August 12, 2019

Portfolio Update August 2019

Despite being on overly relax mode for a while, we are still glad to bring you our latest DIY Portfolio developments. As it has been the case for the last few years, you can expert our next update in about 12 weeks, in early November 2019.

You can also access our earlier portfolio updates here:

Granting things have been somewhat quiet on the markets since our last report, we’ve still experienced the usual ups and downs. In fact, it was more down followed by up this time around, as after a rough patch around May, most stocks resumed their climb up on a slightly slower yet steady pace.

As we eluded to on our last report, we are in a cleanup mode and high market values were a good fit, at least sell wise. Buying replacements was more difficult to accomplish as interesting opportunities rarely materialized. As some of you may have predicted, we adopted a decisive yet patient approach in that context. To sum it up in a few words: decisive to sell and patient to buy.

You will note that even with the remaining concerning suspects, as usual, our DIY Portfolio has been doing just fine.  

Once more, I’ll remind you that I am not an investment or tax professional of any kind. The intent of this blog is not to give specific investing advice. Before investing yourself, we suggest you do all necessary research and consult a licensed financial professional if need be. 

Rejuvenated Confidence in Dividend Growth Stocks

When we started to learn about investing, we instinctively leaned towards dividends. And thru the years, we are constantly getting back to it. At the time, we did not know how it was called. But now, all our research and experience point us that way, the dividend growth investing way.

Dividend growth investing is more about income (dividend) than capital appreciation. It focuses on stocks that grow their income or dividend. Successful dividend growth investors usually look for constant and sustained dividend growth. It is the secret ingredient to their investing recipe.

As we experienced with different stocks during our DIY investing career, we were always more comfortable and inclined towards solid more conservative stocks that provide steady growth. We also had and still have more success with these prudent investments. Dividend growth stocks precisely fit that bill.

It’s kind of strange that for the majority of our investments, without knowing it, we were almost perfectly choosing stocks that precisely fit in the dividend growth mold.

Indubitably, our perfect stock or perfect stock trend hunt also follows the dividend growth scheme. Most of the time, our perfect stocks are also perfect dividend growers. In tune with their dividend, the value of those strong stocks grows steadily and surely, providing their owners great results over the years.

In the past, we also had some success with other stocks. But dividend growth stocks somewhat safely ensure us the most sustainable results. That’s why we’ve decided to focus more on them.

As we stated earlier, the key to profitable dividend growth investing is regular improvement in dividend payments. Dividend growth is good but, steady regular dividend growth is even better. So, don’t just look for growth, look for regular growth.

We like to validate potential stock candidates looking at how steadily they increased their dividend in the last 10 years. That type of data can easily be obtained on the web.

To qualify, we accept yearly dividend growth averages of at least 6-7%. You may be surprised when you realize the dividend amount of many of those stocks would have doubled over the last decade. As a 7% yearly dividend growth nearly represents a 100% increase for 10 years (about 70% with 6%). 

But remember that substantial absolute increases are not enough. The regularity condition must also be met, as it is as important. Spikes in dividend payments may be more exciting or look more appealing. But we know our boring steady-growing dividend payments have a much better chance to be sustainable. In fact, they even have a better likelihood to increase more in the long-term. Again, the key here is steady improvement.

From scratch, a dividend achievers list may be a good point to start. By definition, dividend achievers have raised their dividend for at least 10 consecutive years. For US stocks, although more restrictive, the shorter dividend champions list (the 25 year + variety) can also be an interesting place to begin.

It’s quite funny that our Excel investment document is still named «Dividend Achievers» as it is where we initiated our DIY investing career a little more than 12 years ago.  

Avoid Overdiversification

Proper diversification is desirable to ensure that underperformance from one stock or one sector won’t weigh down too much on your entire portfolio.

But in reality, all stocks will suffer during major downturns. There’s no way to completely get around it. Your only recourse is to select stocks that will survive the best and get thru it all. Many dividend growth stocks give you exactly that.

On this topic, our view kind of goes against financial advices in vogue these days. Simply put, we are afraid of overdiversification and are timid about blindly embracing indexing.

The popular indexing way gives you all, the good but also the ugly. We prefer to tilt odds in our favor by filtering out as much bad apples as possible, giving us a less acidic mix. Dividend growth stocks can still provide adequate diversification. The overdiversification of indexing only guarantees you will catch up bad candidates along the way.

Many indexing advocates will also invoke simplicity. But we don’t consider selecting a few good dividend growth stocks a complicated process. With a little time, a dozen or two should do the trick.

The same goes with the international stocks frenzy. Many investors feel oblige to include international representation in their holdings in the name of diversification. We feel most international stocks will just get you into more volatility. We prefer to stick to solid proven north American companies that we can better understand. Besides, many of those US and Canadian multi-nationals can indirectly give you international exposure.

Furthermore, we feel our good old stocks can provide more robust results in the long run. To some extant, we like having control and understanding in what we invest. Dividend growth stocks can precisely give us that.

Recent Transactions and Remaining Candidates

Our cleanup frame of mind has not changed. Some starting details were already provided in our May Report.

So far, we managed to liquidate our positions not only in lagging stocks like AT&T (T), RioCan REIT (REI.UN), Coca-Cola (KO) and Fairfax Financial Holdings (FFH), but also in others that provided us strong results over the years like CGI Group (GIB.A), Merck (MRK), American Express (AXP) and Walmart (WMT).

Only a few remain on our sell list: Manulife (MFC), Nutrien (NTR), iShares CDN S&P/TSX 60 (XIU) and Pfizer (PFE).

Like we said, buys have been rare, but we’ve still added to our existing positions in Canadian Tire (CTC.A) and 3M (MMM). On a side note, to simplify things, we’ve substituted Atco shares (ACO.X) for its parent, Canadian Utilities (CU).

Have a peek at our Watch List Page to see which candidates are at the top of our selective buy list.

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