The almost default motto of dividend growth investors is a ‘Sleep Well At Night’ or SWAN portfolio. The concept behind this is simple, invest in companies or funds that allow one to sleep freely and easily, knowing your money is relatively safe from harm. This does not imply a lack of risk, but instead of comfort in knowing that your portfolio, and more importantly, dividend income, is safe from all but the most catastrophic of events.
After much thought over the last couple of months, I decided to do a bit of refreshing in my portfolio. As I look ahead, I have great plans for my passive income investments, both peer to peer lending, dividend growth stocks, and perhaps a rental property or two. The sky is always the limit? Or is it capital? I can’t remember. Either way, with designs on putting some serious money to work over the next few years in my accounts, I wanted to make sure I was prepared to launch onward and upward without the distraction of companies I needed to check in on more than usual. No, no, this isn’t to say I’m looking to ignore my holdings, but we all know positions that have the potential to need a bit more monitoring and perhaps some hand-wringing, head-holding, and sweating.
Selling Heartburn and Headache
In order to eliminate some of those later symptoms mentioned above, I divested my portfolio this month of two of my least favorite positions at this point, Prospect Capital and American Realty Capital Properties. While both companies had a well-rounded list of reasons to drop, a couple of highlights for each are below:
Prospect Capital: Business Development Company (BDC) that is externally managed and recently cut their dividend. BDCs benefit best from internal management whose interests are more in line with the company, as opposed to boosting management fees. The dividend cut was the result of portfolio performance not being strong enough to support the dividends scheduled to be paid. I still love the business to business lending that a BDC exposes me to, and will continue to invest in the sector, albeit in a different company (see below). Selling PSEC decreased my forward 12-month dividends by $192.14.
American Realty Capital Properties: Mentioned quite frequently in the news and financial blogs of late, all for the wrong reasons, ARCP was no longer a good fit for me. While I like the underlying assets and the potential dividends those substantial assets can provide, two things pushed me to sell, above and beyond the accounting scandal. The first was the quiet news release that they were suspending their dividend until they could resolve their accounting issues, at which point their payouts would be aligned with their industry peers (read: significant reduction).
Second, was news of the involvement of Corvex Management, and activist investment firm run by Keith Meister, a protégé of Carl Icahn. While I believe there is a time and a place for activism by investors to push management for improvements and change, many activist investors are short-term buyers, with a goal of “unlocking value” for shareholders. Often times this is a short-term solution. As a long-term investor, this is just not a ship I want to be sailing on. Selling ARCP reduced my forward 12-month dividends by $190.23.
These two weren’t the only positions I sold in December. I also got out of my Lorillard (LO) holding, which is pending a buyout from Reynolds American (RAI) in 2015. While I forfeited some guaranteed gains by getting out prior to the buyout date, I wanted to go ahead and make the move while my portfolio was undergoing some churning. Ultimately, while I like the proposition of Lorillard itself, I do not want to own RAI, and therefore exited the position. Selling PSEC decreased my forward 12-month dividends by $102.66.
At the end of the day, I hate selling. It costs money and by and large is a much more involved process, especially emotionally, than buying. SWAN portfolios do not see a lot of turnover, so let’s hope this is past us.
Locked, Stocked, and Ready to Rock… Myself to Sleep
Of course with all of this selling, there was plenty of buying happening during the month of December. All told, I put to work a few dollars short of $10,000 back into the market, not including my Loyal3 activity. While most of that was reinvesting proceeds from the sales above, the rest was fresh capital and the remnants of a small rollover into my IRA. I purchased six different companies, two in my taxable accounts and four in my IRA. Three of the six were completely new to my portfolio, and I’m happy to have doubled down on the other three that already were a part of my holdings. Without further do:
Bank of Nova Scotia (BNS): A new position for me, BNS is a dividend challenger with five years of dividend increases. While receiving some downward pressure over the last few months as a result of the decline in oil prices (Canadian banks have exposure to the oil sands), a good opportunity to enter into more conservative banking environment that is Canada presented itself. Picking up a total of 35 shares at an average cost basis of $56.11 after commissions, I have a yield on cost of 4.21%, adding $79.80 to my forward 12-month dividends. A solid initial yield coupled with a 7.1% five-year dividend growth rate, this investment is a nice addition to my portfolio.
