Now that I’m at roughly the halfway point of the High Inflation Portfolio Review, I figured it was time to share some of the findings and a few of the tweaks made to the assumption set. The batch I’m currently working through brought back some memories and perhaps some investing lessons.
A Walk Down Memory Lane
How many remember Loyal3? This was one of the earlier free trade platforms and only had a limited selection of stocks for purchase, their advertising slogan being, Invest In Companies You Love. On their demise, I transferred ten holdings to Schwab – four of which (SBUX, PEP, AAPL and DIS) were duplicates. Square and Disney are non-dividend payers and are excluded from the chart. Hasbro and AMC were sold due to no increase or cut in the dividend.
I do believe we cam detect a pattern here. With one exception (YUM), the legacy holdings outperformed the new entrants by dividend growth over the past five years. YUMC is on the cut list awaiting a price point and the other two are going on the same list if their next increase disappoints. Bottom line: Of the eight guinea pigs (excluding legacies), it appears only two (YUM and SQ) will survive the experiment. That is a dismal 25% success rate.
The moral being: Loving a company’s product is not (in and of itself) an indicator of a good investment – at least when measured against staying ahead of inflation. The day after penning this segment, Vitaliy Katsenelson published a piece which lays bare some of these types of concerns.
Moving on to the modifications to my inflation screen, the primary change was to replace CAGR with XIRR. The basic difference between the two is that CAGR smooths the trendline from Point A to point B while IRR reflects multiple intermediate data points, such as annual dividend increases or decreases. Though similar, IRR (or XIRR) tends to be more conservative which is borne out in my recalculated numbers – which are tending to be a little lower than SA’s CAGR calculation. As such, I’ve also removed the safety margin as it’s basically built in.
To illustrate this point, my initial example had WEC’s DGR at 6.48% while the 2021 XIRR is 5.45%. Only one company, NSC, increased their dividend enough to have their XIRR exceed Seeking Alpha’s 5-year DGR. I figured this screenshot of a subset of my portfolio that announced dividend increases in January would highlight my thought process.
Evident from the rankings, this type of screening should not be used in isolation, but as a complement to regular due diligence performed based on various metrics and strategies one currently employs. That said, I’m generally ignoring the Canadian banks as they’re repaying shareholders for their patience during the government mandated dividend freeze. I’m also ignoring the railroads as I’m not convinced their growth rate is sustainable. The ones (highlighted in green) that have my attention are MA, ADP and AMGN.
At the bottom of the list are pending sales (after the ex-dividend date) of ERIC and CHD. Ericsson’s Dividend Growth Rate has been oscillating between slightly positive and a flat line and with the wind at their backs on 5G rollout, it’s probably time to exit this ancillary position. Church & Dwight has been a disappointment since its elevation to a Core slot with a decreasing dividend growth rate. As I eliminate it from the portfolio, I’ll temporarily elevate Chevron (CVX) to Core and replace CVX’s Satellite position with United Health (UNH) and reinvest the proceeds in underweight positions.
Conclusion
We continue the pruning process with proceeds being redeployed in issues carrying greater promise of dividend growth exceeding the rate of inflation. One interesting point came from Flushing Financial’s (FFIC) earnings call with the comment, “During the quarter, the company repurchased 151,000 shares at an average price of $23.75, resulting in 56% of the company’s earnings being returned to the shareholders during the quarter. Our capital priorities are unchanged and are to profitably grow the balance sheet, pay dividends to shareholders, and opportunistically repurchase shares. We view the stock as attractively priced given the approximately 3.4% dividend yield.” They are now on my sell list with no track record of increasing dividends, overpaying on stock buybacks (current price $23.57) and their concept of growing the balance sheet is via opening accounts for Bitcoin enthusiasts via the NYDIG platform. Considering the recent volatility in this asset class, one wonders if returns are capable of exceeding the investment – or if BTC volatility will increase the volatility of FFIC’s account balances.
Hoping you’re hunkered down and safe with the winter storm wreaking havoc.
Seeking Returns 