Fluffing the Pillow: Refreshing My Dividend Growth Portfolio

Fluffing the Pillow - Refreshing My Dividend Growth Portfolio - Sleeping Puppy

Sleep. You’re doing it right.

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 LogoProspect 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.

ARCProperties-LogoAmerican 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:

ScotiabankLogoBank 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.

BHPBillitonLogoBHP 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_human_energy - logoChevron 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 logoExxon 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 Logo1Main 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%.

PM LogoPhilip 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

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  1. W2R,
    You make the right decision by selling ARCP and adding top tier names in your portfolio. Like you I made mistake on ARCP but recognized my mistake and sold my whole position. Those names that you mentioned above should give us a peace of mind and a good night sleep.

    • I agree, move on and continue filling our portfolios with companies that best match our long-term goals. Glad to have shared a similar lesson with you.

      Thanks for stopping by FFF.

  2. WYR,

    WOW… incredible amount of activity there! I know MANY individuals have recently divested their position in ARCP, so you definitely aren’t alone there. I was reading more on the LO acquisition and it seems Reynolds may change how they do their dividend to become a much better player. I still am wondering if I want to hold them, or not.

    Looks like you didn’t go light in reinvesting those proceeds. You pumped them into sound stocks that have been around for longer than I’ve existed – in XOM, CVX and BNS. Also, I think we have all started to taste BBL. Sacrificing only $50 for ultimate dividend protection and growth going forward is wlel worth it – call it a lesson!

    Nice job WYR, loving it and excited for your 2015.


    • For me, Reynolds was also the distant brother of the US tobacco companies, and with long-term growth challenging here in the US, I will keep my only tobacco holdings in PM where growth can still be found internationally.

      As for the other pickups, nothing wrong with folks who have raised their dividends 5, 10, 25 years or more. Glad to be along on this journey with you and Bert.

      Best wishes in 2015.

  3. Nice work! These moves make complete sense and sleeping well is what it’s all about. I think we all struggle with how much risk is too much sometimes and it’s great you knew where and why you wanted to draw the line. I’m really interested BNS, PM, and CVX here, and I’m so curious to see what will happen with oil prices. Keep up all the awesome progress and thanks for the great content!


    • Ryan, certainly balancing risk and reward can be a difficult task. I first invested in PSEC a couple of years ago shortly after starting my journey to accumulate dividend income, so sort of a bittersweet moment. Ultimately, investing should be emotionless and calculated, and risks should be weighed for all positions regularly. I know I’m happy where my portfolio currently sits, and will continue to build my investment base as opportunities present themselves.

      Thanks for reading and sharing your thoughts!

  4. Nice job refining your portfolio and positions. You bought some good companies and I’m glad it will give you some much needed peace. Though your dividend income may have gone down now, I’m sure it was for the best. Good luck.

    – HMB

    • Every once in a while a good review needs to be done, and while the cost of adjusting things hurts, cleaning things up is for the best. The loss of dividend income is easily made up with an additional investment or two, so no great concern there.

      Thanks for the support and stopping by HMB!

  5. Seems like many are opting to sleep well at night and find safer and more stable dividend income. In recent weeks I have read quite a few REIT sales or other high yield plays get dumped such as ARCP, SDRL, RIG, PSEC and more.

    When I first started as a dividend growth investor I never considered any of the REITs or mREITs or other high yielding stocks for long term portfolio. In fact, I would venture to guess that my portfolio is one of the lower yielding ones out there as I focused on dividend growth rather than current yield. Yes, I like to sleep well at night and sometimes owning, VFC, GWW, BCR, BDX, ITW or other low yield but growing dividend stocks does the trick. Thanks for sharing.

    • DivHut, for me it was less about selling yield or REITs in general, as I am still a happy owner of a couple of REITs and own a few higher yielding equities, and more about me adjusting my portfolio for quality. There is quality in every sector, just a matter of making wise decisions to find that quality and put your capital in a position to capitalize on it appropriately.

      Based on your last paragraph, I think you’ll like my plan for my Loyal3 account. More of a DRIP program with some higher growth dividend payers like SBUX and VFC. Certainly some long-term potential with those positions.

      Thanks for stopping by and commenting!

  6. I love sleeping well at night. Great decision on selling ARCP, there are just too many unknowns with that company.

    • Tons of uncertainty, as well as some issues with how they will be managed going forward. I am 100% not in support of externally managed REITs. Expensive and management is not incentivized in the same manner as shareholders.

      Thanks for your thoughts Tawcan.

  7. Lot of moves. Always good to rebalance a bit for the new year.

    Good Day and Grind on!

  8. W2R,

    It seems like a lot of housekeeping has been going these past few days. You show a very solid thought process and your decisions clearly reflect that.

    Sleep tight, pal, you’ve earned it!

    • Definitely some housekeeping. I’ve been meaning to do so for a while, and this just presented a good time to do so. I’ll look to continue building my dividend base in solid companies over time, and this has allowed me to continue that journey on the right foot.

      Thanks for sharing your thoughts NMW.

  9. Excellent choices. I don’t know much about PSEC, but MAIN is definitely a great BDC. And I have no doubt that selling ARCP will definitely help. Every single purchase looks great, though I am surprised you didn’t purchase a REIT to replace ARCP. Very well done.

    • MAIN is a best of category for BDCs, much like Realty Income is for REITs. Great management, conservative decision-making, and overall a long-term mindset. I’m happy to have substituted them into my portfolio for PSEC. As for replacing ARCP, I’ve already gotten a couple others on the books, and don’t think they are appropriately priced right now to jump in on any others.

      Thanks for stopping by and commenting DD!

  10. These seem like really good moves for your overall portfolio. I did some selling earlier in 2014, but not later in the year. As you mentioned, I also hate selling and that makes me a little complacent, which is something I need to work on this year!

    Good luck for 2015 and sleep tight!


    • Good moves for the long haul, and the sleep will certainly be easier going forward. I’m looking forward to 2015 and wish you the best of luck as well.

      Thanks for stopping by!

  11. I’m liking all of those buys, and the sells as well. Good sleep is priceless :)

    Also, that is an adorable puppy!! Is that just a picture you found online, or is it yours?

    • Good sleep is priceless! What’s the saying, “Always buy good shoes and a good bed, since if you’re not in one, you’re in the other.” I’m happy to be sleeping well, and the cost of doing so is worth it.

      As for the puppy, not mine, but darn cute! Thanks for stopping by Seraph!

  12. There’s a lot of good picks there. Thanks for the tip on MAIN. I hadn’t heard of them (or much about BDCs) before. Having a great management team is always a plus. I’m also thinking about adding some investment into private equity either through KKR or Blackstone. Need to look these days to get growth but dividends.

    • Glad to have provided a tip! Certainly do your due diligence before making any decisions. BDCs can be complicated, yet rewarding, given their requirement to pay out in a similar fashion to REITs.

      Thanks for sharing your thoughts and reading.

  13. W2R,
    kudos for making the unpleasant decision to get rid off bumpy stocks. We ultimately invest for higher life quality. If they bother you, you are better of selling even if it costs you money. Of course, that is unless it bothers you even more to loose money because of costs.
    That being said, I personally like your moves very much. All of the buys (except from MAIN, which I am not familiar with) are solid buys and seem to offer a lot of value at current levels.
    Thanks for the update.

    • Thanks for the compliments GI. Being able to trust those in charge of your investments is important, and having to monitor a particular management or company too closely doesn’t make sense long-term. While I realized some losses, the benefit of having more confidence in my portfolio was well worth the expense.

      I appreciate your thoughts and readership.

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