probably the most controversial one.
The company is clearly undervalued at a share price of 31 Euro and a dividend yield of 2.95% with a low payout ratio (my fair value estimate is ~43 Euro). I also like their history a lot and the iconic role Else Kroner had.
However, after following it for about a year I asked myself: do I have any conviction about Fresenius?
And the answer is simple: No.
It’s in the business of hospitals and I’m not interested in that line of business. I’m neither really bullish on their long-term growth prospects and their dividend yield-after-tax is not compensating for it.
It happens sometimes that I have an “initial crush” on a stock after analyzing it. It feels that Fresenius is such a case, but it hasn’t turned into any conviction a year later.
So why keep it then and not allocate the money to better opportunities out there?
And that’s what I’ve decided to do. I think that there are better opportunities out there that excite me more.
However, I must confess that I’m still doubting whether this is a good choice.
Maybe my next learning will be the good old learning to not touch your portfolio positions AT ALL unless it breaks one of your fundamental rules, i.e. a dividend cut.
Time will tell.
Discl: Fresenius is a small position for me and those I find easier to sell at once.
This one is much easier to explain for me.
Yes, Philips is undervalued by many metrics, but there’s just one thing: their CEO is one of the worst I know right now.
How they are dealing with the respiratory issues leaves me really flabbergasted.
And it’s as simple as that. I don’t want to watch another 2 years at a CEO who’s wasting my invested capital by sheer incompetence.
It’s just as bad as how Bayer has been dealing with their RoundUp issues. This also resulted in a small dividend cut from Bayer and that’s the last thing I would like to see from Philips as well.
In that case the total investment case would be blown away for me.
Hence, it’s just a small portfolio position for me, but full disclosure: at more than a 30% loss. I better sell it now and bring my attention elsewhere.
Philips is not worth a single minute of my time anymore. What a waste and a mistake it was!
Kimberly Clark is a dividend aristocrat with an amazing dividend growth track record of 49 years. That’s one of the reasons why I bought an initial position into the stock in the summer of 2018.
However, since then it didn’t go really anywhere.
Yes, they had an awesome spike during the first 2 quarters of the pandemic when everyone was hoarding toilet paper. But fundamentally nothing has improved since then.
That’s why I asked myself: do I see a future in the stock?
No, not really!
Especially when knowing that I am already heavy in consumer staples in my portfolio.
So this is the simple reason why I’m deciding to allocate this money to better opportunities out there.
I announced on Twitter that I’m finally going to sell my General Electric position. It’s definitely the biggest mistake I ever made and I’ve referred to that in the Dividend Talk podcast many times.
My buddy Tiago asked me why I’m selling it now and not continuing to use it for tax harvesting.
That was an intelligent question and it made me decide to not sell the entire position. I will still leave a little bit in my portfolio for that reason (25% or so).
However, I coined General Electric also as a turnaround story due to their CEO Larry Culp. I truly believe he’s an excellent CEO and he has a track record to prove that.
Unfortunately, it seems that GE is beyond repair and that he can’t even create a new GE out of it. I think their debt load is just too heavy to start looking at proper growth again and reinstating a growing dividend.
Hence, my thesis didn’t play out and it’s time to reallocate that money back into dividend growth stocks.
In summary, selling these 5 stocks gives me about 3.5% of my portfolio to reallocate back into other stocks. In absolute numbers, this is quite a lot of money, but percentage-wise we’re really talking about several bread crumbs.
I’m also sure that I will get a better yield-on-cost with better dividend growth opportunities going forward.
One example is that I sold my Philips shares already and redeployed the cash into Allianz. Insurance companies are still attractively priced right now and most of them offer dividend yields of about 5% which is more than the 5 stocks that I’m selling.
Stocks I’m Downgrading
I’m using a 4-tier system in my dividend portfolio allocation strategy. A downgrade means that I’m lowering the amount of money that I would like to see allocated to one of the stocks in this overview.
|Tier-1 to Tier-2
|Tier-2 to Tier-3
|Tier-1 to Tier-2
Honestly, it surprises me that I’m mainly downgrading stocks from the higher echelons in my portfolio.
However, I do believe that the reasons for these are obvious. Tier-1 stocks are supposed to be the fundament of my portfolio and the ultimate sleep well at night (SWAN) stocks.
Well, a lot has happened lately with Unilever and 3M and both can be brought back to the quality of management. Fundamentals for both businesses are flat or even slightly decreasing.
And that’s the simple reason why I’m downgrading them right now.
It doesn’t mean that they can’t get upgraded again. I just need to see some evidence that this is temporary even though I believe that Unilever is there to stay and that their dividend is safe.
My conviction is just a little bit less than it used to be and I feel that I should respect that in my dividend allocation strategy.
Discl: non of these downgrades lead to selling parts of my position. I’m still in the accumulation phase for these stocks. However, it does mean that I’m nearing a full position for Unilever and that I won’t add a lot anymore going forward.
Stocks I’m Upgrading
Downgrading several stocks also means that I have space to upgrade some stocks again.
|Tier 3 to Tier 2
|Realty Income Corp
|Tier 2 to Tier 1
|Tier 4 to Tier 3
As you can see in the above table, Shell is a very interesting one. Firstly, I downgraded the stock from Tier-3 to Tier-1 after their dividend cut when the pandemic started. I felt strongly that it lost its anchor status in my portfolio because I couldn’t rely on them in difficult times.
However, I’m giving the company some slack here, because it was really an after-effect of the 2016 oil crash which the company was still trying to recover from.
In hindsight, I appreciate the dividend cut, because the payouts weren’t sustainable and in the best interest of the investors.
