Compounders And Dividends: March 2023 Portfolio Update

March is in the books and it’s been a great month for my portfolio. I will discuss my dividend growth, dividend reinvestments, monthly savings, rebalancing, dividend increases and anticipated dividend increases. I plan to write a Q1 Memo of sorts to discuss the macro environment and my portfolio more broadly. I think I would enjoy writing something a bit broader outside of the detailed monthly analysis below. As helpful as I find these monthly articles for me to write, taking a step back last year and writing some broader articles (My Top 10 and 2023 Portfolio Goals) really helped me gain some perspective on my portfolio, the broader market, and myself as an investor.

Astute readers will remember I typically pool and reinvest dividends the first of the month. I put my dividends to work on March 31, 2023 since I’ll be out of the office on Monday (the first trading day of April) and I’d rather get my dividends to work a day early rather than a day late. Moving forward, I’ll keep reinvesting dividends on the first day of the new month and submit my article for publishing in the first few days of the month.

Dividend Growth

Quarter over quarter (QoQ, with the explanation here) top line dividend income decreased 0.55%. Removing the impacts of ETF dividends (which is included since those dividends are reinvested with pooled dividends), core dividend income grew 19.5%. Year over year, my top line dividend income grew 59.8%.

The key driver of the QoQ dividend detraction was lower ETF payments in March compared to December, which makes intuitive sense. Removing the impact of ETFs, the majority of the 19.5% dividend growth is attributed to inorganic growth via monthly savings.

• Key tailwinds included a larger position in Canadian National (CNI); dividend growth from S&P Global (SPGI), Moody's (MCO), Home Depot (HD), and BlackRock (BLK); and new positions in Otis (OTIS), Northrop Grumman (NOC) and Marathon Petroleum (MPC).

• The key headwind included the removal of Realty income (O), which will continue to present tough comps until March 2024. March 2023 was the first month without an O distribution.

I’m quite pleased with this performance. December will always be a tough month for comps, and the portfolio stood on its own to show respectable detraction from the best month of the previous year. In total, March 2023 appears to be my fourth best month since I began tracking my dividends.

As a “teaser,” (not much fun for me though) April will feature the toughest comp yet since it will be the first beginning of the quarter month without the legacy REIT positions contributing to the dividend income. I’ll show a large QoQ decline but continue to show strong YoY growth.

Monthly Savings

On March 1, I purchased shares of Danaher (DHR) at $246.33 and Alphabet (GOOG) (GOOGL) at $89.92; on March 10, I purchased shares of CVS (CVS) at $78.03; on March 15, I purchased shares of OTIS at $81.72 and CARR at $44.16; and on March 29, I purchased shares of OTIS at $82.18 and CARR at $45.10.

There isn’t much to write about some of these trades. As discussed previously (and in the future), DHR, GOOGL, OTIS and CARR are all key positions for me. When I initially purchased shares of OTIS and CARR, I noted they were trading at premium valuations and I would spread out my purchases to average in.

I almost purchased OTIS and CARR in early March, but decided to go with DHR and GOOGL because they appeared to be trading at a more attractive valuation. DHR continues to be beaten down, but I’ll gladly add to my position when I can. While a 20% CAGR isn’t likely ahead, DHR is still a steady compounder with a proven M&A track record. I’ll buy on weakness.

GOOGL continues to be the most attractive mega cap tech company to me. While I’m still interested in AMZN, I have a hard time diverting cash away from GOOGL (or MSFT, which is my largest position for a reason) for a mega cap tech company. While I hope to own AMZN at some point, I’m not going to lose any sleep having MSFT and GOOGL in the portfolio.

Rebalance:

Quarterly, I’m selling a portion of my VTI position and re-allocating into my dividend growth portfolio. Don’t fear, more money than I’m selling is getting added to diversified ETFs through my 401K, which is why I feel fine reducing some of my VTI exposure.

As market open on March 27,I sold shares of VTI and purchased shares of S&P Global (SPGI) at $336.61, Old Dominion Freight (ODFL) at $334.27, Mastercard (MA) at $357.01 and Altria (MO) at $44.10.

SPGI, ODFL and MA are all key positions, underweight, and (in my opinion) offer double digit return potential. For these quarterly rebalancings, I’m focused on my key positions that offer strong forward return potential. I have my own valuation models that allow me to compare my five year return targets against my top positions. I’m continuing to build these out and at some point I’ll likely have rough models for all of my “key positions” (likely somewhere between 15-30 names) and all of the companies on my watchlist that could be key positions. This lets me quickly compare anticipated 5-year IRRs between top positions and make smarter and quicker capital allocation decisions.

