Tuesday, October 17, 2017

Investment experience should be shared broadly


Since the last posting describing potential adjustments to my dividend growth portfolio, I made two other postings to SeekingAlpha. It's a free website, but it will require registration in order to read the entire postings. The first posting discussed cash management issues that are unique to retirees. It can be found here.

The second posting described updates to the portfolio and the logic behind them. The second posting can be found here.


The postings to SeekingAlpha rather than directly on the Hedged Economist are a response to the large number of followers on SeekingAlpha who monitor the portfolio. There feedback is helpful.

Thursday, September 21, 2017

Buying Stocks For A Dividend Growth Portfolio: Postscript A.


A postscript to this series was just published on SeekingAlpha.com. It is a free website that requires registration. The postscript is largely a response to requests from readers of the series on SeekingAlpha.com. The article can be found here.

SeekingAlpha.com has republished postings from The Hedged Economist under the following topic headings:Long/short equity, long-term horizon, portfolio strategy, and dividend investing.” Since it is a website specifically focused on investments, it attracts a large number of readers to the postings.

There was a request to identify those stocks that currently look cheap and those that looked overpriced. That is a different approach from the portfolio focus of the postings. The postscript discusses which stocks are currently on my watch list. It explains what looks sufficiently interesting to look into it further. It should be looked at as a real-time update of the portfolio.

The posting appeared on Sep. 21, 2017. It includes references to ABBV, BA, BCE, BHF, CLX, COL, CVX, EMR, ENB, F, GE, GG, GIS, HCN, HON, INTC, JNJ, KMB, KMI, LMT, MCD, MET, MMM, MSFT, NEM, NNN, NVS, PAAS, PEP, PG, PPG, QCOM, S, TD, TRP, UL, UPS, UTX, VZ, WTR, and XOM.


Please accept my apology if you find this inconvenient.

Tuesday, September 5, 2017

Buying Stocks for a Dividend Growth Portfolio: Part 3 The Portfolio

What’s been left undone

What’s been left unsaid

Current status

Holes in the portfolio

The previous postings described a 39 stock dividend-growth portfolio. One might think “that's all she wrote.” However, there are still a number of areas where it would be beneficial to have exposure.

In the postings, there was reference to the desirability of having more exposure to US financial services industry. There was also discussion of why that has been avoided of late. With a little more effort, it may be possible to find an investment opportunity. Anybody reviewing the portfolio also might criticize it for the absence of any electric utilities. Both are industries that I worked with extensively during my career, and, not surprisingly, I formed opinions about which companies were the better investments. Since I wasn't constrained by any conflict of interest, I have, in the past, tried investing in both industries. I was blindsided by a risk that I feel totally incapable of assessing, regulatory risk. I won't rush to add them to this portfolio, but I may try trading them or their derivatives in a separate smaller trading account.

Further, it would be nice to identify another non-pharmaceutical method of getting exposure to the healthcare industry. So, health insurers and hospital chains are of interest, and there might be other areas of healthcare that have yet to be considered. Finally, there was a time when it seemed like the content providers were going to dominate the entire entertainment industry. Right now, investors seem to be putting more confidence in the ability of certain distributors to dominate the industry. It would, nevertheless, be nice to have some exposure to a strong content provider.

The whole enchilada

The inspiration for this section of this posting owes a major debt to a SeekingAlpha author who goes by the name of RoseNose. The author posted: “My 84 Stock Portfolio - Oh, What To Buy? Evaluation Process.”  By taking a portfolio of 84 stocks and presenting it as a single portfolio in a cogent manner it proved that the same could be done with the smaller number of names in this portfolio. It's an analysis I do maybe once a year, but I had not planned to do for these postings.

Because this portfolio exists in seven different accounts with varying tax implications, there is a tendency to manage it as multiple small portfolios rather than one portfolio. It certainly made it easier to understand and explain the holdings in any one account. For example, when first asked to provide some insight into what I was doing, it was more productive to present the Widows’ and Orphans’ Portfolio rather than go into a core dump of all the detail. The important thing is to get started, and the 10 stock portfolio is the essence of what is needed, and it contributes the most to the overall portfolio.

