And the slide continues… that’s the summary of my progress for the month of February. On the positive side, I initiated few starter positions in stocks which I had been waiting for to fall into my buy range. I have updated the excel sheet in my holding page to reflect the status as of February 28, 2009.
Portfolio Status Update
The total portfolio dividend cash flow was $1317 (down from $1366). This change was combination of dividend cuts (WL, GE, and AOD) and new purchases (PEP, PAYX, and TEG).
It is end of the month and time for measuring the progress. This is first time I will be providing my monthly progress update. January was month of setting a goal for 2009, analyzing the risk of the portfolio, and rebalancing. The excel sheet shows the Dividend Tree’s portfolio as on January 31, 2009
Portfolio Status Update
The total portfolio dividend cash flow was $1366 (down from $1379). This reduction was due to the re-balancing in the portfolio.
The yield on cost was 5.17% (same as beginning of 5.17%)
Purchases
Purchased Unilever PLC ADR (UL) with annualized dividends of $50 (3.7% of total portfolio dividends). The purchase yield was 4.50%.
Purchased Procter and Gamble (PG) with annualized dividends of $40 (2.9% of total portfolio dividends). The purchase yield was 2.90%.
Selling Actions
Sold a partial position in GE to reduce annualized percentage dividend to 5.4% (from 9.9%). The driver for this change was to reduce dividend risk exposure to single equity.
Sold my stake in PFE because of cuts in dividends.
The next progress update will be on March 1, 2009.
In the earlier post, I discussed that risk management should include asset allocation and quality of investments. I also mentioned criteria’s that I use for my dividend portfolio. The four criteria I use are:
Maintain diversified asset allocation;
Continuity of the stock to meet my buying objective;
Companies’ ability to consistently grow dividends; and
Dividends from a single stock should not exceed 5% of total dividends.
Today in this post I am using above criteria’s to analyze (and action taken) my dividend portfolio. My dividend portfolio holdings can be referenced in “My Holding” menu at top of this page.
Maintaining diversified asset allocation
I look at asset allocation in three different ways viz. (i) asset class; (ii) industry sectors; and (iii) morningstar style classification. For each type of analysis, I have a pre-defined target levels. At this point in time, these are just an arbitrary numbers which I believe is good for risk profile. I do not have any reasoning why those numbers.
For asset class, in general, I am continuing to meet (or much closer) to my pre-defined targets levels. Emerging market is one asset class for which I do not have any exposure. This is one area in which I need to do more work.
For industry sectors, I have a pre-defined maximum limit of 10% for each sector. The chart shows that I higher exposure (relative to my limit) in financial derivates (i.e CEFs), healthcare, and real estate. The health care exposure is limited to JNJ and PFE. At this point in time, both are good quality stocks. So I intend to continue holding it with no further capital allocation. Financial derivates is a sector, where I will reduce my exposure.
The chart for morningstar style classification shows that my dividend portfolio is concentrated around large cap value and growth stocks. Intuitively that seems to be correct because majority of the dividend-growth stocks are stable and mature companies.I may perhaps need to add mid cap stocks. I will be looking into this.
Continuity of the stock to meet my buying objective
Qualitatively, except AOD and IGD, all of the positions that I have in my dividend portfolio continue to meet my buying objective.
Based on this criterion; AOD (shifting concentration from international to US-Based), and IGD (return of capital) are two stocks which are in probation.
Companies’ ability to consistently grow dividends
All the stocks continue to meet this criterion except GE, IIA, IGD, and PID.
PID is an index ETF which continues to meet my buying objective. Therefore, I intend to continue to holding PID even though it is not growing the dividends.
Based on this criterion alone; GE (no increase), IIA (managed distribution, no increase), IGD (return of capital based distribution) are three stocks which are in probation.
Individual stock dividend less than 5% of total dividends
The chart shows that GE (~10%) and AOD (~20%) exceeds my pre-defined limit by significant amount. I will need to scale back my exposure to ensure that dividend cuts do not affect my passive cash flow.