Outside of those key positions, I’ll add money to dividend growth names in my portfolio. For this, I almost added a new position, Philip Morris (PM) (as detailed in my March 2023 Watchlist article), but I decided to move forward with MO. I’m always going to try and defer to names in my current portfolio over adding new names when I think the risk/return is similar. At some point, I’ll start diversifying my “high yield bucket” since it’s getting a bit more concentrated after losing O. That time will come, but I’m generally comfortable with MO and think its income weighting will decline in the future.

On March 29, I reduced my cash position down ~1% to purchase shares of CHTR at $348.83. While I want to bring my cash position up over the long-term, I thought CHTR looked to be trading at an attractive value so I was happy to use some cash on hand to increase my CHTR weighting.

Dividend Reinvestments

On March 31, I put my March dividends to work. I added shares of SPGI at $345.71; ODFL at $339.06; HLT at $140.79; and CMCSA at $37.54.

Long time readers (all of 6 months, ha!) don’t need an introduction to these companies. SPGI and ODFL are some of the highest quality companies in my portfolio. Both are still generally expensive, but I’m not as focused on valuation while reinvesting dividends. Both companies should be a lot larger in my portfolio, so I’m trying to bring these up over the next year or two.

I haven’t added to my CMCSA position in a few months, and the weighting of CMCSA has decreased by several basis points due to the new money coming into the portfolio and relative strength of some companies. I don’t plan on aggressively adding to CMCSA unless it falls a bit more, but I’m happy to grab a few shares with my pooled dividends.

HLT is a company I haven’t discussed too much, but it’s going to be a company of greater focus moving forward. I love HLT’s products, the brand, and most importantly, the business model. HLT generates globs of cash that gets utilized in share repurchases with a small token dividend. I do not anticipate dividend growth and my model is instead focused on the impact of a rapidly decreasing share count. HLT doesn’t lay out its own money for CapEx and instead offers the traditional franchise model that has proven to be a long-term winner for shareholders. Peer group member Marriott International, Inc. (MAR) tends to focus a bit more on dividend growth.

Dividend Raises

Surprisingly, QCOM came through with a raise one month earlier than projected:

• On March 8, QCOM raised its dividend by 6.7% to $0.80 per share

To peel back the layers of the onion on my writing process, I typically begin writing this article around the time my last monthly update is published (sometimes the week before). I always start with the expected dividend increases in the next month. Given that, here is what I pre-wrote about my expectations around a QCOM raise:

• Qualcomm (QCOM) – QCOM has a bit of a checkered history with raises, with its last dividend raise occurring in April but the previous raise occurring in January. The April raise came on the heels of 5 consecutive $0.68 quarters paying $0.65 dividends. Is there a chance QCOM could pay a fifth $0.75 dividend? Of course, but I’m going to assume we see a typical hiking schedule. High single digits is my target, which puts us in the $0.80 to $0.82 range.

The 6.7% bump is much closer to “mid-single digits” rather than “high single digits” but it did come in at the bottom end of my range.

Projected April Dividend Raises

After a busy January/February and a quiet March, we enter one of my favorite months of the year for dividend raises with two of my large positions up:

• Apple (AAPL) – My second largest position has typically been shrewd with its dividend increases, averaging mid-single digit increases for quite some time. The last time AAPL didn’t announce an April bump was in 2018 when it raised its dividend on May 1. Share buybacks have been king at the phone/tablet maker and there does not appear to be any change in strategy. I’m assuming we will get another one to two pennies a quarter which results in quarterly dividends around $0.24-$0.25 per share.

• Costco (COST) – Another core holding of mine has been a dividend growth monster, giving us low double digit increases the last two years and a massive special dividend in late 2020. I have no reason to think we won’t see another low double digit increase. COST is a company I’ll be trying to increase my weight this year.

• Constellation Brands (STZ) – A new holding with a rough dividend growth history gets to show its commitment to growth. Large dividend growth in 2018 has not been repeated and instead was followed by subpar penny raises until we saw a more acceptable 5.2% raise last year. I’m hopeful for another mid-single digit raise which would put the quarterly dividend in the low $0.80s per share.

• Otis Worldwide (OTIS) – A very new holding gets to earn its keep quick with a commitment to dividend growth. Since OTIS was spun out from UTX, it has blessed investors with back-to-back years of 20% dividend growth. I’d love to see another 20% growth year, but a tapering to a low double digit growth rate is likely in the near future. Eventually, OTIS will likely move to my core dividend growth bucket as I anticipate growth to slow to the high single digits over the next few years. I’m hoping for a quarterly dividend in the range of $0.33 per share.

Portfolio

Below is a current look at my portfolio.

Conclusion

Q1 is booked and done, and it was a great quarter for our portfolio. I'll talk more in my Q1 memo, so be on the lookout for that in mid-April. The quarter end is a nice time to undertake some rebalancing in the portfolio, so I was happy to reduce my ETF exposure and to increase my share count in some long-term winners.

Thank you again to everyone for following along. Your readership, comments, and feedback are appreciated, welcomed and encouraged.