However, as stated previously in this series of postings, what one buys should reflect what one owns. Plus, setting a low dollar values for any single holding required constantly looking for opportunities that fit the existing portfolio. So, there was always an informal practice of viewing everything as one portfolio, but the result was probably less than optimal. The total portfolio looks like this:

% of the
% of the
STOCK
Portfolio's
Dividend
TICKER
Value
Flow
BA
9.33%
7.61%
MMM
7.33%
5.73%
MCD
6.28%
5.12%
HCN
2.88%
4.76%
UL
4.59%
4.48%
JNJ
5.21%
4.43%
XOM
3.15%
4.29%
MSFT
5.76%
4.21%
PEP
4.58%
4.21%
TD
3.08%
3.88%
PG
3.71%
3.77%
INTC
3.53%
3.72%
F
1.69%
3.56%
VZ
2.14%
3.49%
HON
5.41%
3.40%
PPG
5.23%
3.20%
GE
2.24%
2.97%
CVX
2.14%
2.92%
NNN
1.81%
2.84%
BBL
1.47%
2.37%
TRP
1.53%
1.91%
ABBV
1.43%
1.73%
GIS
1.42%
1.70%
NVS
1.42%
1.59%
BCE
0.94%
1.52%
MET
1.16%
1.33%
EMR
1.16%
1.30%
KMB
1.13%
1.24%
WTR
1.37%
1.12%
CLX
1.28%
1.06%
QCOM
0.66%
0.98%
LMT
1.20%
0.98%
UPS
0.88%
0.88%
UTX
0.97%
0.80%
ENB
0.34%
0.53%
PAAS
0.71%
0.14%
GG
0.65%
0.13%
KMI
0.08%
0.07%
BHF
0.12%
NA

The total portfolio has a dividend yield of 2.94%. One of the portfolio objectives is to keep the portfolio’s dividend yield at, or above, 3%. Consequently, there will be some modifications. Further, some of the holdings are so small that they are insignificant from the portfolio’s perspective, and they will probably be exited at some point.

Also, it is worth noting that even with 39 stocks in the portfolio, it still tends to be a concentrated portfolio. The 10 stocks that produce the most dividend flow account for almost half of the dividend flow, as well as more than half of the value of the portfolio. That reflects the belief that one has to let the winners have their run. However, it still has to be managed.

It is not unusual for one or two stocks in the portfolio like this to carry the portfolio in any given year. The stock or stocks doing it tend to rotate from year-to-year. An environment that's beneficial to 3M and Boeing may be less beneficial to Exxon and Verizon, but a change in the environment can totally reverse the relationship. The portfolio is designed to work that way. The phenomena can last through an entire market cycle. For example, after the Internet bust and throughout the market decline and well into the recovery, I would joke that Johnson & Johnson was carrying the entire portfolio. It wasn't entirely, but the point was it would regularly appreciate in value and increase its dividend while most of the other stocks were struggling.

The portfolio stock weights are all actually slightly less than what is shown in the table. Two mutual funds were mentioned and are still retained. One is a small-cap fund, basically the market minus the S&P 500. The other is an aggressive growth fund, which is the only exposure to certain industries (e.g., biotech), as well as a different style of investing. The mutual funds lower the portfolio weights slightly.

Further, one can write covered calls on stocks and cash-covered puts to diversify the cash flow. However, those techniques are actually the frosting on the cake, and they only made a marginal contribution to the overall portfolio's performance. Both techniques are only appropriate if the investor is willing, or happy, to accept the consequences if the option is exercised.

It should be noted that whole areas of investing were excluded from the discussion by restricting it to dividend-growth stocks. When talking about stocks, it's very easy to overlook the fact that most of the economy is composed of nonpublic companies. ESOPs where an employee automatically receives stock as a part of their compensation, companies that restrict the ability to buy stock to their employees, offerings through the “friends and family exclusion” from the requirements of accreditation, and, now, the crowd funding as well as the secondary markets offer ways for many investor to get exposure to nonpublic companies. The Hedge Economist has numerous postings regarding the potential role of such investments. For anyone who is interested, the MARCH 16, 2011 a posting entitled “Investing PART 12: Angel Investing” provides references to most of those postings.

