Saturday, April 28, 2018

A review of my US Dividend Growth Portfolio

I realized I have not done a proper review of my US Dividend Growth Portfolio in a blog post before, so here's one blog post to address that lack.

The underlying idea for my US Dividend Growth Portfolio is that it is difficult to find dividend growth stocks in Singapore. I'll have to make a qualifier here before proceeding further. My understanding of the term "dividend growth" entails that the dividends distributed by a given firm increases year-on-year much like clockwork, over decades, and is supported by genuine growth in the underlying business.

Currently, I have the following "dividend growth stocks" in said portfolio (ordered by decreasing position size):

- Welltower
- General Mills
- Hormel Foods
- JM Smucker
- Kimberly Clark
- Abbott Laboratories

The breakdown for each counter, in percentage terms, is as follow. The numbers do not add up to 100% as I rounded the decimals to a whole number.

US Dividend Growth Portfolio

In my Q1 2018 Portfolio Update, I mentioned that I am moving towards a more portfolio-centric way of managing my investment portfolios. Hence, at one glance at the pie chart, I realized that my asset allocation is wonky.

Considering the trio of General Mills, Hormel Foods, and JM Smucker, General Mills occupy the largest share in the portfolio. General Mills' current record is a 14-year streak of increasing dividends. In contrast, Hormel Foods and JM Smucker boasts a 52-year and a 20-year streak, respectively. If I were to weigh each counter according to their historical track record, Hormel Foods and JM Smucker should deserve a far larger weight than General Mills in my portfolio.

How did it turn out that way? When I started out investing in US counters, I was far more cautious and initiated small positions (e.g. JM Smucker). As I grew more experienced, my initial positions became a teeny-weeny bit larger (e.g. General Mills).

Currently, the majority of US consumer staples stocks are on a downtrend, with General Mills exhibiting an even greater downtrend compared to its peers. This may seem like an opportune time to scale in further. However, doing so will result in General Mills occupying a larger proportion in my portfolio, which I am not comfortable with. So I will not do anything for now.

Welltower, a blue-chip healthcare REIT, has a 14-year streak of increasing dividends. It was my very first US counter which I initiated back in December 2016. I added to the position/averaged up in December 2017. It is still a smallish position even after taking into account the addition in December 2017. If I were to value US blue-chip healthcare REITs (e.g. Welltower, Ventas, HCP) by yield, the crisis yield of Welltower would be around ~10% yield. To manage risks, I will only scale in to Welltower (and maybe Ventas) when they are trading at 10% yield. Currently? They are trading at ~6 yield.

Anyway, I expect Welltower to get kicked out of the Dividend Contenders (10 - 24 straight years of dividend growth) list one of these days. It is difficult for REITs to distribute almost all of their cashflow and still grow their dividends. HCP, another "blue-chip healthcare REIT", was supposedly the last man standing until it got kicked out of the Dividend Aristocrat list in 2016/2017. This is yet another example of "cannot blindly buy blue-chips."

Nothing much to comment on for Kimberly Clark and Abbott Laboratories. Small positions due to being cautious when I first started out investing in US counters. I will scale in when the opportunity presents itself.

In the meantime, I will wait it out. There is more room to fall for US dividend growth consumer staples, healthcare REITs, and utilities (which I am trying to research and initiate a position in).

For those who are wondering, my US Dividend Growth Portfolio is around 1/10 the size of my SG Portfolio.

Thanks for reading!

8 comments:

  1. Hi Unintelligent Nerd,

    Interesting portfolio. I read your post with mild confusion / amusement as the 30% dividend withholding tax on US dividends would usually make US dividend stocks unattractive to SG income investors. Your thoughts?

    Regards,
    KK

    ReplyDelete
  2. Hi KK,

    I get that comment quite often actually. From a holistic perspective, my SG portfolio serves to provide higher yields (relative to my US Dividend Growth portfolio) and lesser dividend growth while my US portfolio serves to provide lower yields (relative to my SG portfolio) with higher probabilities of dividend growth. At this moment, my SG portfolio is around 10 times larger than my US portfolio.

    While there are some SG counters that do exhibit some evidence of dividend growth (e.g. dividend growth once every few years), such counters are quite difficult to find. Even if such counters could be found, their valuation may render them as unattractive or merely fair investment options (for now).

