The Evolution Of My Dividend Growth Portfolio – Seeking Alpha

When I write articles about buying shares of companies like Alibaba (BABA) and Tencent (OTCPK:TCEHY), yet call myself a dividend growth investor, Im sure that people begin to wonder what in the world is going on? I wouldnt blame them. Those singular pieces focused on high-growth stocks dont do my focus on income justice. Ive had several people reach out to me, asking about my current holdings. Its been awhile since Ive done a portfolio review piece, so I decided to spend some time putting this together so that followers, old and new, can stay up to date on my portfolios construction.

We live in a different world now than investors did in the middle of the last century. Many of the markets that have given tremendous returns throughout much of the 20th century are very mature at this point, and therefore, I dont expect a lot more growth coming out of them. Im not saying that a company like Coca-Cola (KO) is going away. I expect continued large cash flows and capital returns, but Im not satisfied with 100% exposure to slow-growth industries. I bet that KO will continue to post low-single-digit top line growth on average over the long-term as it adds brands and takes market share. This is all a very mature company needs to do: Single-digit sales growth combined with respectable margins and a sustainable share buyback with excess cash flows is all a mature company needs to produce respectable bottom line growth. Being that these companies are typically evaluated based upon a price to earnings ratio, this bodes well for their stock prices over the long-term. With that being said, I dont expect many of the current dividend aristocrats to generate wealth for their investors over the next 50 years as they did during the last 50 years, and Ive been willing to place riskier bets to attempt to capitalize on truly wealth-building opportunities elsewhere.

I dont think that any of this could come across as a controversial or revolutionary statement. As markets mature, growth slows, and expectations of future returns should change. When seeking that same sort of generational growth that early investors in the dividend aristocrats of today experienced, Im looking at new growth frontiers. Im looking for developing markets in terms of both sectors/industries and economies. In other words, when it comes to growth, Im looking at things like software, and not soft drinks.

But before we get to the growth portion of my portfolio, lets take a look at the more conservative dividend growth portion, which makes up the vast majority of my holdings. I end up writing about my more speculative bets much more often than my conservative holdings, but thats sort of the point, isnt it? When I buy shares of a dividend aristocrat, I hope that I never have to write about them again. I dont want these companies in the news. Im quite happy to sit back and watch as they slowly and steadily grow. Im happy to watch their dividends compound via re-investment in an un-noteworthy fashion and track my monthly income, which is surely trending in the right direction. For the most part, I hope that my dividend growth holdings are boring. That would mean that theyre meeting my expectations and goals.

My dividend growth investments make up nearly 75% of my portfolio. When you consider the fact that ~8.5% of my portfolio is currently in cash, this majority appears even larger. My speculative bets basket amounts to 16.7% of my portfolio, though 5 of the 11 companies that currently comprise that basket pay a growing dividend and I imagine that in a decade or so, their yields will be high enough for me to move them up into the main dividend growth category. So without further ado, here are the graphs I put together to break down my holdings.

DGI Holdings:

Speculative Growth Basket:

As you can see, I hold more holdings than many of the other DGI portfolios that are regularly tracked here on Seeking Alpha. I think only RoseNose owns more individual names. This highly diversified strategy may not be best for other investors; Im essentially a full-time investor at this point, and I have the time/energy available to track a portfolio with 75 holdings. I know Jim Cramer says that retail investors shouldnt hold more than a dozen or so stocks because of the time it takes to properly track them. I dont think there is any one magic number in terms of the right amount of holdings. I imagine it comes down to investable capital, risk tolerance, and the aforementioned time, energy, and passion for the markets. I look at a lot of professionally managed funds/sovereign wealth funds, and these portfolios are typically highly diversified. While I ultimately make investment decisions based upon my own personal goals, I like to see what the big boys and girls are doing as I strive to become a better investor. I imagine that my portfolio will continue to grow to the point where its 100 holdings or so and plateau there due to the fact that, for me at least, money doesnt grow on trees.

I understand that my industry/sector allocations are different than many of the other DGI portfolios that youll see here on Seeking Alpha. Technology, not consumer staples, utilities, or real estate, is my largest sector allocation at more than 26% of my overall portfolio. Up next is consumer cyclical and healthcare, coming in at ~16.5% and ~15%, respectively. The rest of my major sectors/industries are currently weighted fairly equally in the 7-10% range. None of these sector allocations are set in stone. Over time I buy value where I see it (healthcare throughout 2016, for example), and I imagine these weightings will change as market sentiment ebbs and flows. When I take a step back and look at my portfolio through a wider lens, Im happy with where they all currently sit.