What I have concluded

The previous postings talked about buying individual stocks. Nothing was said about how that was done. Early on, that was done by having the broker make the purchase. Later on, many purchases were done by a simple one day limit order at, or close to, the current price.

There are other techniques that have been employed from time to time when the circumstances seemed appropriate. They've included selling cash-covered puts in the hopes that the stock would be put at the price targeted by the put. At other times, it seemed appropriate to enter limit orders as “good till canceled” with the hope that they would be filled within some reasonable amount of time. However, as mentioned, this is intended to be a stock portfolio. Consequently, tying up cash in order to use those techniques was infrequent.

The only principle for using those techniques seems to be that they are appropriate when the investor is willing to, perhaps, miss the opportunity to buy that stock. That would seem most likely if the investor has another potential use of the funds. By definition, with this portfolio, the alternative use would have to be another stock.

One other principle has guided the use of the technique of selling cash-covered puts. The principal was that there was an advantage to accumulating the rather minor proceeds from selling the puts. That could occur if the investor believes that the proceeds would accumulate faster than any upward movement in the price of the stock. Then the proceeds could be added to the cash received as a result of selling the puts. But, the investor has to be prepared for the possibility that the stock might gap right through the put price and be available at a lower price. Consequently, the approach is best used when initiating a position where the intention is to accumulate a total position over time. When that is the case, if the stock gaps through the put price, the investor can accept the put stock and purchase additional at the lower price.

It's always a good idea to improve one's trading techniques, and they have been discussed in previous postings before this series. In many respects, trading techniques are somewhat more fascinating than just buying and holding a portfolio of dividend-growth stocks. My own experience has been that a separate, smaller trading account is a good vehicle for honing trading techniques. However, it's highly unlikely that most investors can out trade Wall Street professionals. Trying to do so is like betting against the house. The odds are always stacked in the house’s favor.

While preparing this series of postings, I noted an unanticipated phenomena. The only time I remembered the details of the technique used to purchase the stock was when it was described in previous postings. By contrast, there was never any uncertainty about how the company fit into the portfolio or how having the stock in the portfolio affected the behavior of the portfolio over time. The realization was that any gain from the particular technique used was minor compared to the contribution the stock made to the overall performance of the portfolio.

A logical conclusion is that any benefit from refined trading techniques pales by comparison to what can be accomplished by putting the same effort into carefully constructing a portfolio. The one exception is that it is almost always beneficial to build a position with multiple buys rather than one big purchase. The commission costs are minor relative to the amount it reduces timing risk.
There are also of other takeaways from the analysis:

The periods of mismanagement of a good company (strong brands, strong balance sheet, and history of shareholder-friendly behavior) can present buying opportunities. Often, with adequate analysis, those buying opportunities are appropriate for a conviction buy.

When a stock that is of interest is going through a merger, split up, or spin off, it deserves special attention. The corporate action creates uncertainty that will depress the price in some cases. That doesn't always occur, but it's worth watching for. At a minimum, one should consider whether it makes more sense to buy before or after the corporate action. Failed merger attempts also should be examined. At a minimum, one should determine whether the failed attempt leaves the company in a stronger or weaker position.

Incongruences between the media’s portrayal of a company’s situation and the reality of the situation can be a major buying opportunity. One should always keep in mind that the media looks for the sensational, and it will manufacture it if it can't find it. Never forget the media saying: "If it bleeds, it leads." They spend a lot of time looking for, and making up, bad news. Consequently, they're very easily manipulated by short sellers.

An individual investor should always be cognizant of his or her own unique time preference and the unique opportunities that it can create. In most cases, the investor’s time preference will be different from that of “the market.” Wall Street keeps score quarter to quarter while an individual keeps score based upon their own unique objectives (e.g., from when an action is taken until retirement).

Finally, the performance of any individual company is less important than the performance of the total portfolio. At any given time, some securities in the portfolio should be underperforming simply because they were selected in order to benefit from circumstances that don't exist at that particular time or as a hedge against the other investments.