    The US market, on the other hand, is way larger. Its sheer size alone contains many dividend growers. We are able to identify these dividend growers from lists such as the Dividend Challengers list, Dividend Contenders list, and the Dividend Aristocrats list. These lists are not foolproof; a given dividend grower could still fail to grow on a particular year and be taken off the list. These lists serve as a starting point for research.

    What attracts me to US dividend growth investing (provided I pull it off well! I may have already failed in this regard by selecting Welltower!) is that they require only occasional monitoring (relative to the effort I will expend on SG stocks) and would increase their distributions like clockwork. It’s like Business-as-usual (BAU) while I adopt a more passive role. In particular, I have a preference towards consumer staples. People need food to subsist. Rain or shine, a thriving economy or not, people still need to eat. Couple this with inflation and a management team that is well-tuned to changing consumer preferences, the probability of dividend growth happening would be higher.

    Singapore does have their consumer staples stocks too and I have quite a few of them in my portfolio. However, they do not increase their dividend every year. Unfortunately, some of them are laggards: stagnant dividends and declining share prices.

    Returning back to the topic on SG dividend stocks, what I have observed is that people do rotate in and out of their income stocks whenever valuation becomes rich. In this way, they are going for total returns that include both capital gains and dividends. I myself occasionally do that as well. This introduces reinvestment risk or market timing risk (sell and hope for the price to drop to their initial buy price and re-enter the counter).

    So what I have done for myself is to loosely follow the concept of buy-and-hold for my US counters and take a more active approach for dividend investing in Singapore that includes capital recycling when there is a need to do so.

    I could stick with ETFs but my overall portfolio yield may drop and I might not want certain counters that are packaged along inside an ETF. I could lose money from the dividend withholding tax and forex losses, but I am willing to live with that and I could tilt my cash injection towards higher yield (SG) or higher yield growth (US) depending on my income needs. I am looking at many counters so that I am not particularly dependent on any one/few of them.

    Here’s my random thoughts. Hope it answers your questions. Cheers!

    ReplyDelete
  3. Interesting, why no McDonald, coca cola or visa/master? Just randomly throwing out names I think* they would fall under the dividend growth category. lol

    ReplyDelete
    Replies
    1. Hi KPO,

      McDonalds is a consumer discretionary stock, not a consumer staples stock. Hence, I have not started to research on it yet.

      Coca cola? I prefer its cousin for better growth. But both are not exactly attractively valued at this juncture. =/

      Visa/Master is outside my circle of competence.

      Cheers!

      Delete
  4. Hi unN,

    Do you mainly employ a quantitative or qualitative approach when prospecting for your US counters? I am interested in going into US since there is temporary market weakness but I am wary of the 30% div tax.

    Also, will you be considering other markets for your dividend counters apart from US? The div tax is probably one of the reason why companies are doing share buybacks and why foreign investors choose growth over dividend stocks. The dividend tax might have a large dent on your actual returns.

    ReplyDelete
    Replies
    1. Hi INTJ,

      Mainly quantitative. I refer to the Dividend Challengers list, Dividend Contenders list, and the Dividend Aristocrats list as a starting point. From there, I look at various metrics (profit margins, ROE, debt load) before considering qualitative aspects ("do I really know the industry that said firm is in?", “what are the economics of the industry?”, “is the business easy to understand?”, etc). I then look at technical indicators (52-week low) and valuation (current PE versus historical PE, etc).

      It is because of the 30% dividend withholding tax that most people approach the US stock market with capital gains, rather than dividends, in mind. Personally, I do not follow that approach because it is a more active approach. I am not nimble enough and would prefer a more passive way of doing things that fits my personality.

      Yes, I do consider other markets. I have looked at Société Bic from the Euronext Paris (the French stock exchange). I am also looking at some other counters from the Korea Exchange and the Amsterdam Exchange.

      Hope this answers your queries. Cheers!

      Delete
  5. Hi UN,

    About our discussion on gold mine companies, I forgot to mention about the value IAMGOLD (IAG) in NYSE. They have been growing by cutting down expenses. What is bad is it has no dividends and were unprofitable before 2016. DYODD though :)
    https://www.fool.com/investing/2017/12/01/2-top-gold-mining-stocks-to-buy-now-and-1-to-avoid.aspx

    ReplyDelete
    Replies
    1. Hi Frowns88,

      Thanks for the info. Shall look into it. Cheers!

      Delete