Fast forward to 2022 and Shell has one of the best balance sheets in the industry ($XOM is still better) and it is one of the industry leaders in the energy transition.
Their bet on Liquid Natural Gas by the acquisition of British Gas has also proven to be a very smart one with all that’s going on right now.
Hence, I consider their dividend as a giant one-off reset that has positioned the company for a much better future. This should benefit current dividend growth investors for years to come and this is something I’m anticipating.
There are still two other stocks that I’m upgrading. Firstly, I’m finally at that stage where I see the true quality of Realty Income. It took me some time though, but this has little to do with $O itself.
It rather has to do with my initial lack of understanding of Real Estate Investment Trusts. Over the years I had to learn more about the concept to really understand how they operate and how to value such a company.
And valuing a REIT continues to be challenging for me, but I definitely do understand the concept of Funds from Operations, the main metric to look into.
Unfortunately, Realty Income is still too expensive for me. I will start looking back at the stock again in the low 50s.
Secondly, I’m increasing my target allocation for Hershey ($HSY). I simply don’t know any better chocolate manufacturer and company than them.
They are an iconic company where management’s incentives align with those of a dividend growth investor. The original founders were very smart to donate a majority of the shares to the Hershey foundation.
Their livelihood depends on the dividend income received from Hershey. A growing dividend income means more opportunities for the foundation.
It also creates take-over protection which has helped the company several years after a 23 billion dollar bid from Mondolez.
Unfortunately, also Hershey’s stock is continuously overvalued. This slow-compounder hardly ever gets into an attractive price range, but I have found that it is worth buying every time it touches 2.75% a dividend yield.
As you can see below, this only happened ~15% of the time over the last 5 years.
New Portfolio Entrants
As you can see in the below table, there are many new portfolio entrants.
And honestly, I have to blame you for this! You guys & ladies are giving me so many great stock inspirations. It’s really hard to ignore those and to not look into them.
Longer-time followers will also notice that many of these companies have been analyzed by me over the last year, especially on my YouTube channel.
Hence, I wont explain all of these, but rather those that I feel deserve some further clarification.
|Increase to Tier-3
|Rio Tinto plc
|Increase to Tier-4
|Increase to Tier-4
|Increase to Tier-3
|T Rowe Price Group Inc
|Increase to Tier-3
|Increase to Tier-4
|Texas Instruments Incorporated
|Increase to Tier-2
|ASML Holding NV
|Increase to Tier-3
Let’s start with ASML. This company is truly a wonderful business and they have a moat that is really hard to copy. This is also the reason why the stock often trades at multiples that are far beyond the average wisdom in the DGI community.
That’s also why I decided to add it to the list. The average dividend yield for all my desired stocks is above 3% at this time of writing.
Hence, I have some space for 1 or 2 low dividend yield, but with very high dividend growth stocks. And to be fair, getting ASML to a 10% yield on cost can easily take 20 or more years.
It’s OK for me, and ASML will probably be the only one. I don’t know any other high quality, high growth business that is worth 20 years waiting for.
The second company I’d like to clarify is Texas Instruments. Usually, my rule is to let a stock first enter a Tier-4 or Tier-3 level in my allocation strategy so that I give myself some time to learn about it before I double down.
The thing is, I know Texas Instruments already for quite some time, but I never really analyzed it. It’s such a strong and high-quality business that I feel very comfortable giving it this position in my portfolio.
Actually, I wouldn’t be surprised if it turns into a tier-1 stock sooner than later.
The last stock from this list that I’d like to clarify is Rio Tinto.
To be honest, I don’t treat this as a pure dividend growth stock. This is rather a high-yield dividend stock for me for which I accept the fact that it will lower its dividend once in a decade when times are tough.
Of course, I wouldn’t like to see that when I need that passive income the most, but I’m making a conscious decision for that right now.
It just helps me to push the snowball a bit faster forward while I’m in the accumulation phase. I would say that BHP and Omega Healthcare investors play a similar role in my portfolio.
That’s also why I will never let these stocks get into a core position in my portfolio. They fit well in Tier-4 territory.
Increasing my portfolio holdings
As a last note, I wanted to let you know that I increased my number of portfolio holdings to 50.
It’s just so hard for me to stick to 40 stocks at this moment in time. The stock market just feels like a candy store and there are many great dividend growth stocks that I would love to own.
This applies even more since I started blogging and creating YouTube videos. I’m analyzing many stocks, so my original thesis of not having time to inform myself on more than 40 stocks seems flawed. At least for now.
Hence, that’s why I’m extending my Tier-4 range from 10 to 20 companies. Generally, this Tier requires less maintenance, so I won’t lie awake too much if something bad like a dividend cut would happen.
Honestly, I don’t know if this will always be the case, but at least for now, this is something really helpful for me.
I’m not perfect and some of these changes might feel like I’m overthinking things. And you’re probably right about that!
But you know, this blog is about sharing my personal thoughts and my journey. This doesn’t mean I’m always consistent in my thinking and my approach.
A good example of that is selling Fresenius, but in the meantime keeping Bayer.
Some things I just can’t explain, but I find it important to share these thoughts with you.
Is this maybe why they call investing an art sometimes?
All I know is that my projected annual dividend income continues to grow beyond my imagination and that I’m amazed by the power of compound interest.
That’s what’s really driving me!
All these portfolio changes are just helping me to increase my PADI and the quality of my PADI even more.
But hey, that’s it from my side. Now I’d love to hear something from you!
What do you think about my cleaning activities? Are you reviewing your portfolio as well from time to time?
European Dividend Growth Investor