Disclosure

In the interest of full disclosure, I have exposure to nonpublic companies, and I mention them because, along with bonds and a small speculative trading account, they represent diversification away from the concentration on dividend-growth stocks. Some dividend-growth investors will argue that theirs is the only style of investing that makes any sense. It should be clear from the fact that I have other types of investments that I recognize that there are many different ways to profit from financial markets. I know people who would no sooner consider a buy-and-hold position than cutting off a finger. All of them are successful investors using their own unique approaches. However, their success is based upon their own definition of success and their own personal risk tolerances. They generally have built up tremendous expertise in their own brand of trading. By contrast, I favored dividend-growth investing because I believe it can be done successfully by just about anybody, and it is the approach that has consistently proven profitable for me and many other investors over very long periods of time.

It should be obvious to readers that I own all of the stocks mentioned in this and previous postings on this topic. In the disclosures related to individual stocks, I indicated whether I might be buying or selling the stock mentioned.


Friday, September 1, 2017

Buying Stocks for a Dividend Growth Portfolio: Part 2c Supplemental Examples

It is okay to be aggressive if the foundation has already been put in place.

A different portfolio for slightly different objectives.

Stock-by-stock discussion of CLX, KMB, TRP, GIS, UPS, LMT, QCOM, NVS, MET, BHF

Introduction: Why this is a separate portfolio

The focus of this portfolio has always been more aggressive than the core portfolio. The investment held for the longest period of time, and the only one that has reached the maximum dollar value guideline used to manage these portfolios, is an aggressive growth mutual fund. It was originally, and for a long time, the only holding in this portfolio. That fund was virtually a technology fund during the build up to the Internet bubble, and, not surprisingly, its performance took off during the 90s.

It hit the dollar maximum limitation resulting in sales of mutual fund shares a number of times, especially late in the Internet bubble. The proceeds were used to purchase some stocks discussed below and a “parking lot" position in Berkshire Hathaway.  Funds were also taken out of the stock portfolio to purchase long-dated, inflation-indexed Treasuries. This portfolio was not restricted to 100% common stocks like the Widows’ and Orphans’ Portfolio. The Treasuries resulted in significant capital gains when the Federal Reserve decided to drive interest rates down in response to the housing bust.

Until they were sold, the Treasuries provided interest payments that were used to purchase some stocks in this portfolio. More recently, some of the Berkshire Hathaway stock has been liquidated in order to purchase dividend-paying stocks.  It took some time for the mutual fund to recover from the Internet bust, especially since, late in the bubble, shares were sold to reduce the holding to 25% below the dollar maximum threshold. Recently, shares of the mutual fund have again been sold to conform to the dollar limit on individual holdings.

Thus, this portfolio was built more recently than the core portfolio, and it is intentionally more aggressive. It was also built in spurts rather than slowly and continuously over a long period of time. As a consequence of those spurts, there have been times when multiple stocks were added to the portfolio over short periods of time. A previous posting mentioned the problems of trying to make a second and third pick in a given year. This posting mentions a number of times when the consequence of making multiple selections at once was bad timing. It was possible to correct those by making subsequent purchases that lower the average cost. Fortunately, so far none of the picks have turned out to be bloopers.

Hopefully, going forward, the current structure will be a less volatile than the aggressive growth mutual fund. So far, it has been. Surprisingly, it has also kept pace with the aggressive growth mutual fund, but the time period has been very short.

Dividends are reinvested in all holdings in this portfolio. The only restriction on what stocks can be added to this portfolio is that it cannot overlap with the core portfolio discussed in previous postings. It also has to make sense internally as a portfolio, while at the same time taking into account the holdings in the core portfolio. So, with that in mind, here's a nifty little 10 stock portfolio.

