Compounders And Dividends: February 2023 Portfolio Update

With Another month down and closer to financial freedom we march. Unfortunately, my portfolio underwent some involuntary sales in February. We will dive into that after discussing dividend growth. Then I’ll cover what I did with my monthly savings, selected dividend reinvestments, dividend raises and anticipated March raises. We will conclude with my current portfolio and closing thoughts.

As a reminder, my individual stock portfolio is a large and growing portion of my net worth, but my family also owns large positions in VOO and VTI. That percentage will decrease in the future, but rest assured a large portion of my money is indexed to the market.

Dividend Growth

Quarter over quarter (QoQ, with the explanation here), my dividend income increased 42.7%. Key tailwinds for this increase include Verizon (VZ) and Enterprise Products Partners (EPD) which were not in my portfolio in November 2022 and the timing of the American Tower (AMT) dividend (paid out a few days late in Q1 and which I have since sold but owned on the record date). Adjusting for those items, dividend growth QoQ was 7.1%, which was made up mostly of inorganic dividend growth (buying more shares with monthly savings) with some organic growth (dividend increases). This mix is expected due to the QoQ comparison. A year over year comparison will reflect dividend increases from (likely) all of my holdings, so we should expect to see more robust organic dividend growth.

So, while top line (42.7%) growth was fantastic, that mostly came from adding two high yielders (VZ and EPD) and the timing of a payment (AMT). I don’t anticipate this level of dividend growth next year with the tough growth comp, but I still expect healthy organic dividend growth as likely all of my holdings will have raised their dividends by that time.

Sales

As disclosed in my February 2023 Watch List Update:

• For reasons somewhat out of my control, my portfolio underwent another change in early February. I'll discuss that more in my February update, but the quick takeaway is that I gained more responsibility at work which has me touching the REIT sector. I was not asked to sell my REIT shares, but to avoid any potential ethical/compliance issue, I went ahead and divested all of my REITs. It was the correct decision, and thankfully I had an idea that may happen at the end of 2022, I just didn't realize it would happen 2 months later. The dry powder unlocked let me move a few companies that were on my watchlist to my active portfolio and add more to some existing positions (all of which will be detailed in my early March portfolio update).

Due to this change, my portfolio lost a good bit of yield and forward income. I’m still on target for 20%+ dividend growth this year, but next year may be more subdued. Dividend growth will always be the backbone of the portfolio, but I don’t think I can execute on some of the goals I laid out in my 2023 Portfolio Goals article in the near future. I was previously anticipating reaching this goal by using a diversified basket of REITs and higher yielding companies. Without the REIT portion, I would have to increase the allocation to the higher yielding companies, which is not something I’m willing to do given my focus on a set of quality companies that typically pay below market dividend yields.

• I focused on this because my long-term portfolio goal is to raise my dividend yield to something “meaningfully higher” than the yield of the S&P 500. I won’t achieve that goal next year, or the year after, or possibly this decade. In order to achieve that goal, I’ll have to guide my portfolio in that direction over the next several years. While my shorter term goals may conflict with that (you’ll see further below) my long-term goal remains.

If I’m able to build my portfolio to yield in excess of the S&P 500, great, but I’m not going to have that be a key tenet. The REIT segment (almost 8% of the portfolio and 15%+ of the income) was the big driver of dividend income. I could have thrown the money into a higher percentage of higher yielding names to make up/increase the dividend yield, but instead I want to aggressively focus on quality.

Dividend growth will naturally be occurring through two ways in my portfolio:

• Companies increasing their dividends

• New capital purchasing dividend growth companies will increase the “bottom line” (dividend income)”

In essence, I don’t want to focus on the yield of the companies I’m buying or the yield of my portfolio for some time. I can always rebalance into higher dividend payers at some point later in life if needed, but for now, a relentless focus on quality has to be the key pillar of the portfolio. When I view high yielders as attractive, I’ll pounce on the opportunity, but I’m never going to chase yield to try and make up for lost income. Double digit dividend growth will be a by-product of that north star. And when that 10% or 20% threshold has been breached, I will gladly gobble up shares of high quality non-dividend paying companies.

I’ll dig into this more with either my Q1 letter or mid-year top 10 depending on how things play out.