BHP Billiton (BBL): For many in the dividend growth community, BBL needs no introduction as many have been picking up shares of late, myself included. A dividend contender with 12 years of dividend increases, BBL is a semi-annual dividend payer with vast exposure to the commodity markets. While by nature this industry is very cyclical, BBL runs some of the leanest and most efficient mines and other operations in the world. As an existing holding of mine, I was happy to average down my cost basis given further weakness in the price since I first added shares. I added 25 shares with an average cost basis of $40.54, sporting a yield on cost of 6.12% and adding $62.00 to my forward 12-month dividends.
Chevron Corporation (CVX): Again, another recent buy and existing position of mine, Chevron is known as one of the oil and gas supermajors. Like BBL, when the opportunity presented itself to add to my position after falling from my original cost basis, I added a few shares. A well diversified company that has weathered many ups and downs as a result of the cyclical oil markets, Chevron is a company that known for rewarding shareholders. A dividend champion with 27 years of raising dividends, CVX is a company I can own and rest well knowing that with a low payout ratio and generous free cash flow, I’ll be rewarded even with oil prices going up and down. By adding another 10 shares of CVX at an average cost basis of $102.80, I gained $44.00 in forward dividend income while receiving a yield on cost of 4.28%.
Exxon Mobil (XOM): Oil again? Yup, ‘tis the season. While I don’t want to go overboard on oil, I’ve been wanted to gain some exposure to the biggest names on the block. The past couple months have given me that opportunity and I’m happy to take it. While not a big position, I was able to invest in this dividend champion with a track record of 32 years of increasing dividends. With an even lower payout ratio than CVX, and the scale to weather the challenges of being a commodity company, XOM will continue rewarding shareholders with buybacks and increased dividends. As a result, I picked up 16 shares of XOM at an average cost basis of $93.08 per share. With an initial yield of 2.97% my shares add $41.40 to my forward 12-month dividends.
Main Street Capital (MAIN): Main Street Capital is known as the best of breeds for BDCs. Conservatively and internally managed (big attributes for BDCs), MAIN is the antithesis of my previous PSEC ownership. A common comparison is to Realty Income (O) for REITs, with a history of great management and shareholder aligned leaders. One example is their dividend policy. While they are currently sporting just a four year growth trend, they pay out monthly less than the anticipated requirements for a BDC, and will special dividend the difference at the end of the year. This allows them to slowly build their monthly dividend stream without getting locked into high payouts with no chance of sustainability.
MAIN has often traded far in excess of it is book value in relation to other BDCs, and this premium is a reflection of the value the management and quality of the underlying assets. I’m happy to have added this monthly payer to my portfolio in lieu of PSEC, trading yield for quality. I purchased a total of 67 shares in two separate purchases at an average cost of $29.50 per share. Given a monthly dividend of $0.17 per share, I’ve added $136.68 to my forward 12-month dividends at a yield on cost of 6.92%.
Philip Morris International (PM): Yet another dividend hero that needs no welcome, PM is the international spin-off the old Altria family. I originally purchased shares in PM back in August of 2013. Since then the prices has floated around my cost basis, but most recently trended below. I’ve been able to add shares to this dividend challenger and average down slightly as a result. Of course, by selling Lorillard I lost some tobacco exposure, and felt that PM was a great replacement considering the international market is where the vast majority of growth in the industry remains. I was able to average down my cost basis with my purchase of 18 shares at an average of $83.10 per share, adding $72.00 to my forward 12-month dividends at a yield on cost of 4.81%.
No Monsters Under the Bed, Time to Sleep Well
Having cleaned up the portfolio a bit, things are much more settled heading into the new year, with fresh goals and renewed vigor for achieving the impossible. While this past month was a bit more turnover than I would have desired, I look at my portfolio and see a group of companies I am happy to hold and will likely do so for a long time.
The overall impact on my forward 12-month dividends wasn’t too terrible, but it declined. My three stock sales decreased my forward dividends by $485.03, a shockingly large number as I just now calculate this. Just over 23% over my forward 12-month dividend total at the end of November, this was a blow, but one for the best.
My multitude of purchases returned $435.88 to my forward 12-month dividend total, so in making my trades, I sacrificed only $50 of future income and countless headaches. December was a great month, for dividends received (soon to be published), passive income as a whole, and for the quality of my assets.
Here’s to sleeping well in the New Year, and the many years to follow.
My Dividend Growth Portfolio page has been updated to reflect these most recent changes.
Flickr: Kevin Martini