Maybe the most glaring difference between my portfolio and others is the fact that I have basically zero exposure to energy and utilities. Ive been a bear with regard to the energy space for some time now, having divested all of my oil/gas-related names in 2015/early 2016. Id love to add exposure to the utilities back into my portfolio, but for the time being, I believe theyre irrationally overpriced in this low-rate environment. These high valuations combined with the fact that utilities typically dont offer the dividend growth that Id like to see have caused me to avoid the sector, in general.

77% of my holdings are of the large/mega cap variety. 6% are mid-caps and less than 1% are small caps. Generally, because of my focus on shareholder returns, reliable earnings, strong balance sheets and large cash reserves, Im attracted to large-cap companies. Even when I look at growth names I find myself attracted to large-/mega-cap names because of my focus on best in breed names. The cream typically rises to the top in the markets, and once a growth company becomes profitable (something that I usually wait for before investing), their market caps are relatively large. Im OK with this. Ive seen amazing stories of investors who created generational wealth with relatively small investments in early stage companies that turned into the industry leaders that we see today, but for every one of these home runs Im sure there were numerous strike outs, and sticking to the baseball metaphor, Im content to bat for average rather than power.

Nearly 92.5% of my overall portfolio is comprised of companies domiciled in North America. I dont mind being so overweight with North American (primarily American) companies because many of them are multinationals and Im getting exposure to foreign and emerging markets through their sales anyway. I have taken steps recently to reduce this vastly overweight exposure, hoping to become a bit more diversified internationally. European companies currently make up about ~5% of my portfolio and Id probably like to see that figure rise to the 10% range. Asia makes up the last ~2.5% of my portfolio; as time moves forward, Id like to see this figure rise as well, probably to the 5-10% range. Right now Im seeing better value in Europe and Asia than I am in the U.S. markets, generally. I hope to take advantage of these value gaps as the world plays catch up to the American markets.

But heres the most important graph that Ill be including in this piece: my monthly dividend income totals. Im quite pleased with the progress that Ive made in this regard and I feel confident that Im well on my way to financial freedom because of this passive income. Every few months it seems that I cross a new monthly income threshold with potentially impactful meaning to my life. I remember a few years ago when I was excited to know that my dividends could cover my utility bills if I needed them to. Now my utilities and both of our car payments could fall under the dividend income umbrella if I decided to spend the cash rather than re-invest it. I havent had a month yet where my dividend income could have potentially covered my mortgage payment, but I expect to achieve that goal within the next year or so. Tracking dividend income, rather than the overall value of my portfolio, gives me an anchor to hold on to during market volatility. This is one of the reasons why Ive become so attracted to the DGI portfolio management strategy.

Sure, if I was to eliminate my speculative growth basket and put those funds into a handful of stocks yielding 3%, my monthly income would be even higher. But since Im still in the accumulation phase, I like having that growth exposure and the opportunity to generate outsized returns over the long-term. Although I like to focus on my income stream, I still track the major market indexes and attempt to beat them on an annual basis. The competition aspect of the stock market is a large part of what I love so much about it. Having exposure to companies like Facebook and Amazon and Alibaba and Tencent as a small piece of my portfolio gives me what I believe to be the best of both worlds: steady, reliable income and the potential to make large jumps up the social ladder due to the massive potential of a sub-set of my portfolio.

All of this just goes to show that there are many ways to skin the cat in terms of a dividend growth portfolio. I dont think it matters much what ones sector/industry allocation weights look like so long as they stay true to standard value investing principles with an extra focus on shareholder return related metrics. I look forward to hearing what everyone has to say about the portfolio that Ive constructed over the last 5 years or so. I look forward to the continued journey moving forward. Until next time, best wishes all!

Disclosure: I am/we are long AAPL, DIS, T, BA, AMGN, ABBV, BMY, MDT, MRK, PFE, NVO, JNJ, AMZN, FB, GOOGL, NVDA, MA, V, EXPE, REGN, CELG, BABA, TCEHY, KR, MKC, SJM, KO, PEP, MMM, MO, HASI, NNN, STOR, VER, VTR, SBRA, OHI, CMCSA, MSFT, DLR, AVGO, NKE, QCOM, CSCO, UPS, WHR, FDX, NSRGY, C, MS, GS, BAC, JPM, TRV, BRK.B, GILD, HON, UNP, BX, BLK, UL, XLF, XLK, EZU, IEUR, DEO, BUD, VZ, KMB, IBM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Just incase I missed a long in the disclosure form, I am long every stock mentioned in the graphs posted in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Original post:

The Evolution Of My Dividend Growth Portfolio - Seeking Alpha