Clorox (CLX) - The investment thesis: A consumer non-durable good producer with fewer brands than some of the alternatives, a history of times when it would take on more leverage than some of the alternatives, a long history of dividend growth and effective brand management. Their periodically higher dividend payout ratios (dividends as a percent of free cash flow and/or dividends as a percent of profits) can be looked at either as a source of increased risk or as a display of greater shareholder friendliness. Clorox also has a history of very efficient production of its principal products including exemplary quality control. Their production efficiency is often overlooked

More liberal use of leverage and limited product offering create risk that may be inappropriate for a core holding in a portfolio with the objectives of the Widows’ and Orphans’ Portfolio, but they may be tolerable in a supplemental portfolio. Clorox essentially produces two products. Further, Clorox is less conservative in its use of leverage than some alternative consumer nondurable producers.  
However, when held as a supplement to other consumer non-durable companies such as Procter & Gamble and Unilever, Clorox can benefit a portfolio. As stated, it has a long history of effective brand management, and the vary narrowness of its product offerings makes it less likely that there will be a loss of focus.

Clorox had been on my watch list of consumer non-durable producers for a while when circumstances arose that allowed for an opportunistic entry point. When the news is all about a phenomenon that should increase the demand for a particular product and the stock of the producers is not rising, it's an opportunity to buy.

At some point, the CDC identified some potentially catastrophic pathogen that could only be effectively counteracted by washing down all surfaces with bleach. In order to demonstrate its own importance, the CDC was making sure that the story was getting extensive unwarranted press coverage. However, Clorox stock had not risen at all in response. In fact, it had been downgraded by one of the Wall Street firms. It became an advantageous entry point since the concern the CDC raised resulted in a predictable temporary spike in sales of bleach. That sales spike surfaced a few months later in a strong quarterly report from Clorox. The stock experienced a step up in its price appreciation for a period of time.

Disclosure: I own CLX and am accumulating additional shares through dividend reinvestment. I don't plan to, but cannot rule out, opportunistic purchases on price pullbacks. A statement buy is possible if the opportunity arose, but it would probably not result in a large exposure.

Kimberly Clark (KMB) - The investment thesis:  A consumer non-durable producer with a long history of very efficient production of its principal products, a reasonably strong balance sheet, and reasonably, but not exemplary, brand management. Nevertheless, it has very well-entrenched brands.

It is easy to overlook how well-entrenched Kimberly-Clark's products have become. Years ago to dislodge Kleenex from an extremely dominant market position, it took government action. In order to facilitate the entry of a competitor (who probably made bigger campaign contributions), the government restricted Kleenex’s ability to refer to its product as Kleenex. It insisted that the company refer to it as Kleenex tissues. Kleenex is now seen as a competitor in the tissue market rather than other tissues being viewed as competing in the Kleenex market. Similarly, Charmin toilet paper established its brand by reference to its superiority to the “leading brand.” They did not even have to name Scott's in order to position their product against it.

The reasons for holding Kimberly-Clark as a supplemental investment are the same as those for Clorox and will not be repeated. However, like Clorox, Kimberly-Clark should be kept on the watch list of anyone whose portfolio has reached the point where supplemental purchases may be appropriate. That was the case with Kimberly-Clark.

The opportunity to add it as a supplemental arose for totally different reasons from Clorox. They are discussed in some depth in a previous posting: MARCH 30, 2010, “Wall Street doesn’t run the world.Basically, Kimberly-Clark has been downgraded by Goldman Sachs, and for the reasons explained in that posting, the downgrade was totally irrelevant. It presented an opportunity for long-run investors to purchase on a temporary and (for the long-run investor) irrelevant dip. Given the exaggerated importance the media attached to Goldman Sachs’ opinions at that time, it was an opportune time to acquire Kimberly-Clark if for no other reason than to demonstrate how easy it is for a long-run investor to play Goldman Sachs like a fiddle. Since then, dividend reinvestment seems justifiable for the holding as a supplement. A long-run investor can play Wall Street's short-run focus to time purchases.

Disclosure: I own KMB and am accumulating additional shares through dividend reinvestment. I don't plan to, but cannot rule out, opportunistic purchases on price pullbacks. A statement buy is possible if the opportunity arose, but it would probably not result in a permanent holding as a large exposure.

TransCanada pipeline (TRP) - The investment thesis: A pipeline company, a long history of dividend increases, a C-corporation, a Canadian company with Canadian and US market exposure.