I sold shares of Essex Property (ESS) at $226.88, Mid-America Apartment Communities (MAA) at $173.43, Realty Income (O) at $67.15, and AMT at $220.64. The proceeds were immediately deployed into AbbVie (ABBV) at $145.36, Marathon Petroleum (MPC) at $115.50, EPD at $25.71, Estee Lauder (EL) at $264.16, Automatic Data Processing (ADP) at $224.36, Northrop Grumman Corporation (NOC) at $448.71, and Canadian National Railway (CNI) at $118.98.

I was very excited to be able to make these moves. In total (combined with my monthly purchases) I sold 4 positions and added 4 new positions, keeping my portfolio at the same number of total holdings while upping my share counts of some of my favorite companies.

• EL/EPD/ABBV – These are key dividend growth companies for me and hit all three of my buckets.

• ADP/CNI – These are two core positions for me and both sold off after earnings. I was happy to take the opportunity to purchase shares. ADP is a company I haven’t purchased since early in 2022.

• NOC – In my opinion, NOC is the best prime government contractor. The government contracting business has been a fantastic area for shareholders over the past few decades. Shareholder friendly management with a deep pocket buyer means these companies have delivered stellar top line growth. There are significant tailwinds for the industry, but NOC sold off a bit on some near-term concerns. I was happy to finally grab exposure to a company that has long been on my watchlist.

• MPC – I almost pulled the trigger on PSX since that company has been on my watchlist, but I view MPC as the higher quality refiner. I think there are good reasons to go with VLO, PSX or MPC, but I chose MPC after taking a weekend to get up to speed on alternatives outside of PSX. There are some strong tailwinds in place for the refining segment, so I was happy to add to my energy exposure. MPC’s focus on reducing the share count is attractive, as the increasing EPS should allow the company to provide healthy dividend raises moving forward.

While I saw a small hit in forward income, I still am on pace for a large year over year dividend growth rate.

Monthly Savings

On February 2, I purchased shares of OTIS at $85.32, CARR at $46.60 and DHR at $270.28; on February 6, I purchased shares of CVS at $85.59; on February 10, I purchased shares of DHR at $256.94; on February 15, I purchased shares of GOOGL at $95.01; on February 21, I purchased shares of CHTR at $383.85; and on February 27, I purchased shares of CP at $77.95.

This was a busy month for my monthly savings as I’m now able to add more money to my individual stock portfolio and I added a larger one-time amount to initiate Otis Worldwide (OTIS) and Carrier Global (CARR) positions. As my portfolio fills out, I’ll likely focus on some of my more underweight high quality positions. Positions that fall into that category include CHTR, SPGI, ADP, ODFL, and CP while other positions that I’d like to substantially increase include MCO, V, MA, COST, GOOGL, CNI, and DHR. Some companies on my watch list that I think may be entering my portfolio this year include TMO, CNSWF, SYK, FICO, BRK.B, ROP, MKL, and TYL.

Here is a quick discussion on companies I purchased in February:

CARR is one of the largest HVAC companies operating in a fantastic market with few large players and an incredible global growth trajectory. I’ve also looked at WSO, (a distributor of HVACs and a JV owner with CARR) but decided I’d rather own the manufacturer (for now, I could decide to purchase WSO in the future).

OTIS is the leading elevator and escalator manufacturer that moves 2 billion per day on their products. The elevator market is highly concentrated, and anyone who has read my previous articles knows I love oligopolies in my portfolio.

Both companies offer little margin of safety (and are likely slightly overvalued), but I intend to add to these companies over the next several months to smooth out any market gyrations.

DHR is a company I really love and have long felt it’s been under allocated in my portfolio. With the spin-off of EAS later this year, I currently plan to sell those shares (or choose not to exchange my shares depending on how DHR decides to elect its tax free spin) and reinvest into the core DHR-business. I’m building my position now while I still think shares are around fair value.

CVS looked to be trading a bit under fair value for me, so I was happy to slightly up my weighting.

CP and GOOGL are under-allocated core positions. While CP shares are fully valued, I will take my time to slowly increase my weighting. GOOGL shares offer a little more margin of safety, so I’ll try to be more aggressive when I add.