Action taken:
My asset allocation showed that I had excessive exposure to financial derivates (IGD, IIA, AOD) and I had higher exposure to risk-to-dividend (ADO, GE). I made following changes:
I reduced my holding in GE by selling partial positions. My dividends from GE are now only 5.5%.
I have put IGD in the sell block. IGD is an example from my high yield chasing days when I was still learning different aspects of distributions such as income, qualified dividends, ROC, short gain, long gains etc. I do not believe it is a good quality investment because majority of the distribution consist of return of capital. Selling IGD will also help in reducing my exposure to fund based investments. I am evaluating when to sell.
I am continuing with IIA a real estate based income CEF. It continues to meet my buying objective and maintains stable dividend annually.
My concern with AOD is the CEF has transformed from 65%+ international allocation to 65%+ US-based allocation. I am no longer getting international exposure with AOD (which was my buying objective). However, my current capital allocation for AOD is 6.2% which I expect to reduce further with more stock purchases in this quarter. Additionally, my existing YOC is in excess of 20%. Assuming dividend reduction by 10 to 15%, even then my YOC will be well above 5% and it will reduce my single stock dividend to approx 10% or even less. With this background, I intend to continue holding AOD. I will be looking into changing my objective to hold this stock.
I hope with this approach to risk-based allocation, I will reduce my risk to dividend cash flow and continue to maintain potential for capital appreciation.
This is the first time I will be making my investing goals public. In addition, I also plan to provide quarterly reviews on how I am making progress. My dividend portfolio consists of two investments buckets. One bucket consists of dividend stocks, and the second bucket consists of dividend ETFs/CEFs. Since both of them provide dividend cash flow, I review both in combination (and not standalone). The standalone analysis is used during the asset allocation and/or diversification analysis.
In order to establish my goals for 2009, first I will present the current state of my dividend portfolio. It will form the baseline on which I will continue to build my portfolio. The table above shows my existing 2008 year end portfolio parameters. The portfolio has:
(1)$1358 per year as dividend cash flow;
(2)Yield on my original investments (YOC) is 5.17%;
(3)Lost 19% of the value (relative to loss of 38.61% in S&P500); and
(4)Personal rate of return (XIRR) as -9.0%
In the prevailing economic environment, companies are showing reduced earning, paring down growth plans and expenditure, and slashing and suspending dividends. Not only that many companies are not able to look forward and predict their own earning expectations. To me, not able to put an expectation is a sign that management is either not able to plan (clueless?) or not sharing the true state of their business. I do not see any economic drivers that, at least in first half of 2009, will make market go up. I anticipate that Year 2009 will continue to show pessimism with occasional burst of optimism. As dividend based investor, I can invest in some really good companies at bargain prices.
In first few initial years, my focus is on accumulation based on divided cash flow. Therefore, my dividend cash flow driven target is as follows:
(1)Generate dividend cash flow of $3000 per year (currently at $1358).
(2)YOC will get affected because it will be based on my initial buy price. One argument is markets would drag down the price, while the other argument is that demand-driven dividend companies would be at higher price. Additionally, I will need to balance initial yield vs. risk to dividends. With this contrasting perspective, I am anticipating my YOC will drop down below 5.0%. I will target it not to drop below 4.5%.
(3)XIRR and value is something that I keep track for relative comparison. My preference is to keep both parameters on the positive side and keep my portfolio value better than S&P500. Unfortunately, I do not have any direct control over it. I will invest in good companies and hope that Mr. Market will do the rest.
In addition to these tangible targets, I have few other intangible areas of portfolio management that I need to continue to work on. These are:
(1)Manage asset allocation and diversification from risk-to-dividend viewpoint; and
(2)Invest in international dividend paying companies.
For me, the challenge in these targets is to be able to provide sufficient funding and balancing dividend risk versus initial yield.
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