This is a fairly new addition to the portfolio. It went from just a company I was aware of, to its being on a watch list when it entered the headlines in connection with the controversy surrounding the Keystone pipeline. The stock held up fairly well despite being yanked around by the regulators and mischaracterized by environmentalists, but there was no major catalyst to buy. From a long-term investor's perspective, it was encouraging that they stuck to the economic and business case for their pipeline rather than taking the shortcut solution of paying Bill Clinton a bundle of money to speak at one of their functions and getting the pipeline approved. It also was encouraging that while trying to get approval of the Keystone pipeline, they were also planning other contingencies.

By late in 2014, the viability of the company as a holding had been demonstrated. On a pullback associated with news on one of their pipelines, the stock declined slightly, and an opportunistic purchase was made. When attention shifted away from the Keystone pipeline to pipelines they were planning, the price recovered.

However, the real opportunity to purchase the stock at discount occurred later in 2015. With the final announcement that the Keystone pipeline would not be approved by the Obama administration along with the fall in oil prices, the stock price fell. That would've been the best time to make a statement buy. When the media and the market are focusing on one particular project and overlooking alternative contingent plans, it can present a buying opportunity. In cases where the stock is already held, it's an opportunity to average down the acquisition cost.

Equally important, the fall in the price of TransCanada pipeline late in 2015 demonstrates the importance of accumulating into a position rather than buying it all at once. For me it was an opportunity I couldn't fully capitalize on. My initial position on the opportunistic buy absorbed much of what I wanted to invest in this holding. In this case, it would have been better to wait for the big opportunity to buy rather than taking advantage of the smaller opportunity earlier. However, it was an opportunity to average the price down with subsequent purchases.

Disclosure: I hold TRP and would recommend it to anyone planning a long-term portfolio. I would be comfortable initiating a small position at the current price, but will only be using dividend investment unless a better opportunity for a statement buy arises. The position in Kinder Morgan might be liquidated in order to take advantage of a buying opportunity in TransCanada pipeline. The structures of their pipelines are quite different, but their roles in these portfolios are the same.

Lockheed Martin (LMT) - The investment thesis: A defense contractor with technical expertise in a couple of areas that are in high demand, and a major beneficiary of the planned military buildup.

This, too, is a recent addition to the portfolio. The stock was put on a watch list as result of the change in policy implied by the most recent presidential election. The federal government policy shifts can definitely create buying opportunities, but the company has to be in a position to respond to the opportunities. 

The situation with Lockheed Martin was, in many respects, analogous to the situation with Boeing described in a previous posting (2a). Defense systems have long developmental lead times. While Boeing has to finance those internally, defense contractors will get assistance from the federal government during the developmental phase. But, much of the payoff to the development process occurs when the defense system goes into production. When there is a shift from the developmental process to ramping up production, it is quite often a buying opportunity.

How much of a buying opportunity is created by the shift to production depends upon the anticipated volume of subsequent purchases, or, in more general terms, a forecast of demand. In that respect, Lockheed Martin was doubly advantaged: It was transitioning to production when the political environment was transitioning to a posture of higher demand.

Interestingly enough, the president's posturing regarding the price of Lockheed Martin's new fighter only distracted attention from the tremendous sweet spot Lockheed Martin was in. When the market mistakes negotiating postures for actual rigid positions, it will often create a buying opportunity. The media and the markets were also focusing on the controversy surrounding one product and ignoring other product areas where demand would be growing.

Disclosure: I own LTM and do not intend to purchase or sell additional shares. However, I would recommend a purchase under current conditions. I would recommend that purchase either as an entry point to a long-term hold or as an entry point to a shorter-term trade.

Qualcomm (QCOM) - The investment thesis: A microchip producer, principal revenue source is licensing its intellectual property, exposure to communications most notably the cell phone market, but it is often involved in disputes related to its intellectual property licensing.

The best time to buy Qualcomm is when they're involved in a dispute over their intellectual property. But, it has to be bought with the realization that the investor is taking a position on the outcome of the legal dispute. I can attest to the importance of the timing since my timing was terrible. A lot more shares could have been purchased if the timing had been correct.