CHTR will be a core position moving forward, so expect to see me add periodically through dividend reinvestments and monthly savings. I’ll expand on this more in my Q1 or H1 letter, but for now, understand I view CHTR as a high quality company. With my portfolio’s dividend growth already on track for a big year, I’m not going to shy away from adding up to 50% of my monthly savings in non-dividend paying companies.

Dividend Reinvestments

On March 1, I put my pooled February dividends to work. I purchased shares of ODFL at $340.63; COST at $481.34; and MPC at $124.98.

ODFL and COST are core positions. Both are not only fantastic dividend growth stocks, but total return stocks. I don’t think either provides an attractive margin of safety, which is exactly why I’m adding to them through dividend reinvestments. I try not to focus too much on valuation on the first of the month, as I’m just trying to increase my share counts of high quality companies. It’s difficult to find time to aggressively allocate capital to companies that always seem to be priced to perfection.

MPC is a new position that I’d like to see grow. As noted above, I find the tailwinds for the refining space attractive and want to increase my exposure to energy in general. MPC is the largest independent refiner and I’m always going to be attracted to the perennial winners in a market.

Dividend Raises

As expected, February was a busy month of dividend increases. Here are the companies I own that declared dividend raises:

• On January 31, MCO increased its dividend by 10.0% to $0.77 per share.

• On February 1, ODFL increased its dividend 33.3% to to $0.40 per share

• On February 10, VMC increased its dividend by 7.5% to $0.43 per share

• On February 16, KO increased its dividend by 4.5% to $0.46 per share

• On February 17, NEE increased its dividend by 10.0% to $0.4675 per share

• On February 21, HD increased its dividend by 10.0% to $2.09 per share

• On February 22, DHR increased its dividend by 8.0% to $0.27 per share

I’ll discuss them in order.

MCO delivered another 10% dividend raise, as expected. One of my biggest positions that was a big loser in 2022 has started off the year hot and rewards shareholders with a low-double digit raise. No share buybacks in Q4 2022 was surprising, but I expect MCO to continue to compound over the coming years.

ODFL knocked it out of the park and delivered another 30%+ dividend increase this year. I love this company because it’s a perfect mix of dividend growth and capital appreciation. At the time of writing this (Feb 2) ODFL shares are up 33% on the year, a staggering number. Again, trees don’t grow to the sky, but it’s hard not to love this perennial out performer. The valuation is approaching nosebleed levels similar to late 2021, so I’m not aggressively adding. My last tranche of shares was in the $270s in September. I’ll have to start dedicating some of my pooled dividends if I want to keep growing my position.

VMC came in right on target with a 7.5% dividend increase. This is a company I feel generally under-allocated to, so expect to see me throw some dividends its way over the course of the year.

Two pennies a quarter from KO is in line with expectations. I’m assuming KO will hike one to two pennies a quarter for the next several years.

NEE delivers upon its promise of 10% dividend growth. A fast growing utility company is rare, so I’ll happily ride this one for years to come.

HD came right in the middle of my expectations ($2.00-$2.19), and I won’t complain with another solid double digit increase. I anticipate dividend increases to decelerate moving forward with the payout ratio creeping up coupled with the softening guidance.

DHR’s raise comes in under expectations (I was hoping between $0.28 to $0.30 per share). I noted in my January preview that:

• “I guess there is a chance of slower growth given the spin-off of EAS later this year, but that honestly would be a disappointment.”

I am a bit disappointed with the raise, but I understand the logic of a smaller raise with a big spin-off upcoming. DHR’s last small raises occurred around the time Envista was spun. I’m hoping for a return to more robust dividend growth next year.

Projected March Dividend Increases

None

Portfolio

Below is a current look at my portfolio.

Conclusion

The snowball is gaining speed. It's incredible to compare the first two months of 2023 with previous years as the dividend growth is massive. That will slow down given the higher starting values as my portfolio transitions from a heavy ETF allocation to individual stocks, smoothing the monthly dividends.

One exciting development you'll see over the next few months is that I'll be rolling my wife's 401K from her previous employer into her traditional IRA, meaning a significant amount of "new" capital will be deployed into our portfolio. This money was not paying dividends, so I'm excited to put this money to work into the market and stop paying fees to the administrator.

Thank you to everyone for following along. Your comments and suggestions are invaluable. I'm approaching six months of writing at Seeking Alpha, and the reception has been so positive. I have a lot to learn and I'm excited to include this community on my journey.