This was the third stock bought over a very short period of time: Lockheed Martin worked out very well. TransCanada pipeline was less well-timed, but the position could be improved by subsequent purchases bringing down the average price. In the case of Qualcomm, the purchase was made between when they settled their dispute with the Chinese government and when they began one with Apple. Thus, this experience seems to support the argument for avoiding entering multiple positions all at once. Impatience can undermine a good investment thesis.

From the perspective of this individual stock, it suggests it's pretty important to know when individual contracts are up for renegotiation. Further, it can only be a long-term hold if you have confidence in their legal staff's ability to defend their intellectual property.

Disclosure: I own QCOM and do not intend to buy or sell additional shares. I would recommend it to anyone who's willing to bet on it legal staff’s ability to defend its intellectual property. I caution anyone purchasing the stock that it's going to be volatile.

Novartis (NVS) - The investment thesis: European pharmaceutical company, positions in prescription and nonprescription products, strong balance sheet, and a history of successful drug development.

Portfolio fit is always important. The stock was put on a watch list because of the need for increased pharmaceutical exposure. It was one of a number of foreign and domestic pharmaceutical companies being analyzed. Exposure to a foreign market was also considered appropriate for the portfolio if it could be acquired in an advantageous way.

The relative performance of the US markets and European markets can be used to time purchases of Novartis whenever those general market trends include pharmaceutical companies. It was purchased for this portfolio in order to provide exposure to foreign markets. To a limited degree, the timing was determined by the relative stronger performance (higher prices) of the US market versus European markets. 

Also, there was a minor pullback in Novartis that seemed unjustified. The only explanation I could find for the pullback was concern about the breath of the products offered by Novartis. Whenever the diversification of a diversified company becomes a negative in-and-of itself, it presents a buying opportunity. In the case of Novartis, it was an extremely mild phenomena. European investors seem to be a little less in love with financial engineering than American investors. Consequently, European stocks seem to get yanked around a little less by Wall Street trends in financial engineering.

Disclosure: I own NVS, and, because dividend reinvestment is not offered by my broker on this ADR, I will be making additional purchases using dividends.

General Mills (GIS) - The investment thesis: Well-entrenched, branded food products; conservatively managed financially, and a long history of shareholder- friendly behavior, including a long history of rising dividends.

General Mills is a highly reliable company. Nevertheless, circumstances can create buying opportunity. It is a company with a reputation for a particular type of behavior. That behavior can go in and out of style. There times when new products are valued much higher than reliable existing products. That's often the best time to buy General Mills.

Currently, General Mills stock is lagging due to the phenomena just mentioned and the belief that its products are “tired.” Whenever there is a new product that is challenging one of General Mills existing products, it will present a buying opportunity if the market is discounting “reliable” in favor of “new.” One can generally hold off until the results of General Mills’ response become apparent, but that involves sacrificing a fair amount of the upside because General Mills is so widely followed.

Disclosure: I own (GIS) and recommend it to anyone planning to build the dividend-growth portfolio by reinvesting dividends over a prolonged period of time. I also would recommend purchasing it at its current price. There is a possibility I may make additional purchases.

Metropolitan Life (MET) and Bright House Financial (BHF) - The investment thesis: Provides exposure to the financial services industry, the consolidated financials of the two companies represented a financial powerhouse despite the federal government's inclination to want to tinker with it, and, after the split up, there's no urgency associated with disposing of either successor company.

I have owned MetLife off and on before. Thus, it's been on my watch list for many years. Mergers, split ups and spinoffs do more than provide news items for the financial media. Often they will depress the price of the stock because of the uncertainty it introduces. So, I began looking at the status of MetLife in greater detail as talk of the separation into two companies began. As details of the plan became available, it looked like an opportunity.

Metropolitan Life was purchased before it was broken into two companies with the understanding that both companies would be in a businesses that could comfortably fit in the portfolio, at least temporarily. It is a purchase that has the potential to work along the same lines as was described in a previous posting in connection with Abbott Laboratories. The difference in this case is that it isn't immediately apparent which piece of the split up company will be the more desirable to hold. Both will be in good businesses as the population ages and self-directed retirement planning becomes more common. Whether both, one, or neither company is retained will depend upon an assessment of their ability to execute.

The US financial service industry does not have the level of dividend stability that one would want in a widows’ and orphans’ portfolio. While the dividends from MetLife may become unstable, they seem to be something that can be forecast. A decision to reduce the dividend is not something that happens abruptly.

Thus, while the current plan is to hold both companies as long-term holds, it is possible that one or both would be sold well before 20 years. However, it is also possible that through dividend reinvestment the positions will build to a point where any setbacks can be absorbed without harming the overall portfolio's performance.

While mergers present a unique opportunity because of the uncertainty they introduce, in general, the best opportunity to buy financial service companies is during a major downturn. Again, it illustrates that the buy part of buy-and-hold can be very difficult. The purchase might be made after dividends have been cut and the company has experienced what might be considered a near-death experience. The near-death experience has never occurred with MetLife, but the impact of financial downturns and economic downturns definitely have.

Disclosure: I own (MET) and (BHF) and have no plans to buy or sell either over the near-term. I intend to hold them over the long-term, but may liquidate one or both if there is a need to reduce the portfolio’s exposure to the financial services industry, or, if a financial service firm with the likelihood of a more desirable price and dividend behavior is identified.

United Parcel (UPS) - The investment thesis: A reliable dividend grower in the transportation services industry, a strong balance sheet, and considerable expertise in logistics.

United Parcel has been in this portfolio for a long time. It was one of the earliest purchases, perhaps the first. To illustrate, it was originally purchased because of its long dividend history. But, the thesis behind retaining it was the trend toward increased catalog sales. Things change, and now it is retained in order to benefit from the trend toward e-commerce. However, the truth is their business is far more dependent upon business-to-business shipping than business to consumer shipping.

UPS can be bought on pullbacks with a high degree of confidence that the pullback is temporary. In the future, an entirely new profile may emerge. The relationship to e-commerce may actually create a new kind of opportunity. Over the last few years, UPS has developed a distinct seasonal pattern, falling in January. That could represent a systematic pattern of the only buying opportunity that seems to exist with UPS.

Disclosure: I own (UPS) and would recommend it to anyone who wants to build a dividend-growth portfolio by reinvesting dividends over 20 to 30 years. I would point out the seasonal pattern that has surfaced in the last few years, but recommend making a small initial purchase, and then adding to it on any pullback.

The portfolio characteristics

The portfolio weights in this portfolio are allowed to vary widely. Dollar limits are irrelevant since neither the dividend flows nor the value of any individual stock holding is anywhere near a limit. The positions just haven't been held long enough to get to the limits. Further, since all dividends are currently reinvested, managing the percent of dividends from individual holdings seems inappropriate. As a percentage of the portfolio, the individual stock holdings are roughly equal with the exception of Bright House Financial which is a much smaller position. However, that's purely accidental since the size of the positions is allowed to vary within a much wider range than is characteristic of the Widows’ and Orphans’ Portfolio.

The aggressive growth mutual fund is very close to the limit on dollar amounts in any one investment, which implies that there will be future funds to be allocated from the mutual fund to the individual stock holdings. Consequently, a number of the stocks in this portfolio are back on my watch list:

General Mills appears, on the surface, to be presenting a buying opportunity. But, that will require an assessment of the stock’s performance versus the underlying performance of the company. Qualcomm is a more difficult situation to assess because of the uncertainty associated with the current dispute with Apple. It is likely that this dispute will cost Qualcomm. However, it is hard to tell whether the decline in the stock price reflects what the dispute will cost, or whether there is an excessive discount because of the uncertainty. The breakup of MetLife has resulted in two new companies that require a re-examination. Lockheed Martin will undoubtedly increase in value, but a determination will have to be made as to whether that is a trade or an opportunity to enhance permanent holding. UPS is displaying a seasonal pattern in stock price that, if it continues, may be used either to enhance the position or as a trade.


Finally, because this portfolio is supplemental and holds large mutual fund position, a decision will have to be made as to whether to maintain the portfolio at 10 stocks. It could easily be increased or decreased. Each has its advantages. Further, just from a portfolio management perspective, taking into account all the stocks being held, reducing the total number of stocks from 39 may be desirable. That may be accomplished by eliminating the practice of not having this portfolio overlap with the core portfolio.